How Does an FHA Mortgage Affect the Seller of a House?

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A seller can pay part of the buyer's closing costs on an FHA loan.
A seller can pay part of the buyer's closing costs on an FHA loan. (Image: Thinkstock Images/Comstock/Getty Images)

A Federal Housing Administration (FHA) mortgage requires a seller to meet specific guidelines in order for the property to qualify for funding. Since FHA insures the home loan even if the buyer defaults, the administration wants to make sure that the seller's property retains market value, is safe and sound, and has a sales price that does not exceed FHA limits. The seller is allowed to contribute toward the buyer's closing costs.

Closing Costs

According to FHA guidelines, a seller is allowed to contribute up to 6 percent of the sales price toward the buyer's closing costs. The 6 percent concession is not mandatory, but it can influence the selling price and the buyer's ability to purchase the property. The closing costs include origination fees, lawyer fees and required documentation expenses. Closing costs also include points if the buyer wishes to purchase them in order to lower the interest rate. The seller is not permitted to pay any portion of the buyer's down payment.

Appraisal

The FHA only insures a property for the contract price if it appraises at or below the market value. As a result, the seller can not sell her property above the appraised value if the buyer wants to use FHA financing. The U.S. Department of Housing and Urban Development (HUD) does not permit an appraiser to predetermine a minimum value in order to establish market value; nor does it allow a buyer to participate in "appraisal shopping" in order to obtain the highest appraisal value.

Inspection

A house inspection is not required by the FHA, but part of the FHA appraisal requires that the property be evaluated for safety and soundness. A seller is required to repair all structural and safety concerns if the FHA appraiser deems it necessary. The seller is required to fix and pay for those mandatory repairs, but he is not required to fix minor problems unless the repairs are listed as a contingency in the contractual agreement.

FHA-Insured Limits

The FHA has loan limits, so a seller can not sell her home above those limits if the buyer wants to use FHA financing. According to the FHA, as of January 1, 2011, the FHA loan limit is $417,000 in most counties. In communities determined to be high-cost, the loan limit increases to $729,750 for a single residential unit.

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