Interested Party Contributions Can Help You Buy in Texas… Here’s How!

You’ll notice that there are many people involved in the homebuying process, and the people who have a financial stake of interest in the property or the transaction occurring (like the seller or the real estate agents) are called “interested parties”. These interested parties can contribute funds known as Interested Party Contributions (IPCs) that can help pay for closing costs, whether those closing costs are property taxes, property insurance, repairs, or any number of other closing costs.

IPCs appear as closing cost credits and are shown on the final closing disclosure the buyer receives. IPCs are fantastic at reducing the money you need to pay at closing and can be a huge benefit to buyers in today’s market. The one downside to be careful of is when you receive too many IPCs, you run the risk of increasing your loan to property value ratio (LTV) beyond the allowable amount, which can then force you to incur further costs like mortgage insurance premiums.

Don’t worry, LendFriend is here to help walk you through how to make the most  of your IPCs. Let’s take a look at how you can maximize the benefits of IPCs and eliminate the downside.

What Are Interested Party Contributions (IPCs)?

IPCs are credits from a financially interested party in the transaction to help cover the buyer’s closing costs. They’re a powerful way to reduce your out-of-pocket expenses and can often be negotiated during contract discussions—especially in a buyer’s market.

Common IPC providers include:

• The seller

• The homebuilder (especially for new construction)

• Listing or buyer agents (if they choose to credit commission)

• Affiliated parties in the transaction (e.g., the seller’s lender)

Want to learn more about closing costs in general? We’ve broken down every fee and how to minimize them in our Complete Guide to Closing Costs.

Here’s the lay of the LTV land:

Most underwriting guidelines have a limit on the maximum IPCs a buyer can use. The maximum IPC permitted will always be a percentage of the lesser of the purchase price or closing costs. If the home being purchased is a primary residence or second home/vacation home, the maximum amount of IPCs will depend on the LTV. If the home being purchased is an investment property, the maximum amount of IPCs is the lesser of 2% of the purchase price or the closing costs. Below is a helpful chart laying out all of your options.

What happens when you exceed the maximum amount of IPCs?

If your IPCs exceed the maximum amount of IPCs allowed by underwriting guidelines, the lender is required to count the excess amount as a reduction of the purchase price, which might sound great, but, in reality, can be detrimental to your LTV.

It’s important to keep in mind that if you are obtaining a conventional mortgage loan, you want your LTV to be 80% or less in order to avoid having to pay for mortgage insurance. Having to pay for mortgage insurance just because you received too many credits would be a waste of money that we’d love for you to avoid!

So, before agreeing to IPCs, check in with your lender and make sure your IPCs don’t affect your loan payments.

Examples of how IPCs can affect your LTV

Here are a couple examples to show you the application of IPCs at your closing.

Example 1 (LTV below the 80% threshold):

A $400,000 Purchase of a primary residence with a $240,000 Loan means a Loan-to-Value Ratio (LTV) of 60% (240,000/400,000).

Looking at the chart above, the maximum IPC permitted by the lender before counting against the purchase price is 9% of the lesser of the purchase price or closing costs or $36,000.

If the IPC on the transaction is $40,000, the credit would exceed the IPC limit. The extra $4,000 would be a sales concession (or reduction of the purchase price). The lender would consider the purchase price to be $396,000 ($400,000-$4,000) and the resulting LTV would be 60.61%, still well below the 80% threshold.

Example 2 (LTV at the 80% threshold):

A $400,000 Purchase with a $320,000 Loan would be a Loan to Value Ratio (LTV) of 80% (320,000/400,000).

The maximum IPC on a 80% LTV is 6% of the lesser of the purchase price or closing costs or $24,000.

If that same $40,000 credit from example 1 was offered, the $24,000 cap would leave $16,000 of excess IPCs. The lender would consider the purchase price to be $384,000 ($400,000-$16,000) and the resulting LTV would be 83.33%, which would cause the buyer to have to pay mortgage insurance.

Why Working With a Mortgage Broker Matters

Unlike retail lenders or big banks, mortgage brokers work across multiple lenders and can help you:

• Structure your IPCs to maximize credits without triggering LTV consequences.

• Shop for lenders with more flexible IPC policies, particularly helpful for low-down-payment buyers.

• Combine IPCs with down payment assistance and seller concessions for creative financing.

Curious how brokers stack up to banks? Read our in-depth post: Mortgage Brokers vs. Banks: Who Really Gets You the Best Deal?

Pro Tip: Combine IPCs With Smart Down Payment Strategies

The beauty of IPCs is that they free up your cash, which you can then use to improve your loan structure. For example, if IPCs cover your closing costs, you may be able to bump your down payment to reach that 80% LTV sweet spot and avoid private mortgage insurance altogether.

And if cash is tight? IPCs can be used in conjunction with one of LendFriend’s many low- and no-down-payment programs. Explore all your options in our guide to Down Payment Assistance and Creative Financing Solutions.

LendFriend is here to help!

IPCs are one of a buyer’s best tools and we don’t want you to think otherwise. Who wouldn't want to use other people's money to buy their home?! However, it’s important to make sure you adjust your loan terms accordingly when necessary, so you don’t get stuck paying for avoidable costs. If you have questions on how to make the most of your IPCs, give us a call at 512.881.5099 or apply now, and one of our loan officers will be in touch as soon as we receive the application.