FHA’s New Limits on Financial Concessions from Sellers to Buyers

This is a reprint from Inman News (3/1/2012)http://lowes.inman.com and is information everyone should know and understand (sellers, buyers, agents)

    

The Federal  Housing Administration’s long-awaited rules on how much home sellers can  contribute to buyers’ closing costs are finally out — sort of.

Rather than  publishing final guidance on “seller concessions,” the agency put out  a Federal Register notice late last week saying, essentially: “OK folks,  here’s what we plan to do — but if you don’t like it, we’ll give you just 30  days to tell us why.”

As forecast  in an earlier column (see “FHA  may lower cap on seller concessions to buyers“), the almost-final rule  abandons the agency’s previous plan to impose a flat 3 percent, across-the-board  limit on settlement cost contributions by sellers that sweeten buyers’ deals.

That  approach was strongly criticized by the National Association of REALTORS® and by  prominent regional realty brokers as penalizing buyers and sellers in markets  with low to moderate home-sale prices.

Limiting seller  assistance to just 3 percent would smother sales, brokers complained, because  many closing costs are fixed and represent a larger percentage of the bottom  line in moderate-priced transactions compared with higher-cost sales.

To remedy  this, FHA officials now say the agency intends to adopt a more nuanced approach  under which the maximum allowable seller contribution can be the greater of  $6,000 or a percentage of the selling price, based on a sliding scale.

In some  cases, the current 6 percent cap will remain. In many others, it will dip far  below 3 percent and become a tiny fraction of what is allowed today.

For example,  in the sale of a $100,000 home, the maximum seller concession would be $6,000,  or 6 percent, under the new rule — the same as it is today.

On a  $120,000 purchase, it would be 5 percent ($6,000 is 5 percent of $120,000). At  a $140,000 selling price, the $6,000 cap would be 4.3 percent; at $180,000 it  would be 3.3 percent. At $200,000, the $6,000 cap would equal 3 percent, but  would still be one-half the $12,000 (6 percent) limit currently allowed.

All higher  sales amounts would be progressively more severely restricted by the 3 percent  limit. For instance, on a $300,000 home purchase the present FHA rule would  allow a seller to kick in as much as $18,000, but under the new cap that  assistance could not exceed $6,000 — far below even a 3 percent limit, which  would total $9,000.

In effect,  FHA wants to rein in what it sees as unacceptable distortions of the true  property value — and therefore its own risk of loss in the event of a default  — as transaction prices rise.

Left at its  current 6 percent across-the-board approach, FHA noted, sellers can throw in as  much as $43,785 in financial inducements to buyers in high-cost areas such as  California, New York and Washington, D.C., where the maximum conforming loan  limit is $729,750.

Fannie Mae  and Freddie Mac have long limited seller contributions to a flat 3 percent of  the selling price. The U.S. Department of Veterans Affairs allows 4 percent.

In its  proposed rule, FHA also took aim at certain types of seller assistance — particularly  those offered by some builders to bring buyers to the settlement table.

No longer  permissible under FHA’s revised definitions are seller concessions involving advance  payment of homeowner association fees, advance payment of mortgage interest for  a period of months, and “mortgage protection plans,” where borrowers  receive insurance policies free of direct charge that guarantee up to six  months of mortgage payments in the event of an unforeseen job loss or medical  disability.

“HUD  believes that these types of payment supplements, while permissible under  current seller-concession guidelines, are really inducements to purchase and  should be treated as such,” the agency said in its proposal.

To the  extent that builders or other sellers continue to make such offers to buyers,  FHA intends to subtract them, dollar for dollar, from the sale price of the  house before calculating the loan-to-value limit on the insurable mortgage  amount.

Still  acceptable to FHA under the proposed changes:

  • actual  closing costs;
  • prepaid  expenses;
  • loan discount  points; and
  • the  upfront mortgage insurance premium charged by FHA.

Though NAR  has not commented publicly yet on the FHA proposals, homebuilders are unhappy  with the rollbacks and new restrictions.

“This  is going to impinge on (builders’) ability to sell homes,” David Ledford,  senior vice president for regulatory affairs at the National Association of  Home Builders, told me.

Worse yet,  he said, FHA is planning to change the rules “at a very inopportune time”  in the market cycle, “just when there are ‘green shoots’ ” of  recovery sprouting up — in the form of higher traffic and slowly increasing  sales — in markets around the U.S.

In  particular, he added, many builders now routinely offer to pay a limited period  of homeowner association dues for their buyers, but now they may have to cut that  practice.

Steve A. Brown,  executive vice president of Crye-Leike REALTORS®, a large regional brokerage  based in Memphis, told me that in relatively moderate housing-cost areas such  as where his firm operates, FHA’s new sliding scale on sellers assistance caps “should  not have a huge impact, especially if agents advise clients to close toward the  end of the month to minimize prepaid interest, (which is) a large variable in  closing costs.”

In higher-cost  areas, however, it will be a whole different story.

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