Seller concession, FHA vs. Conventional

When  buying and selling a home, one of the big motivating factors a buyer will buy one house over another is based on seller concessions.  In simplistic terms, seller concessions is the seller contributing money that the seller would receive and crediting those funds back to the buyer to assist in paying for closing costs.  This is a very big motivating factor for many first time home buyers as well as move-up buyers.

There are two (2) types loans that have drastically different guidelines of seller concessions to each other with residential mortgage loans, FHA and conventional loans.  If you are a seller, a buyer or a real estate agent or real broker and you are involved in this process of buying or selling a home, then understanding the difference between an FHA and a conventional loan for seller concessions is going to save headache right before closing when the lenders doc drawer is trying to send docs to the title company and everything is co-sure.  When those involved don't understand what is permitted and what is not permitted, then deadlines are missed an finger pointer and relationships can be ruined by those that don't understand the basic guidelines of these differences of loan products.

     1) FHA Seller Concessions

6%

There are no limitations to what percent base on credit scores nor based on the buyers down payment and LTV (loan to value).

Seller contributions allowed up to 6% of the sales price, but seller contributions may not exceed the actual amount of closing costs, pre-paid expenses and discount points

§ UFMIP, when paid by the seller, is included in the 6% limitation o Seller must pay all or no UFMIP – Partial financing of UFMIP is not allowed

§ Any seller contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the sales price before calculating the maximum loan amount

Job Loss Insurance

§ May be paid by builder or seller of property

§ HUD-I must reflect payment made directly to the insurance company

§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation

§ A copy of the insurance policy is required at closing

Homebuyer Counseling

§ May be paid by builder or seller of property

§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation (typical fees are $250)

§ A copy of the homebuyer counseling certification is required prior-to-closing

2) Conventional Guideline for Seller Concessions

Contributions/Concessions

Borrower closing costs paid by the property seller or by any other interested party to the transaction (i.e. builder, developer, real estate agent, lender or any of their affiliates) are considered contributions. Items paid by the property seller that are the responsibility of the seller are not contributions (i.e. real estate sales commissions, charges for pest inspections or costs that the property seller is required to pay under state or local law). Funds the purchaser receives from a non-participant to the sales transaction are not considered contributions, even when they are used to pay closing or settlement costs (i.e. the property purchaser’s employer or a family member). Standard Conforming ·  Primary residence/second home > 90% LTV = 3% of value. ·  Primary residence/second home > 75-90% LTV = 6% of value. ·  Primary residence/second home < 75% LTV = 9% of value. ·  Non-owner occupied properties = 2% of value. Super Conforming ·  Primary residence/second home = 3% of value. ·  Non-owner occupied properties = 2% of value. The amount of any contributions in excess of the limitations set forth above will be considered a sales concession. Any amount contributed by an interested party that exceeds the costs to close the loan, must be considered a concession and subtracted from the purchase price. Additional examples of contributions granted by any interested party to the transaction that are considered to be sales concessions (regardless of the of the limits above) are: Vacations. Furniture or decorator allowances. Personal property items being left in the property. Automobiles. Moving costs or other "giveaways.". For purposes of determining the LTV and CLTV, the dollar amount of any sales concessions or contributions that exceed the maximum allowed must always be deducted from the purchase price. The LTV and CLTV are then calculated using the lower of the reduced purchase price or the appraised value. The appraisal must reflect the effect that any subsidies, contributions or sales concessions have on the market value for the property. The AU Feedback must accurately reflect the LTV and CLTV adjusted for any financing or sales concessions in the transaction.

Must pay all or no UFMIP – Partial financing of UFMIP is not allowed

§ Any seller contribution exceeding 6% of the sales price results in a dollar for dollar reduction to the sales price before calculating the maximum loan amount

Job Loss Insurance

§ May be paid by builder or seller of property

§ HUD-I must reflect payment made directly to the insurance company

§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation

§ A copy of the insurance policy is required at closing

Homebuyer Counseling

§ May be paid by builder or seller of property

§ Amount paid on behalf of the borrower is included in the 6% seller contribution limitation (typical fees are $250)

§ A copy of the homebuyer counseling certification is required prior-to-closing

If you are a buyer with a limited amount of down payment and you need seller concessions, you ough to be leaning towards having an FHA mortgage rather than  a conventional loan.  Everyone wants to have a conventional loan based on what the stigma in the air is.  When you look at the benefits that come with an FHA loan, it may just outway a conventional loan and you will find this is the way to have your financing work out.  This is why there is mortgage insurance to help individuals and families that are good borrowers.