In January, the Department of Housing and Urban Development (HUD) announced the first major changes to FHA financing for the year changing the maximum seller concessions from 6% to 3% early summer 2010.
The changes to seller concessions will have a large impact. Concessions include what the seller is contributing to the buyer in the transaction. A common concession is a credit from the seller to cover the buyer’s closing costs. A 3% limit on seller concessions is enough to cover closing costs on a purchase of around $250,000, but with a purchase price of anything less than $250,000 the buyer will be forced to pay some closing costs out-of-pocket. This will be a pain-point for many FHA borrowers in the months to come.
The change in concessions will also impact new construction transactions. Upgrades on a new home will be considered a seller concession if the purchase and sale clearly states that there was an increase in price for these upgrades. For example, supposing a buyer plans to purchase a new home at $295,000. In this transaction, the builder/seller is offering to pay the buyer’s closing costs up to $9,000, and the buyer is putting $20,000 down. The buyer’s loan officer arranges a loan with closing costs of approximately $8,000 for a $275,000 loan. In this instance, $275,000 x 3%= $8,250 — the buyer is okay.
However, as this is new construction and the buyer is purchasing from the builder, the buyer negotiates upgrades valued at $5,000. In this instance, the Purchase and Sale contract itemizes: upgraded flooring valued at $3000.00, and upgraded counter tops valued at $2000.00. In the underwriting process, the underwriter will likely consider these upgrades seller concessions. This additional $5,000 will be counted against the 3% limit. After a down payment of $20,000, your loan amount would be $280,000. If you’ve been following the math, you will note that 3% x $280,000= $8,400. The original $8,000 in closing costs, plus the $5,000 in upgrades will exceed the 3% limit. The loan no longer qualifies under FHA guidelines.
Another example of how this could affect a transaction? Let’s suppose a buyer is shopping for a condo. The seller is offering to pay for all the closing costs and Homeowner Association Dues for 1-year. Both are considered a seller concession, so if the two figures total to over 3%, this purchase also would not qualify under FHA guidelines
If the seller is paying for something in behalf of the buyer, it is likely a “concession.” Home buyers should be careful of any potential concessions offered if they’re planning on using FHA financing.
Why is HUD doing this? The answer is simple, to protect home values. Since buyers often need sellers to pay for their closing costs, HUD is trying to protect sales prices from being inflated to include these concessions. Though a valiant cause, it doesn’t make sense to squeeze the little guy out. FHA is now a perfect loan program for buyers in the higher income range and a small down payment. This is not what FHA was intended for. Here is an excerpt from HUD’s mission statement:
The Department of Housing and Urban Development (HUD) is committed to helping communities across America identify and overcome regulatory barriers that impede the availability of affordable housing. READ ENTIRE MISSION STATEMENT
Keep reading to learn more about the other changes mortgage guidelines and new rules as they come about.
A colleague of mine (Ann Liberato, founding partner at Cobalt Mortgage) told me she spoke with someone at HUD and they confirmed the change is still happening but will likely take place in the fall of this year (2010). We’re not sure why HUD is delaying the change but I hope that it is modified to allow higher concessions for smaller sized transactions.
I spoke with Ken Harney from the Washington Post a couple of weeks ago on this topic. Ken also wrote an article about the changes to seller concessions for FHA financing:
One of the key attractions of FHA 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 percent of the home price to 3 percent. Seller concession rules allow buyers to look to the property seller to pay for some services and taxes connected with the transaction — loan origination and local transfer fees, appraisals, inspections, closing and escrow costs, among others — though not the down payment. READ MORE
I hope the national attention will persuade HUD to allow higher concessions on smaller transactions.
UPDATE JULY 28TH, 2010
HUD is closer to changing their concessions from 6% to 3% but is open to hearing comments, according to an article on Mortgage News Daily. I will be sure to let my voice be heard. If you would like to have your voice heard as well, please follow the instructions as given from this article.
- Visit http://www.regulations.gov
- Scroll down about 1/3rd of the page and you will see a link for “What’s Hot –Most Visited Regulations”
- Click on that link and you will see a list of pending regulation. Select the notice: “Federal Housing Administration Risk Management Initiatives: Reduction of Seller Concessions…”
- That will take you to a page where the document outlining these changes is available for review. Towards the top right-hand of the page, you will see a link in light-blue ink that reads “Submit Comment”…click on that link and fill-in your information, and type-in your comment.
- Hit “submit” and let your voice be heard.
UPDATE MARCH 17TH, 2011
So far, FHA guidelines have remained at 6% which I think is a good move. Most transactions under $250,000 have more than 3% in total closing costs and prepaids and the sellers are more than happy to pay them.