What is the deal on 3% closing costs concession on FHA loans?

[moh malekpour]

I looked at many sold homes with FHA loans and most of them had 3% closing costs added to their last listing prices. I don’t know if this is typical for all FHA loans or I just happened to see those with 3% closing costs concessions. I am sure appraisers have to explain in their reports about their FHA subjects with concessions but how about the Comps with FHA loans and 3% closing costs? My subject was not FHA but one of my comp had FHA loan and the sales price was 3% higher than its listing price and I adjusted that after I confirmed it with its listing agent. I remember in the past, if the subject had a conventional loan and the comps had FHA loans with closing cost concession, we needed to adjust for the concession but if the subject was FHA and comps were also FHA, the adjustment was not needed as long as the concession was not more than 3% of the sales price but I don’t know about now. Do you adjust for the 3% closing costs of your FHA comps even if your subject is also is FHA? Just curious

 

[RSW]

FHA will only allow the seller to pay up to 3% now. You would treat that comp the same way you would treat any comp where the seller made a concession. It doesn't matter if the subject is a conventional or FHA loan. It is the same. Remember, you are comparing the comps to the subject.

 

[Lee Lansford]

... I remember in the past, if the subject had a conventional loan and the comps had FHA loans with closing cost concession, we needed to adjust for the concession but if the subject was FHA and comps were also FHA, the adjustment was not needed as long as the concession was not more than 3% of the sales price but I don’t know about now. Do you adjust for the 3% closing costs of your FHA comps even if your subject is also is FHA? Just curious

Anyone who would like a brief and to the point article on treatment of concessions to buyers when communicating an appraisal with a Fannie form, PM me here and be certain to include your e-mail address and I shall respond with the article.

Seriously.

Concessions to buyers: one of the more frequently discussed, yet least understood, appraiser topics.

Hint to all: read and digest the "asterisk" section of Fannie's definition of Market Value.

 

[Otis Key]

Anyone who would like a brief and to the point article on treatment of concessions to buyers when communicating an appraisal with a Fannie form, PM me here and be certain to include your e-mail address and I shall respond with the article.

Seriously.

Concessions to buyers: one of the more frequently discussed, yet least understood, appraiser topics.

Hint to all: read and digest the "asterisk" section of Fannie's definition of Market Value.

And I thought you had something new - LOL m2::laugh::laugh::laugh:

 

[moh malekpour]

Hey Otis,
Do you remember when the GI bill passed after WW 2 when GIs came home after the war and wanted to buy homes with FHA loans. It was a law at that time for homeowners who wanted to sell homes to GIs with an FHA loans to pay 3% closing costs of the FHA loans from their pockets. The housing market was so bad at that time that GIs with FHA loans were the best buyers for homeowners who really wanted to sell their homes and didn't mind to pay that 3% from their own pockets in order to sell those homes otherwise they had to wait for a long time to find a regular home buyer with a conventional loan. GIs were able to get FHA loans with zero down payments, concessions from sellers for their closing costs, a real appraisal on their homes that intended to buy and much lower interest rates from fixed conventional rates at that time. It was part of new deal at around 1944. Now, that 3% for buyer's closing cost still is there but the buyers are not GIs and the sellers are not paying the closing costs but they are adding those costs to the sales prices. I don't know why FHA agrees to that but I guess it is the tradition from the past that was for different purpose and different groups of people when it originally started.

 

[Lee Lansford]

And I thought you had something new - LOL m2::laugh::laugh::laugh:

Otis, something new?

Heck, we can't get appraisers to read and understand the "old" (as is: don't need anything "new" when the "old" says it all).!

 

[moh malekpour]

Is the 3% payment of the sales price towards the borrowers closing costs in FHA loans a concession from the seller to the borrower or changing the LTV from 100% to 103%?

 

[The Sheriff]

My take on the comps... and I actually sat next to a Landsafe appraiser during the Super Bowl who said I was flat out wrong. If a comp has a seller paid concession and I'm doing an FHA deal, I'm discounting the comp dollar for dollar for the concession paid by the seller (when confirmed). Three years ago, were sellers paying three points on the deals? No. So, is it truly typical for every market? I spoke to Brad Pack recently on the phone, and this was one thing I wanted to run by him so I could hear it from the horse's mouth.

FHA says if seller concessions are typical in all markets, don't adjust... however, it's painfully obvious that seller concessions were not typical during the seller's market when the run up occurred in 2004, 2005, and part of 2006.

The Landsafe appraiser did not like my answer and says he gives up to 3%, adjusting for anything over 3%.

Until we all get on the same page and a guideline says "Don't do this or I'll spank you", every appraiser will handle it differently (and unfortunately, client influence will dictate how this gets handled for the appraisers that lack a backbone). That 3% adjustment caused plenty of headaches this summer when my firm was doing a ton of FHA work for BofA (we completed about 100 FHA deals for them over a five month period). We had many reports that came under the sales price because we adjusted for concessions (and the agents were livid with us on both sides - you would think the buyer's agent would be happy for their client).

Not sure where Lee is going with this... but I am curious if he has a difference of opinion with my answer. We are appraisers and we all tend to differ on something or another.

 

[Mike Boyd]

Let's say the sales price is $100,000 and the buyer applies for maximum FHA financing.
Theoretically, the maximum FHA loan is 97% of the sales price or the appraised value, whichever is the LOWEST. Let's assume it appraises for $100,000. BUT WAIT!!! FHA allows the the LOAN to be bumped 3% to cover all or part of the buyer's closing costs.

Therefore, that 97% maximum has become $100,000! BUT WAIT!!! The buyer still has a deficit equal to 3% and must come up with $3,000. BUT WAIT!!! The agent negotiates with the seller to credit the buyer $3,000, ostensibly, for worn carpet, fading paint, too many frogs in the fish pond, or whatever. FHA does not require the frogs to be removed so he winds up with what we use to call an FHA no no. No down payment, no closing costs. That was called a 203B loan. For a vet, there was a 203B-2 loan. As far as I can recall, that program was for veterans and it increased the the basic loan to 100% of the purchase price or appraisal, which ever was the lowest. Therefore, it was no longer necessary for the seller to credit the buyer for worn carpet, fading paint or frogs in the pond.

There never was a concession unless the seller was paying the 3% closing costs and since it was limited to $3,000, it was allowed and assumed to be SOP. No adjustment needed.

 

[Walter Kirk]

Look at them carefully. 3% is also the required minimum down payment on most FHA loans. This may be a way to get 100% financing.