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

[TJSum]

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.

Are you sure about this, I am still seeing plenty of comps out there with over 3% concessions whatever financing is being used including FHA. The FHA sale I inspected this morning has 3.5% in concessions.

 

[Mike Boyd]

Are you sure about this, I am still seeing plenty of comps out there with over 3% concessions whatever financing is being used including FHA. The FHA sale I inspected this morning has 3.5% in concessions.

Only 3% can be financed. Fannie and Freddie will allow 6%.

 

[timd354]

FHA requires that the borrower has a minimum of 3.5% cash in the transaction. The FHA still allows the seller to pay up to 6% towards closing costs.
From Mortgagee Letter 2008-23:


•

Seller Concessions: Sellers are still permitted to provide financing concessions up to 6
percent of the sales price. Amounts exceeding six percent must be subtracted from the sales
price (or value, if less) before applying the downpayment percentage multiplier. Other

inducements to purchase, as described in the mortgage credit analysis handbook (HUD-

4155.1 REV-5) must also be subtracted from the sales price or value, as appropriate, in​

calculating the maximum mortgage amount/downpayment. In such cases,
the actual downpayment is increased by the amount of the inducement.

 

[moh malekpour]

The 3% of the sales price towards the borrower’s closing costs is not the seller’s concession. The seller doesn’t pay a penny towards the borrower’s closing costs and the borrower doesn’t get a penny from the seller as a concession. The borrower simply borrows the closing costs from the lender on the top of the loan amount for the sales price of the property but if the loan amount for the purchase is 100% LTV, the additional borrowing of the 3% closing costs to 100% LTV is going to make that loan 103% LTV. The maximum LTV for FHA loan is 95 to 100% and FHA cannot insure above 100% LTV loans because any loan with LTV above 100% is considered sub prime and risky loan and requires a higher interest rates for the higher risk. FHA insurance premium doesn’t cover the risk of above 100% LTV. So, how can they create a loan that it doesn’t look like FHA is insuring above 100% LTV loans? They simply add the borrowed closing cost to the sale price and make the loan to look like as if it is a 100% LTV loan. This is simply a sub prime loan in disguise.

 

[TJSum]

Just as a follow up on the report I did today, I looked at 12 potential comps, 3 of which were FHA with the 6% (to the penny) closing help. It was a large cookie cutterish townhouse development, so I did not use them and went with the ones with little to no closing help. But I am seeing plenty of FHA potential comps out there right at the 6% level, especially in the distressed markets.

 

[JSmith43]

Just to confirm: (If I am wrong, show me the mortgagee letter I missed.....please

6% seller paid financing concessions OK. After that, a dollar for dollar reduction in the maximum loan amount.

Since 1/1/2009, the borrower must have 3.5% of the sales price as a down payment.

Example: On a $100,000 purchase, the maximum base loan amount will be $96,500. The up front portion of MIP is typically financed (added to the base loan amount). A break from the past, borrower paid closing costs do not count toward a 3.5% "minimum investment", which means that virtually every transaction I am seeing is structured so that the seller pays all the closing costs and pre-paid expenses. In the past, the borrower could put as little as 2.25% down as long as he/she paid a minimum of .75% of the sales price worth of closing costs, in order to meet the 3% minimum investment requirement of the previous standard.

Rate/term refinances and streamline refinances may still have a maximum base loan amount of 97.75% of appraised value, which might be a bit confusing.

 

[Lawrence R.]

Moh,

You get a green square from me.

It is a game, and it is a game that has been played from the start. It would seem that everyone--with the possible exception of the FHA and its investors--understand that these loans are partially unsecured, sub prime in nature...and frankly will be the coup de gras that brings down the house. First Fannie, then Ginnie. All these ladies are going to fall.

 

[JSmith43]

Moh,

You get a green square from me.

It is a game, and it is a game that has been played from the start. It would seem that everyone--with the possible exception of the FHA and its investors--understand that these loans are partially unsecured, sub prime in nature...and frankly will be the coup de gras that brings down the house. First Fannie, then Ginnie. All these ladies are going to fall.

Well, they should fail, but they will benefit by the luck of their good timing. FHA, at the peak of the market, was a mere 5% or so & now that prices have dropped sharply, is ramped up to over 50% of loans. I'm winging the percentages-don't have time to research now, but the point is, the bulk of their exposure is loans on homes that sold relatively close to the bottom (hopefully), and this serendipity may save them this cycle.

 

[TJSum]

Well, they should fail, but they will benefit by the luck of their good timing. FHA, at the peak of the market, was a mere 5% or so & now that prices have dropped sharply, is ramped up to over 50% of loans. I'm winging the percentages-don't have time to research now, but the point is, the bulk of their exposure is loans on homes that sold relatively close to the bottom (hopefully), and this serendipity may save them this cycle.

I agree, they might luck out this time. The loans that are made today sure are more solid then the loans made at or near the peak of the value cycle. In the meantime, FHA might also keep the entire real estate industry from totally collapsing by making loans when no one else is. If the FHA option were not out there right now many real estate markets would be totally shut down.