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Is 6% seller consessions an issue when doing an FHA mortgate

I'm in the middle of buying my first home.  The seller has agreed to pay 6% seller cnsession.  On my mortgage committment it notes that the seller can only contribute 3%.  Anything more has to be reviewed by underwriting.  This has me concerned because I'm due to close once the seller has fixed a few small things and the house gets appraised by my lender again.  I want to ensure that I will not need to bring more funds to the table then already agreed to. 
  • January 14 2012 - US
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Answers (37)

So siperbowl, still no explanation? 
  • January 17 2012
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4155.1 2.A.4.a  

Certain expenses paid by the seller and/or another interested third party on 
behalf of the borrower are considered "inducements to purchase" and result in 
a dollar-for-dollar reduction to the lesser of the sales price or appraised value 
of the property before applying the appropriate loan-to-value (LTV) factor.  
  • January 17 2012
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This is a valuable thread. I have been informed, confused, re informed that confused was the right position to hold, all in one discussion. My two cents worth follow. Please correct me if I'm wrong.

If it isn't allowed, reducing the principal amount by the excess allowable IPC's, it should be. I think that the guidelines being moot on the subject would indicate it is allowed, but is used only by savvy, somewhat aggressive UW's, that work for similarly minded Lender's.

The reason I think it should be allowed is, at least, twofold. First, it makes the Seller do what they contracted to do under the ratified agreement, which is contribute a precise agreed upon amount.

Secondly, if the Borrower is bringing 3.5% of the agreed purchase price to the table, it doesn't confound their qualifications, in any way that could be detrimental to the Lender. In fact, the Lender, and FHA, end up in a slightly better position. Right?

I've had this dilemma a few times in my life, and was never able to convince the UW to apply the allowed IPC overage to the Buyer's benefit. It fell back in the Sellers lap. Of course, it was never anywhere near three full points, which would/could be the case in the OP's dilemma. I hope they get it resolved, one way or the other. I hope the Seller doesn't get to keep any of it. I would walk over disallowing a full three percent. Especially, since six percent meets the FHA IPC guidelines.

I'm certainly not trying to step on any of the answerer's toes. I think the passionate discussion is informative, and enlightening, even if not fully resolving of the question. IMHO, Zillow threads can serve as the best continuing ed that free can buy.

Please go to my website for more info; underpromiseandoverdeliver.org :)
  • January 17 2012
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Profile picture for funds2
The issues being discussed re: reduction of principle balance is a good example of not all Underwriters view guidelines the same way. As Bob pointed out, if you have never had a loan purchased by investor for not meeting their guidelines you are likely to in the future. In the past I have done what AKA Chuck is touting, but not able to do that now. Guidelines are up for interpretation, and he who has the gold makes the rules......
  • January 17 2012
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Don't shoot the messenger:
  • January 17 2012
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You are asking me to point to where it says you can do something and as you know, guidelines generally tell you what you cannot do. If it's not allowed, then I can point to a handful of lenders that are violating the guidelines. 

Valid point on the guidelines.  

Over that last several years, I have seen several lenders violate guidelines and are forced to purchase loans back because of these violations.   I have also seen several lose their ability to do FHA loans or sell to Fannie/Freddie because of violations.  

  • January 17 2012
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Robert, 

I can tell you that it is done all the time. It's not increasing down payment, it's structured as a payment to principal at closing. You are asking me to point to where it says you can do something and as you know, guidelines generally tell you what you cannot do. If it's not allowed, then I can point to a handful of lenders that are violating the guidelines. 

It's the same as excess YSP on a refinance. Guidelines don't allow you to payoff any portion of the old mortgage with it but you can use it to make a payment to principal at closing. It may be semantics but it's done all the time. 
  • January 17 2012
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Chuck, where are you seeing in the FHA guidelines that excess concessions can be used for a principal curtailment?  Can you provide your source?  I was not able to find this on HUD's website.

I can tell you from our interpretation of FHA's guideliness:

You can't use excessive concessions for a principal curtailment.  You can use the excess to pay the Up Front MIP (if you can pay in full), pay discount points for a lower rate, pay condo or HOA dues in advance, reduce the concessions, or treat them as a inducement to sell.

An inducmenent to sell will result in a reduction of the sales price.  If the loan amount were simply reduced through a principal curtailment, this would result in the seller contributing to the down payment (which is not permitted.)

I realize lenders have overlays, but this has been the rule as long as I know it.
  • January 17 2012
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Profile picture for funds2
Siperbowl,
I think you will learn that the lender will be able to do your loan with up to 6% seller concession. Hopefully your closing cost will be $4,200 or higher so you can use all of the concession/credit.
If you learn that lender is not allowing the 6% then let us know reason, and you will be given input on your options.
  • January 17 2012
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" I too believe it is important for the public not to be misled."

And it shows in this thread.

There is nothing misleading in telling the public than on an FHA loan unused seller credit under the maximum allowed may be used as a principal curtailment. 
  • January 17 2012
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@Robert Lowery,

Thank you for your response!  I too believe it is important for the public not to be misled.

You & Clay Branch provide the answer to the author of this question with simple clarity.

All the best,
Ros 

Roswell Moore, CMPS
Certified Mortgage Planner
  • January 17 2012
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I am surprised at some of the responses on here.  They could be very misleading to the public.  The bottom line is any contributions above the max allowable contribution or actuals closing costs must result in a dollar for dollar reduction in the sales price, if you want to avoid the concessions being reduced.  And, yes.......most underwriters should/would ask for a revised sales contract to reflect this.

Yes, this will typically result in a lower loan amount.   But, you can not just apply these excess funds to the down payment.

Back to the original post, I would check with your loan officer.  It could just be a clerical mistake, but you do want to get a corrected commitment letter as soon as possible.  I can't believe its been two days later and still no resolution.
  • January 17 2012
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Simply ask for a clarification why the contract states a 6% seller concession and the loan commitment says 3%. My guess is the underwriter sees the 6% on the contract but the loan was submitted and approved based on 3% but that's just a guess. You should look back to the paperwork you signed to see if it says 3%, in other words junk in junk out.  
  • January 17 2012
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Profile picture for siperbowl
Well, I have received quite a bit of professional advice.  I am just wondering what approach I should take and what my options are.  My Real Estate Agent is going to connect with my Loan Officer today, so just to be certain of the options I have in comparrison with the options she gives me I am wondering if someone can let me know which direction I can and should go in....and of course in laymons terms:)

Thank you!

L.S.
  • January 17 2012
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Roswell, 

You simply don't know what you are talking about. You dug up a guideline that was not relevant to the conversation. The guideline YOU BROUGHT OUT addresses excess IPCs relative to the maximum allowed per Fannie Mae. The conversation was about excess IPCs relative to the borrows closing costs but not exceeding the Fannie Guidelines. 

If you don't understand the difference, you may need a CMPS refresher.
  • January 16 2012
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Mr Adams,
You divulge more the about your integrity, common courtesy & manners than you know by making unfounded comments like these…
  • January 16 2012
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Chuck,

I appretiate your laying this out, however, I believe you are reading the guideline verbiage incorrectly...  

In your Example 1, you state that "This would trigger that guideline requiring the sales price to be lowered." It doesn't quite work that way. Fannie Mae (& FHA) guidelines are not stating that if there is excess left over from a "seller credit" to the borrower, that it triggers an action requiring the property's price to be reduced. IF there is any seller credit left over, AND if the borrower wants to be able to use any of the credit left over (whether is an FHA or Conventional loan), THEN the property's purchase price must be reduced by $500, based on your Example 1, to match the seller credit left over, since both Conventional & FHA guidelines will not allow ANY seller credit to be used to make any part of the borrower's down payment.  

Now, if you are reducing the purchase price, here in Arizona (& I am sure in many other states), the Purchase Contract must reflect the new reduced price, which means the seller agrees to the price reduction by the action of signing an addendum, reducing the price. If the seller does not agree to reduce the price, then the buyer does not get to use that seller credit left over to reduce the purchase price of the home; the seller keeps it in their pocket.
  • January 16 2012
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Mr D Plume,
I believe we end up at the same destination, we just have different ways of getting there..
  • January 16 2012
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I've often used 1% to pay the UFMIP instead of financing it into the loan amount.
  • January 15 2012
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Additional proof that the CMPS designation is worthless!
  • January 15 2012
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Roswell,
You are misreading the guideline:
" PC Limits
The table below provides IPC limits for conventional mortgages. IPCs that exceed these limits are considered sales concessions. The property's sales price must be adjusted downward to reflect the amount of contribution that exceeds the maximum, and the maximum LTV/CLTV ratios must be recalculated using the reduced sales price or appraised value." 

If you look at the table it shows the maximum amount of contribution allowed as related to LTV for conventional financing. The guideline references what to do if the contribution exceeds the 3% or 6% (whichever is indicated). The "excess" it is referring to the max, not excess that does not exceed the max.

Example 1: 100 K mortgage 6% allowed, seller wants to give 6500 in concessions. This would trigger that guideline requiring the sales price to be lowered.

Example 2: 100K mortgage 6% allowed, borrowers closing costs are $5500. The contribution DOES NOT exceed the IPC limit. The guideline says nothing about the excess in this case.
Read it again.
  • January 15 2012
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same way as on FHA; I run into it on conventional more often than FHA, usually when the buyer has both a broker rebate (i.e. Redfin) and seller help. re-read your own post, you answered your own question on how to do it.
  • January 15 2012
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I agree with you.  If there is no need to engage the seller, it is much quicker & less stress for the client, I just have not had success with Underwriters unless the PC in modified. I will ask a couple of Underwriters how they stand on this now. Things do change in the business.

You state that you do this with Conventional loans, as well. How? Fannie Mae guidelines state specifically:

"Fannie Mae does not permit Interested Party Contributions (IPCs) to be used to make the borrower's down payment, meet financial reserve requirements, or meet minimum borrower contribution requirements.

IPC Limits

The table below provides IPC limits for conventional mortgages. IPCs that exceed these limits are considered sales concessions. The property's sales price must be adjusted downward to reflect the amount of contribution that exceeds the maximum, and the maximum LTV/CLTV ratios must be recalculated using the reduced sales price or appraised value." 

  • January 15 2012
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Mr Moore,

The seller does not have to reduce the purchase price; the excess proceeds are used to reduce the loan amount. 

The purchase price on the contract remains the same throughout, no changes.

In your example; the purchase price is $70,000 to start; the purchase price will remain $70,000 and no contract change is needed. If there is $500 in excess concession the $500 can be used to increase the down payment, thus lowering the loan amount from $68,225 (assuming financed MIP) to $67,737 (also assuming the UFMIP is financed).

I know it's splitting hairs, but the end result is you do not have to go back to the seller to lower the purchase price thus it doesn't matter if the seller agrees to it or not.  If you want to run your clients through a whole renegotiation with the seller that's certainly your prerogative as a mortgage planner and I'm sure there are planning reasons that just go over my head; personally I see no point in doing so and just handle it the way I outlined.



  • January 15 2012
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Hey Norm,  

I am not challenging you here; I am always interested in new ways to help my clients, so I sought your professional advice. I also understand perfectly how seller concessions work within the FHA & Conventional guidelines, that's why I asked you the question.

In my response to the question posted, I also stated that the purchase price can be reduced by the amount of seller's concession not used to cover all the closing costs, however, the purchase contract must reflect this new reduced purchase price & the seller can refuse to agree to lower the price.  

For the benefit of other buyers who may read the answers to this question, I think your initial answer could be confused by some of these readers when you state that "the excess proceeds may be used to reduce your loan amount" by just applying any overage left from the unused portion of the seller concession to reduce the loan amount.

The buyer will have to go thru several steps, starting with the buyer requesting that the seller reduce the price of the home by the amount of the excess proceeds left over & then, the seller can agree, or not, to reduce the price. If the seller agrees, then the Purchase Contract will have to be revised to reflect the new lowered purchase price.  

For example, in this case, if there is $500 of unused seller concessions, the buyer cannot just apply that amount to reduce the initial loan amount. With the permission of the seller & a revised Purchase Contract, the $500 can be used to reduce the purchase price from $70,000 to $69,500.  The original loan amount of $68,225 would then be reduced to $67,738 for this FHA loan.
  • January 15 2012
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The $250 inspection can be included in closing costs.
  • January 15 2012
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Profile picture for siperbowl
So if I understand this correctly, there isn't a 3% limit of seller consessions through FHA.  It has more to do with my bank only allowing the amount of consessions to match the closing costs of 3%.  I have already paid the $1,000 to my agant for the escrow, $400 for my loan application to my lender, and $250 for the inspection which probably not concidered as part of the closing costs.  The 6% seller consessions is on the purchase agreement as well as on the closing contract.  Both lines were signed by myself as well as the seller. 
So, just in case my agent and loan officer have trouble sorting this out I am wondering what advice I can give them and what my options are.  As for right now, my loan officer still hasn't called me back but I did hear from my agent this morning.  I forwarded her the closing concract and let her know where to find the page indicating the 6% or $4,200.  Which is on the FHA/VA Addendum.  I will scan and email her the two different Mortgage Committments tomorrow morning when I get into my office.

Thank you again for all of your advice on this matter. 

L.S.
  • January 15 2012
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Mr Moore,

You're the mortgage coach and "mortgage planner" so it seems odd you don't understand this; your underwriters are probably aware of how to do it but are just going by how you submit the file.

I've done it numerous times every year on FHA and on conventional loans.

Now for the part where you slap your head and go "Doh!"........

excess concessions are handled as a dollar for dollar reduction in purchase price before calculating the loan amount. The purchase price on the contract remains unchanged, you simply reduce the loan amount so that it's 96.5% (FHA) of the purchase price minus excess concession; this way you can apply all the seller help..




  • January 15 2012
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"nor can they be used to reduce your loan amount 
===========================
yes they can; the excess proceeds may be used to reduce your loan amount and happens occasionally"

___________________________________________________________

Norm, I've been a Loan Officer for over 10 years & have never seen an Underwriter allow the excess proceeds from a seller's concession to be used to pay down the loan balance on an FHA loan, or a conventional loan.  

I have used the "left-overs" to lower the interest rate or to pay other items in advance. It has been my experience that the Underwriter's position is that the purchase price may be reduced by the amount left over, but this usually cannot be done that late in the transaction process.

Have you done this on loans you have originated?  If so, please share how you accomplish this so those of us in the profession can help our clients.

Thanks,
Ros 

Roswell Moore, CMPS
Certified Mortgage Planner

  • January 15 2012
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It was on the purchase agreement.  The principal of the note is $70,000, and it show seller consessions of 6% $4,200.

Another thing that I feel may be out of place is my lender is showing the loan amount to be $68,225.00.

 As far as the loan amount goes, it is correct. The $70,000 figure is not the note amount, it is the purchase price. 6% of the purchase price = the seller concession of $4200. After you make a 3.5% down payment you get a base loan amount of $67,550, then the upfront MI charge of 1% is added for a total loan amount of $68,225 which is what is being disclosed.

If your disclosures were emailed or you have a copy of what you signed, look for the worksheet showing a breakdown of closing costs, prepaids, monthly payment breakdown, etc. If you have that document see what it says for the seller concession, whether it's $2100 or $4200.    
  • January 15 2012
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