What are Interested Party Contributions?
Buying a home and, more specifically, getting a mortgage, is a big deal. Mortgage transactions can be quite the headache and require large amounts of time and patience to be seen through to the end. The thing that worries most home buyers, however, is not the time nor patience that they will need to invest into a mortgage transaction, but the more tangible, cold, hard, cash that they will need to invest.
It’s no secret that mortgages can be expensive. A mortgage loan, separate and apart from all of the costs surrounding it, is typically a gargantuan sum of money in many people’s eyes. It has been said many times, but truly, mortgages account for the largest investments made by the average person in their lifetime.
Still, the principal amount is to be expected. Real property is a tangible asset that’s meant to be utilized as a permanent dwelling in most cases, so it makes sense that it isn’t as easy to buy or sell as a car. No, what really gets under the skin of a home buyer isn’t the amount they are borrowing to purchase a home, but the upfront costs and fees they face when closing a mortgage transaction: the dreaded closing costs.
Closing costs are fees paid to the lender and relevant third parties for the services rendered during a mortgage transaction. Closing costs are meant to be paid at the closing of the loan, as an upfront fee, often collected with the down payment on the mortgage loan. These fees are typically anywhere between 2% and 5% of the principal loan amount and even without lumping them in with the down payment requirements that the majority of loans carry, can amount to more money than the average consumer has laying around or even saved up!
Needless to say, closing costs have done their fair share of averting potential home buyers. So much so that over the years, many new mortgage programs have popped up that have sought to reduce or even remove some of the upfront fees that home buyers are expected to pay at closing. Low and zero down payment options aside, more and more “no-cost” mortgages are on the market that sees the lender front the necessary closing costs in return for higher interest rates paid by the home buyer. Then there are some loans that simply roll these fees into the principal amount to be repaid.
A long-held solution to the closing cost problem has been certain loan types acceptance of gift money to be paid by a family member of the home buyer. These contributions are typically put towards the down payment but are usually allowed to be used for closing costs as well. The only caveat is that in most cases, the contribution is only allowed to come from a blood relative, or in more lax programs, a direct family member to the home buyer.
Even with that being said, there is an even lesser-known option for tackling those horrible closing costs. Particularly, a method that involves them being paid by someone else. And while not all loans may allow them, or put caps on the amount of funding that can come from them, interested party contributions may be the best way for some home buyers to escape the burden of closing costs in a mortgage transaction.
What are Interested Party Contributions?
Interested party contributions (IPCs) are costs that would normally be the responsibility of the home buyer that are instead paid either directly or indirectly by someone else, specifically someone who has a financial stake of interest in the property. These “interested parties” of a mortgage transaction typically include (but are not limited to) the seller, the builder or developer, the real estate agent or broker, or any third party affiliate who stands to benefit from the sale of the property. Lenders generally don’t fall into this category unless there is some longstanding business relationship between their company and the seller.
Interested party contributions are generally in the form of either sales concessions or financing concessions. According to Fannie Mae, one of the nation’s largest investors in home mortgages, interested party contributions can be any of the following:
Funds paid directly from an interested party to the home buyer
Funds funneled through a third-party (including Non-profit organizations) that are eventually paid to the borrower
Funds submitted into the transaction on the borrower’s behalf that comes from an interested party such as a third-party organization or nonprofit agency
Funds donated to a third party so that they may be utilized to pay some or all of the closing costs for a mortgage transaction
Lender credits are not considered interested party contributions. Down payment assistance programs, however, are typically IPCs as they fall into the last category defined by Fannie Mae. No undisclosed interested party contributions are eligible to be accepted.
Financing concessions are financial contributions from interested parties that provide a benefit to the home buyer in the financing aspect of a mortgage transaction, payments or credits granted for acquiring the property, and payments or credits for the acceptance or use of specific financing terms, including (but not limited to) prepaid items. The typical seller-paid costs and fees associated with a mortgage transaction commonly referred to as “common and customary fees or costs” typically fall under this category for any amount up to Fannie Mae’s IPC limitations. Any amount over those limits is then considered sales concessions.
Financing concessions are interested party contributions allocated towards mortgage transaction fees such as discount points, origination fees, commitment fees, appraisal costs, transfer taxes, attorneys’ fees, survey charges, title insurance premiums or charges, real estate tax servicing fees, and mortgage discount points. They also include prepaid items like Interest charges (of up to 30 years), property insurance premiums (up to 14 months), real estate taxes for any period after the settlement date (when applicable), HOA dues for any period after the settlement date (up to 12 months), escrow accruals for renewal of borrower-purchased mortgage insurance, and initial/renewal of mortgage insurance premiums.
Interested Party Contribution Limits
Fannie Mae’s regulation of interested party contributions as they pertain to conventional mortgages is through the implementation of IPC limits. Loans of different loan-to-value ratios (LTVs) are subject to IPC limits expressed as percentages of the reduced sales value of the home. Investment properties have a standard rate, regardless of their loan to value ratio.
The IPC limits set by Fannie Mae are:
LTV > 90% - 3% ICP limit
LTV Between 75.01% and 90% - 6% IPC limit
LTV < 75% - 9% ICP limit
Investment Properties with any LTV - 2%
Sales concessions account for any interested party contributions that are over the IPC limits set by Fannie Mae. More so, they are also representative of any non-realty based contributions that are a part of a mortgage transaction such as automobiles, decorator allowances, moving costs, furniture, cash, or any other giveaways. When calculating loan-to-value or combined loan-to-value ratios for underwriting or eligibility purposes, the value of any sales concessions must first be subtracted from the sales price of the property.
Probably the most popular form of interested party contributions, seller concessions (sometimes called “seller assists”) are a great way for home buyers to avoid having to pay for some or all of their mortgage closing costs. A seller concession is when the home buyer and seller make a formal arrangement for the seller to pay some or all of the buyer’s closing costs at the time of settlement. Most major loan types such as conventional loans, USDA loans, FHA, loans and VA loans allow the usage of seller concessions, under the condition that they may ONLY be used to offset the home buyer’s closing costs.
Seller contributions when under the IPC limits placed by Fannie Mae are considered Financing concessions, but become sales concessions once they surpass those limits. These seller contributions do not always cover the full amount of closing costs that a home buyer faces, but they may never surpass the value of a home buyer’s closing costs. In other words, home buyers may not receive any cash-back for any seller concessions made that surpass the total amount of closing costs that the home buyer is responsible for paying.
Contributions from sellers are restricted to the payment of closing costs, and nothing more. Seller concessions are not to be used to cover home repairs, home appliance costs, and most importantly, they cannot be put towards a home buyer’s down payment.
How to arrange Seller Concessions
Seller concessions can be arranged directly between the home buyer and the seller of the property. The process is simple enough, but it is imperative that any decisions made or agreements reached are well documented on paper and signed by both parties. This kind of deal is perfectly legal, but must be done correctly in order to avoid any mishaps or misunderstandings.
In order to arrange a seller contribution, the home buyer and seller of the property must first decide on a sale price for the property. Once the property’s sale price is determined, the next step is to decide how large of a seller concession is to be made. Keep in mind that the final value of the seller concession must not exceed the total value of the closing costs.
With that value in mind, the buyer and seller can then agree to raise the sale price by the amount that they agreed on, with the seller’s agreement to “concede” the added value to be utilized for coverage of the buyer’s closing costs.