Loan Modification

FHA?s ?seller contribution? rule in limbo

By Peter G. Miller

It was last April when HUD announced an effort to change FHA guidelines by reducing allowable seller concessions from 6 percent to 3 percent.

This could be a very big deal at a time when the real estate marketplace is hardly robust. However, HUD has not introduced new FHA loan guidelines that would restrict the size of seller contributions.

Huh? How come?

This is one of those situations where you would think: aha! Lower the seller contribution and you also reduce the FHA’s loan risk because you’re effectively forcing the borrower to put up more cash at closing.

Or, maybe you don’t think that: Maybe you think local markets are weak and seller contributions could make sales happen, something that can help raise home values generally.

It’s a tough call and and the guess here is that HUD has not tried to reduce allowable seller concessions because the second idea is hard to overlook even if a lower benchmark is desired.

How It Works

In basic terms owners have long been allowed to provide as much as a 6 percent “seller contribution” or “seller concession” to make a transaction happen for FHA loan borrowers. In practice the deal works like this:

Scenario One: The market is hot, hot, hot. Buyers are lined up outside the Smith house, down-payments in hand, begging to buy. Nope, no seller concession here.

Scenario Two: The market is balanced with buyers and sellers negotiating every clause and debating every penny. To speed the sale of the property owner Johnson offers a 3-percent seller contribution. The home sells for $400,000, buyer Jones gets a $12,000 credit from Johnson at closing and the result is that Jones has no cash closing costs.

Scenario Three: The market is woeful, homes aren’t selling so to stand out owner Grayson offers a 6 percent seller contribution. The property sells for $300,000 and at closing the buyer receives an $18,000 credit from the owner.

Notice what a seller concession is not: Is it NOT money that can be used for a down payment. In all cases the buyer must come up with cash for a down payment (or a gift).

Also, notice that the size of the seller concession can impact the qualification process. As HUD explains:

“Contributions exceeding six percent of the sales price or exceeding the actual cost of prepaid expenses, discounts points, and other financing concessions as well as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio.

If you’re buying or selling speak with your lender regarding current mortgage rates and also the matter of seller concessions. As a seller they can be a tool to move a home in a tough market, as a buyer they can be the different between affordable and not affordable.

Full post as published by FHA Mortgage Guide on January 05, 2011 (boomark / email).