A new debate is emerging in Washington -- the question of whether the FHA should reduce the level of seller contributions it now allows.
In the course of buying a home, there is often a lot of negotiation between the purchaser and seller. In markets where buyers have the better position, it's sometimes possible to negotiate what is called a "seller contribution." Under long-standing FHA rules, such concessions can equal as much as six percent of the sale price.
As an example, imagine that a home sells for $200,000. The purchaser financing with an FHA loan could get a seller contribution for as much as $12,000. This is a credit which can be applied to closing costs and loan discount fees -- points. By increasing the number of points paid to a lender, borrowers can buy down their interest rate and reduce monthly costs.
Last year, HUD proposed new rules which would limit the size of seller contributions to three percent. The thinking is that by lowering the maximum seller contribution, FHA loans will be less risky and as a result there will be fewer claims against the battered FHA reserve fund.
The proposal has not gone anywhere to this point but it does pop up in the news with some frequency, suggesting that HUD may be ready to move on the issue. If it does what will be the impact on FHA borrowers?
The answer is probably not a whole lot. Here's why: six percent of the sale price is a huge amount of money and not something any seller would gleefully offer. It's difficult to believe that large numbers of sellers would agree to such concessions, especially in a marketplace where home prices have generally risen during the past year. In other words, deals with six percent off the top are perhaps as common as unicorn teeth.
The talk about reducing potential seller contributions is really part of a political game, a change that can be made without much impact on borrowers or transactions. If new and lower seller contribution standards are announced, it would show that HUD is doing "something," a way to assuage critics.
For FHA borrowers the more important point of the conversation in Washington is that seller concessions are allowed. In some markets that could be an important negotiating tool for buyers, something to reduce the end-cost of the transaction. Maybe not 6 percent, but any reduction would be a savings.