FHA Seller Concession Rules Proposal Issued

The long awaited details of the proposed rule to limit seller concessions is finally back in the federal register. A re-proposal requesting comments was published yesterday, Feb. 23 with a comment period open until March 26th. The new proposal combines a percentage cap with a dollar limitation and works like this (of course it isn’t just a straight forward policy!):
  • The seller is permitted to pay an amount to offset actual closing costs up to the greater of 3 percent or $6,000. The 3% is based on the lesser of the sale price or appraised value. There is a note with Table G in the federal register that states ‘except for 203(k) where the appraised value is to be used’.
  • The definition of acceptable concessions permits payment of actual costs to close the loan including pre-paids, payment of UFMIP and/or fund an interest rate buy down.
  • The seller or other interested third party is not permitted to pay condominium associations fees, mortgage interest payments and mortgage payment protection plans. HUD is trying to eliminate sellers paying incentives such as a year’s worth of homeowner association fees, 6 month’s worth of mortgage interest or mortgage payment protection plans.
  • The cap applies to any contribution by an interested party. HUD has clarified this definition to be: “Seller or other interested party such as a real estate agent, builder, developer, mortgage broker, lender, and/or settlement company.” However there is a statement in the table defining the 3% rule that lender paid closing costs as a result of premium pricing are not considered in the 3%. I believe this wording triggers several questions! We will be addressing this topic with HUD to make sure it is clear how broker paid costs or a last minute waiver of fees will be viewed.
Some important notes:
  • The loan amount after which the 3 percent of the property value is greater than $6,000 is $194,930 with a sale price/value of $200,000. Therefore, any sale price/value above this amount will be limited to the 3% maximum.
  • The $6,000 is not static but tied to an index. The dollar limitation may increase annually and at the same percentage rate as the FHA national loan limit floor, rounded up or down within $100.
  • In the previous federal register notice, FHA was also asking for comments related to manual underwriting rules. The proposal for the manual underwriting rules has not been included with this posting. We should expect a separate request for comments on this subject in the coming months.
Remember this is a request for comments about seller concessions and is not a final rule. Here is the link to post a comment:!submitComment;D=HUD-2010-0063-0908 FHA is planning a conference call with the MBA FHA Subcommittee of which I am a part of. Please feel free to send me your questions and concerns and I’ll make sure we get answers during the meeting.   Stay tuned!