When purchasing a home, understanding the potential financial assistance available to you can make a big difference in your buying experience and financial setup. Interested Party Contributions (IPCs) are a key component of this, offering a way for sellers, builders, realtors, or other affiliated parties to contribute financially to your purchase under specific conditions. This blog post will explore what IPCs can cover and the limits imposed on them.
What are Interested Party Contributions?
IPCs are payments made by the seller, developer, real estate agent, or another party who has a financial interest in the transaction. These contributions aim to reduce the burden on the buyer, making home purchases more affordable.
What Can IPCs Be Used For?
IPCs can be used to cover various expenses related to buying a home, including:
- Closing Costs: These are the fees and expenses you pay to finalize your mortgage, such as loan origination fees, title insurance, and appraisal fees.
- Prepaid Items: These include prepayments of property taxes and homeowners insurance.
- Buydowns: IPCs can fund temporary buydowns, where the interest rate is reduced for the initial 1-3 years of the mortgage.
- Permanent Interest Rate Buydowns: Less commonly, IPCs can also be used to permanently reduce the interest rate on your mortgage.
- Mortgage Insurance Premiums: Contributions can be used to pay upfront or ongoing mortgage insurance premiums.
Limits on Interested Party Contributions
The limits on IPCs vary by loan type and are expressed as a percentage of the lesser of the purchase price or the appraised value of the property:
- Conventional Loans (Fannie Mae and Freddie Mac):
- For owner-occupied properties and second homes with a down payment of less than 10%, the IPC limit is 3%.
- If the down payment is between 10% and 25%, the limit increases to 6%.
- For down payments of 25% or more, the limit is 9%.
- For investment properties, regardless of the down payment, the IPC limit is 2%.
- FHA Loans:
- IPCs can cover up to 6% of the home’s sales price, irrespective of the down payment size.
- VA Loans:
- The Department of Veterans Affairs allows IPCs to cover up to 4% of the appraised value of the home, plus reasonable and customary amounts for any other allowable closing costs.
- USDA Loans:
- Similar to FHA loans, USDA loans allow up to 6% of the sales price in IPCs.
Things to Consider with Interested Party Contributions
While IPCs can significantly reduce the amount of cash you need at closing, it’s important to consider how they might affect your loan and home purchase. For instance, IPCs might be included in negotiations for the final sale price, which could impact the appraisal or the loan-to-value ratio. If you are getting more contributions than there are closing costs, a purchase price reduction is normally required.
Conclusion
Interested Party Contributions can provide substantial financial relief at closing, allowing for greater flexibility in your budget. As a homebuyer, understanding these contributions and how they fit into your overall financial picture is crucial. Always discuss IPC possibilities and implications with your real estate agent and lender to fully leverage these opportunities in your home buying process.
If you have further questions about IPCs or need assistance with your home purchase, feel free to reach out for personalized advice and support. 720-250-7764, nick.ross@edgehomefinance.com
