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FHA Proposes to Reduce Allowable Seller Concessions

By: | March 16th, 2012

In another round of the continuing list of changes taking place in the mortgage industry, the U.S. Department of Housing and Urban Development published a revised proposal in February, 2012 regarding FHA insured single family mortgages. This FHA proposal reduces allowable seller concessions or any other third party concessions that contribute to a borrower’s mortgage.

The current concession limit is 6 percent of the value of the home which is, in most cases, contributed by the seller of the transaction. The revised proposal would reduce this to 3 percent of the home’s value or $6,000, whichever amount is greater. According to the proposal, seller concessions at 6 percent of the sales price of the property, which are in currently in place, increases the risk of default. The proposed 3 percent is not an unusual amount since it is the same amount that is currently allowed with conforming mortgages. Although this may sound terrible to many home buyers and real estate agents, the 3 percent maximum will actually only occur on mortgages $200,000 and above. For a $100,000 property value, the concessions will be the maximum of $6,000 which is really 6 percent. The percentage decreases as the amount increases. It is also proposed that the items that are paid for by interested third party concessions exclude payment for items such as homeowner association fees, mortgage protection plans, etc. Concessions are to be used to acquire the property, not payment supplements which are considered inducements to purchase. Acceptable costs to be paid with concessions are closing costs, prepaid expenses, discount points, the upfront mortgage insurance premium and interest rate buy downs. The revised proposal also clarifies the interested third party as seller, real estate agent, builder, developer, mortgage broker, lender and/or settlement company.

The FHA proposal to reduce allowable seller concessions is currently open to discussion until the end of March. After that, HUD and FHA will make the final decision and rules that will be put into effect shortly thereafter.

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