mortgage

FHA may curb seller-paid closing costs

Highlights
  • FHA may cut seller-paid closing costs to 3 percent of sales price.
  • New rule aims to reduce risks of loan defaults, inflated appraisals.
  • Loan programs with lender-paid closing costs may help some borrowers.

Homebuyers who want a mortgage insured by the Federal Housing Administration, or FHA, may soon be limited to negotiating seller concessions of just 3 percent of the home's purchase price.

The FHA's rationale for the proposed rule change is that the current maximum level of seller concessions -- 6 percent -- exposes the agency to excessive risk. It also creates an incentive to inflate the appraised value of the property to cover the amount of the concession, according to a memo from the desk of FHA Commissioner David Stevens.

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The rule change was published in the Federal Register on July 15. For the next 30 days, the public was invited to comment on the change. Now, the comments will be analyzed before a final decision is made.

The term "seller concessions" refers to cash assistance the seller offers the buyer as an inducement to purchase the home. The seller's contribution, or "concession," is applied to the buyer's share of the closing costs.

Such costs may include loan origination, title search, title insurance, appraisal, inspection, recording, transfer and closing or attorney's fees, plus credit reports and flood certifications. The buyer's down payment isn't a closing cost.

Most buyers unaffected

The FHA says the new rule will align FHA loans with industry practices and reduce loan defaults by borrowers who don't have a sufficient investment in their home.

The rule change won't affect a huge number of borrowers. According to FHA spokesman Lemar Wooley, only 12 percent of FHA loans originated in 2009 included seller concessions and more than 60 percent of those loans had concessions that were only 3 percent or less.

The change is still important, however, because the FHA backs approximately one-third of new loans. FHA loans are popular today because they allow a down payment of just 3.5 percent of the purchase price and have flexible guidelines for borrowers to qualify.

Jeff Belonger, a mortgage broker at Infinity Home Mortgage Company in Cherry Hill, N.J., says buyers who don't have enough cash to pay closing costs without a larger concession should discuss their situation with a knowledgeable loan officer.

A few options might include:

  • Cash assistance from a community homebuyer program.
  • A loan that allows lender-paid closing costs with a higher interest rate.
  • A loan from Fannie Mae that allows 100 percent financing to purchase a Fannie Mae-owned home or a similar program through the U.S. Department of Veterans Affairs.

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