My Real Estate Blog

One of the key attractions of FHA home-mortgage financing is going, going, but not quite gone. Sellers and buyers who move fast can still make the most of it. Sometime this summer, the Federal Housing Administration plans to slash maximum "seller concessions" from 6% of the sales price to 3%. Seller concession rules allow buyers to look to the property seller to pay for a variety of services and taxes connected with the transaction but not towards the down payment. 

If you're buying a $200,000 house and are using FHA financing, under current rules you can structure the contract so that the seller agrees to pay all closing costs and even some repairs the house needs at settlement, up to 6% of the price or $12,000. On a $400,000 house, allowable concessions go to $24,000. That's huge, especially if you struggle to come up with a 3.5% down payment and you're not sure where you'll find the closing and repair money. Contrast that with Fannie Mae or Freddie Mac conventional financing, where seller concessions generally are limited to 3%. For many buyers, the extra negotiating flexibility built into the FHA program makes the choice between programs a no-brainer.

When FHA officials announced the policy change earlier this year, they said the long-standing 6% maximum "exposes the FHA to excess risk by creating incentives to inflate appraised value." That would occur when sellers agree to pay buyers' closing and other expenses but merely tack those costs onto the final sale price of the house. Rather than agreeing to a $200,000 price as in the example above with $12,000 worth of concessions, the final contract price of the house would instead be $212,000. If an appraiser did not detect and report the price boost, FHA would effectively be insuring a mortgage on a house worth less than the sale price. In fact, since the rules allowed a 6% seller concession and the down payment was just 3.5%, FHA would be insuring an underwater loan from the start.

Posted by Jim McCowan on June 13th, 2010 12:39 PMPost a Comment (0)
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