FHA points to reduced seller concessions

FHA yesterday announced plans to increase lender requirements and to consider reducing allowed seller concessions.

The first announcement was about increased lender requirements which may lead to some further tightening in lender underwriting standards.

More significant for most consumers is the announcement about the renewal of plans to "reduce the maximum allowable seller concession from its current level to one more in line with industry norms."

This has been under consideration for a couple years or so. It was part of the reforms that were discussed in 2010 by then Asst Secretary David H Stevens.

"We are also proposing a third policy measure to reduce the maximum permissible seller concession from its current 6 percent level to 3 percent, which is in line with industry norms. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value."

The new announcement does not indicate a proposed level for seller concessions and it does not provide a definite time frame.

The biggest impact if seller concessions are reduced will be felt at the lower loan sizes. Seller concessions of 3% cover most of the closing costs for loan amounts over $150,000. For loan amounts under $100,000, buyers will see their required funds to close increase significantly. Or they will pay a higher rate in order to fund some of their loan costs in their interest rate.

FHA lending has seen numerous changes over the last few months. One of the most sigificant impacts on consumers has been with a series of increases in the monthly mortgage insurance premium.

Another of the changes discussed in the proposals made in 2010 was an increase in the minimum downpayments to 5%. Fortunately, I have not seen anything further on that.

Please leave your thoughts on this possible change. There will be a comment period announced when the specifics of the proposed changes on seller concessions are published.