Competing mortgage lenders stand to profit when the Federal Housing Authority (FHA) chops attractive seller concessions from 6% of home sale price to 3% later this summer. Home buyers and sellers still have a few weeks, possibly as long as a month, to take advantage of more lucrative seller concessions, but the clock is ticking and the FHA is expected to enact the proposed policy change before the end of August.
One of the primary reasons that home buyers have been attracted to FHA mortgages is the profitable seller concession rule that allows property sellers to pay certain taxes and services connected to the sale that would normally be paid by the home buyer. Naturally, buyers gain when sellers pay for things like loan origination fees, appraisals, transfer fees, inspections, closing cost and escrow costs. Under current FHA seller concession rules, home sellers could sweeten the deal by offering to pay for nearly everything except the buyer's down payment, up to an amount equal to 6% of the sale price. It's proved a powerful incentive to purchase a FHA mortgage and considered something of an unfair advantage by competing mortgage lenders.
Economic issues and newfound concern about mortgage risk appear to be at the root of the FHA's decision. In announcing its pending decrease of seller concessions from a lucrative 6% to a far less attractive 3% earlier this year, the FHA said the program had led to inflated home appraisal values that created an unacceptable risk for the mortgage lender. A FHA investigation revealed that many sellers who agreed to pay buyers' costs recouped those costs by adding them to the sale price. The FHA found itself approving mortgages on homes that were actually worth somewhat less - 6% less - than their selling price. With the FHA requiring home buyer down payments of only 3.5%, the agency found itself holding an awful lot of "underwater" paper on overvalued homes.
Real estate agents and mortgage brokers assisting buyers and sellers who are relying on the more attractive 6% seller concessions to bring a sale to contract will push to close those homes as soon as possible before the FHA enacts its policy change and the golden goose is gone forever!