FHA Changes Guidelines for Seller Concessions

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.