What Does Seller Concession Mean Under an FHA Loan?
The Federal Housing Administrations, which has helped millions of Americans purchase and refinance their homes despite modest means or credit challenges, offers flexibility for cash-strapped borrowers. FHA insures loans made by approved lenders, reimbursing them in the event of default. FHA allows borrowers to receive certain seller concessions to help them purchase a home.
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Sales concessions may be given to the buyer by a seller or any party to the FHA mortgage transaction. Sellers may give an FHA borrower monetary or material incentives to purchase their property, such as a lump sum to cover certain settlement costs or personal property.
The FHA allows the seller to pay for the following as a form of concessions: loan discount points, loan origination fees, interest rate buydowns, closing cost assistance, payment of condominium fees and builder incentives.
Appraisal Issues
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"Sales concessions influence the price paid for real estate," according to FHA. Concessions generally increase the sales price, as the seller simply tacks the amount onto the sales prices to achieve maximum net proceeds. As such, the FHA requires its appraisers to identify and report when seller concessions are part of a purchase agreement. Appraisers account for seller concessions by addressing and adjusting comparable sales they utilize in their appraisal report. This helps the FHA avoid insuring a loan on a home worth less than the price paid. The lender may request a reconsideration of value if it believes a home's price is overly inflated for the seller concessions provided.
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In 2010, the maximum allowable seller concessions dropped from 6 percent to 3 percent of the sales price. The long-standing maximum exposed "FHA to excess risk by creating incentives to inflate appraised value," according to the FHA.
Seller concessions exceeding the 3 percent maximum are treated as inducements to buy. In such cases, the FHA requires a dollar-for-dollar reduction in the loan amount it insures. They must subtract the amount paid by the seller from the lesser of the sales price or appraised value. The loan-to-value factor, generally 96.5 percent, applies to this lower amount.
Considerations
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Sellers may pay for certain buyer closing fees considered FHA-allowable, such as lender origination and points, their fair share of escrow and title fees, as well as home upgrades in new home transactions. Seller may not pay any part of the borrower's down payment requirement of at least 3.5 percent. FHA banned the use of seller-funded down payment assistance programs as a means of preventing price inflation and inducements to buy.
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