Ask the Underwriter is a regular column for HousingWire's LendingLife newsletter, addressing real questions asked to, and answered by, professional mortgage underwriter, Dani Hernandez. 

Question:

My borrower is purchasing a home using conventional financing. The purchase price is $200,000 and the loan amount is $190,000, which puts the  loan to value at 95% and the borrower’s down payment is $10,000. The seller is giving a credit of $7,000 and I am giving a lender credit of $2,500 and the closing costs and prepaids are $5,500. The cash to close after all the credits is $4,000 which is less than the 5% down payment of $10,000. If the lender and seller credit are more than the closing costs can we use the excess credit to cover part of the down payment?

Answer:

The combined seller and lender credits cannot exceed the combined closing costs and prepaids. Unfortunately, Fannie Mae prohibits using the seller or lender credits to make part of the borrowers down payment. Fannie Mae classifies these credits as Interested Party Contributions.

Fannie Mae IPCs Guideline

Interested party contributions (IPCs) are costs that are normally the responsibility of the property purchaser that are paid directly or indirectly by someone else who has a financial interest in, or can influence the terms and the sale or transfer of, the subject property.

Interested parties to a transaction include, but are not limited to, the property seller, the builder/developer, the real estate agent or broker, or an affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible. A lender or employer is not considered an interested party to a sales transaction unless it is the property seller or is affiliated with the property seller or another interested party to the transaction. (For Fannie Mae's purposes, an affiliation exists when there is direct common ownership or control by the lender over the interested party or vice versa, or when there is direct common ownership or control by a third party over both the lender and the interested party. A typical ongoing business relationship — for example, the relationship between a builder and a lender that serves as its financial institution — does not constitute an affiliation.)

IPCs are either financing concessions or sales concessions. Fannie Mae considers the following to be IPCs:

  • funds that are paid directly from the interested party to the borrower;
  • funds that flow from an interested party through a third-party organization, including nonprofit entities, to the borrower;
  • funds that flow to the transaction on the borrower’s behalf from an interested party, including a third-party organization or nonprofit agency; and
  • funds that are donated to a third party, which then provides the money to pay some or all of the closing costs for a specific transaction.

A lender credit derived from premium pricing is not considered an IPC even if the lender is an interested party to the transaction.

See B3-4.1-03, Types of Interested Party Contributions (IPCs), for more information.

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.

If the loan to value is 95%, the borrower must make the entire 5% down payment from their own funds. In this case, the minimum contribution from the borrower is $10,000. The seller credit should be reduced so that when combined with the lender credit, it is less than or equal to the total closing costs and prepaid items.

Closing Costs and Prepaids: $5,500

(minus)

Lender Credit: $2,500

______________________

Maximum Seller Credit: $3,000

Once you reduce the seller credit, the borrower’s cash to close will be $10,000, which is equal to the minimum contribution of 5% of the purchase price and you can close the loan!