Lender: "Seller can't contribute more than 2% towards closing..."

4 Replies

So I'm buying my first rental property (actually closing this afternoon, :)!! ) and my lender tells me last week that the underwriter has approved the loan, however, because of the loan amount and it being an investment property, the seller can not contribute any more than 2% of the price of the house toward closing costs. Naturally I became irate since I worked the total amount of the closing cost to be paid by the seller into the contract. When I asked the lender, she said these were Fannie Mae rules, tough. The solution was to ask the seller to simply lower they price of the house by the difference but it could have turned out differently he wasn't a gentleman.  

My questions are:

1) Why is there such a rule in place? Why does the bank care where the money originates? The first thought that came to my mind was that I was being punished for being an investor.

2) Is this such a common occurrence that I will only be able to count on a 2% seller contribution for all future negotiations. 

Thanks, Justin

Hi @Justin B. yes this is a FNMA guideline. If the property is an investment, total "interested party contributions" cannot exceed 2% of the purchase price. Your loan officer should have told you this upfront after receiving the contract.

From FNMA's perspective, since mortgages secured by investment properties are statistically more risky than those secured by a primary residence, the guidelines are set to ensure that the investor has more skin in the game. That's why the minimum down payment is higher, maximum IPC's are lower, and funds to close can not come from a gift.

Ah! It boils down to 'more skin in the game'. I don't know why I didn't make the correlation. Thanks @Michael Smith  !!

The underwriter guidelines may seem initially absurd but due to the high statistic of foreclosures on investment properties, the lender wants to make sure that the seller isn't buying their way out of a contract that they no longer wish to carry. Costs that are normally the responsibility of the buyer to bear but are paid directly or indirectly by someone who has a financial interest in the property is considered an INTERESTED PARTY CONTRIBUTION. The most common IPC is from a seller that is willing to contribute a portion of their proceeds to help the buyer cover the necessary costs of the loan they're obtaining. IPCs are either financing concessions or sales concessions. Fannie Mae does not permit IPCs to be used to make the borrower's down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements. Remember, assuming you're going through FNMA's DU pricing system, you will still need to show 2 months reserves minimum in addition to your down payment. IPCs that exceed the limits below are considered sales concessions. The sales price must be adjusted through a reduction to reflect the amount of contribution that exceeds the maximum, and the maximum LTV/CLTV ratios must be recalculated using the reduced sales price or appraised value.

*Primary Residence and 2nd homes 

>90% LTV/CLTV = 3% MAX IPC

75.01% - 90% = 6% MAX IPC

<75 = 9% MAX IPC

*Investment property

All CLTV ratios = 2% MAX IPC

These are absolutely conditions that you should expect for future financing instances. These are pretty simple purchase parameters. Things can get a little more interesting regarding the topic of IPCs during a refinance transaction. There additional ways to alter and select the most cost effective program that will accommodate your short term and long term goals as a consumer. Hope this helps.

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