Situation: Selling investment property and buyer is proposing a FHA loan with up to 6% Seller contributions to closing costs AND up to 6% Seller contributions to “gift” down payment to a Down Payment Assistance program of buyers choice. This is a whooping 12% total of possible Sellers contributions to the sell of our company property. They inflated the sales price to ~+8.4% just below buyer’s FHA approval of purchase amount. This so happens to be the same amount that Seller would bring to the table for closing costs and down payment as a “gift” to the Buyer.
Okay sure, the numbers work out to where in the end we would get our original sales price before this sneaky “gift” from the Seller was put in the contract. So, what are the pros and cons for the Seller (ME!) here? Everything I see when Googled it is from the perspective of the buyer on how a great program this is to get 100% financing from FHA.
Am I right that the Seller’s 8.4% of money will be tied up in escrow during the duration of the contract? Therefore, 8.4% of my money is sitting (37 days before close) instead of making me money?
Please reply ASAP. Otherwise, I’ll just walk and rent the property out again. Thanks!
I did this once for a cash poor buyer, although for a smaller percentage. The buyer requested down payment assistance and agreed to raise the purchase price to cover the seller concession. The buyer was using an FHA first time buyer loan program which allowed 6% gift funds for downpayment and closing cost assistance but limited direct seller contributions to only 3%.
I don’t remember all the particulars since this occurred a few years ago. The buyer used the Nehemiah program which gifted the buyer up to 6% of the sale price. The gift amount came from a direct seller contribution to the Nehemiah program in addition to a $750 processing fee. (This was a few years ago, so the fees may have gone up since then.)
As I recall I signed a participation agreement with the Nehemiah program prior to settlement, but the gift and the processing fee were both deducted from settlement proceeds on the HUD-1. No deposit required prior to settlement. I believe escrow was held open a couple of days while the seller contribution and the Nehemiah gift amounts were wired back and forth.
In your case, I would expect the amount the seller is receiving directly from you to be deducted from your sale proceeds at settlement. Should the gift or grant program rules require that they receive the seller’s contribution prior to settlement, I can’t imagine that they would need more than a couple of days to work the process especially if wire transfer is used to send the money.
Thanks! So, in your case, you did not have to bring money until closing. At closing, the percentage to inflate your sales price was used for the seller contribution and Nehemiah gift amounts going back and forth, correct? And this FHA government process did not get drawn out for weeks, but a couple of days. Wow! Anything with the government, I usually expect much longer delay.
I guess this is legitimate. In your response, it doesn’t sound like there is too much of a concern for the Seller. Thanks for your response.
The government is not directly involved at all. The FHA first time buyer loan program is insured by the government and must conform the to the government’s underwriting guidelines, but the loan is originated by a local lender and loan funds come from private (not government) sources. The Nehemiah program is an approved source of gift or grant funds for the buyers applying for an FHA first time buyer loan, but the program itself is administered by a non-profit organization based in CA.
As I said earlier, I did this several years ago. I don’t that I contributed anything out of pocket to the Nehemiah program. However, if I did, it was done outside of closing only a couple of days before settlement so the financial impact was negligible – so negligible that the details of the experience are largely forgotten.
If you are worried about a scam or a large financial impact, I think your concerns are unfounded.
I am selling a property right now and the buyers are using a down payment assistance program similar to Nehemiah. I am contributing down payment and closing costs through the charitable foundation which is considered a charitable donation and I will receive a tax credit at the end of the year for it. I also have the option of contributing 6% as well. This is not a scam at all.
Not a tax credit, rather an itemized tax deduction.
You can treat it as either a charitable contribution or a seller concession but not both.
In my case, I chose to treat the Nehemiah contribution as a seller concession and reduced my taxable capital gain. I probably did not itemize that year, so the chartiable contribution option was not available.