FHA Guideline On Seller Paid Closing Costs - - When does a "guideline" become a "restriction"??

Reblogger Lenn Harley
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

This is what happens when the government dictates processes that should be determined by the real estate marketplace.

The post by George Souto is very helpful.  We do need to keep the restrictions in mind when designing offers/counter-offers, financing alternatives, etc.  That said, I believe that the regulators have gone too far, by far.

What is the percentage of sales where the below is clear????

"In reality what happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing."

Where is this documented?? 
Are the sales prices higher than list??
Was the list price low to encourage bidding?
What are the comparable SOLDs for this property?

I simply do not see buyers paying over list to cover seller paid closing costs for buyers.

The "checks and balances" are there.

There is a list price.
There is an offer.
There is a request for closing cost credit from the seller to the buyer.
There is an appraisal.

Unless the contract price is higher than the list price, what makes the practice of raising the price to "cover" seller credit so obvious.  Even then, the market for that property would determine the value, not always the list price.

This was the "rationalle" for the government ending the Ameridream, Nehemiah, etc. programs.  The government dictated what a seller could do with their own money (net proceeds).

The normal market forces of ask, bid, negotiate, accept/decline, process don't work when the government gets involved.

Oh well.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 

Original content by George Souto NMLS #65149

These days many of the FHA Borrowers that I work with require Sellers to pay most of their Closing Costs, so I need to be on top of what the FHA Guideline On Seller Paid Closing Costs are. The FHA Guideline On Seller Paid Closing Costs are very specific, but could cause some last minute surprises if not explained correctly, and understood by the Borrower.

FHA does not require that a Buyer put any of his or her own money towards Downpayment and/or Closing Cost.  All of the money for Downpayment and Closing Costs can come from an acceptable gift source such as a:

  • Family member
  • Employer
  • Non Profit
  • State Bonded Program like CHFA in Connecticut

FHA will not allow a Seller to contribute ANY money towards Downpayment, but they will allow the Seller to contribute up to 6% of the Sales Price towards the Buyers Closing Costs.  This sounds good and it is, but I rarely see the Seller actually pay the Buyers Closing Costs.  In reality what happens is the Seller raises the agreed upon Selling Price by the amount of the Closing Costs that they will be contributing.

This means that even though the Buyer can receive up to 6% towards Closing Costs, they should not request any more than the actual amount of Closing Costs that the Seller will be allowed to pay at the Closing.  If the Buyer asks for more money than the Seller will be allowed to contribute towards Closing Cost, the Seller gets to keep the difference, and the Buyer ends up paying more for the house than they needed to.  This means that before a Buyer or their Realtor asks for Seller Paid Closing Costs, they need to talk to their Loan Originator, and have him or her give them a very close estimate of what the Total Closing Cost will actually be.

In figuring the Estimated Closing Costs, the Loan Originator will need to take into account the Closing Cost that FHA will not allow the Seller to pay, and subtract them from the Total Closing Cost Estimate.  The Closing Costs the will need to be deducted from the Total Closing Costs are any Closing Costs that are paid before the Closing.  Those will include any fees paid to the Lender or other vendors prior to the Closing.

Possible items that maybe required to be paid before of the Closing are:

  • Appraisal Fee
  • Application Fee
  • Condo Questionnaire
  • Homeowners Insurance

There are other fees that could possibly be required to be paid before the Closing, but these are the most common ones.  However, even though I have included Homeowners Insurance in the list above, there is away to include them into the costs that the Seller will contribute at the Closing.

All Lenders will require that the Borrower obtain an insurance binder before the Closing, but they do not require that the premium be paid prior to the Closing as long as a check will be sent to the insurance company at the time of the Closing.  However, some insurance companies will not issue the insurance binder without a payment, so what I advise my Borrowers to do in that case is to just pay them one month premium, and the other 11 months paid at the Closing.  That way they can maximize the funds that that they can receive from the Seller, and reduce their out of pocket cost.

I have heard of agree Buyers that did not find out until the Closing that they could not be reimbursed for the items that they paid before the Closing.  That is not the type of surprise that anyone wants at the last minute.  I make sure that my Borrowers understand this when I am Pre-Qualifying them, when I am doing the Mortgage Application with them, and after the loan is approved and they are now going to shop for Homeowners Insurance.  I want them to take advantage of ALL the funds that the Seller has agreed to contribute, and I don't want an agree phone call from my Borrowers after the Closing.

This is something that can not be explained enough, and should be reinforced at every appropriate opportunity.  FHA Guideline On Seller Paid Closing Costs are very clear, and need to be followed, because FHA does not provide any flexibility when it comes to this issue.

 

*************************************************************************************

Who To Call For Your Mortgage Needs In Connecticut:

George Souto NMLS# 65149 is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308  gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage

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Topic:
Real Estate Sales and Marketing
Tags:
seller paid closing
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Comments 11 New Comment

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Rainmaker
1,003,468
Conrad Allen
Webster, Ma, Realtor
Re/Max Professional Associates

Hi Lenn.  Closing costs contributions from the seller should negotiable and not limited by government "guidelines".

August 07, 2012 03:52 AM
Rainmaker
348,334
Debbie Cook
Silver Spring and Takoma Park Maryland Real Estate
Long & Foster Real Estate, Inc

"The government dictated what a seller could do with their own money (net proceeds)."

The normal market forces of ask, bid, negotiate, accept/decline, process don't work when the government gets involved.

This is what is sooo wrong with this Country right NOW.  Stop telling people what thay HAVE TO DO with their own hard-earned money!!  Wish the Government could stay out of other people's business, especially a business like real estate (and a lot of other businesses) that they know nothiing about. 

I apologize .... I felt a rant coming on! 

August 07, 2012 03:57 AM
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Lenn Harley
Real Estate Broker - Virginia & Maryland
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

Conrad.  Agreed.

Debbie.  Don't apologize.  You are 100% correct.  Sadly, day by day, it gets worse and worse.

 

August 07, 2012 04:05 AM
Rainmaker
815,362
Jeffrey DiMuria 321.223.6253 www.SouthBrevardBeachHomes.com
www.SouthBrevardBeachHomes.com
Coldwell Banker Sun Land Realty

Lenn...you make a really good point here. Why do we have these stupid restrictions?

August 07, 2012 04:11 AM
Rainmaker
566,982
Bobbie Smith
Real Estate in the Poconos of PA 570-242-1891,
RE/MAX OF THE POCONOS

Good point Lenn. To much government involvment which usually ends up hurting things more than it helps them, you're right.

August 07, 2012 04:33 AM
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Lenn Harley
Real Estate Broker - Virginia & Maryland
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

Jeffrey.  Thanks.  Why indeed??  No doubt they are designed to perpetuate government involvement in our daily lives in their quest to justify their existance/job.

Bobbie.  When something infringes on a property owner's right to control his own money (sales proceeds/equity/profit, etc., it goes too far.

August 07, 2012 04:35 AM
Rainmaker
1,218,430
Jay Markanich
Home Inspector - servicing all Northern Virginia
Jay Markanich Real Estate Inspections, LLC

Wow, we think alike.  My Free Enterprise quote today addresses this same issue!  Gubment involvement, and market skews!

August 07, 2012 04:36 AM
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George Souto
Your Connecticut Mortgage Expert
George Souto NMLS #65149 FHA, CHFA, VA Mortgages Connecticut

Lenn thank you for the re-blog.  I just want to clarify something that some have miss understood in the blog.  When I stated that the Sellers will generally add the Seller contributions to the cost of the property, I did not mean to imply that it was added to the asking price.  The way it generally happens here is that lets say a house is on the market for $200,000 and the Buyer negotiate down to $190,000, but then ask for $6,000 in Closing Costs.  If the Sellers agree they will then usually counter with a $196,000 selling price.  The price is still lower then or equal to the asking price, but rarely above the original asking price.  To do so would run the risk of the property not appraising, and that would not do anyone any good.  I hope that my further explanation helps to make what I stated in the blog a little more clear.

And Lenn I agree, things would work much more efficiently if government stayed out of things, and got out of the way.

August 07, 2012 03:41 PM
Rainer
405,885
Randy Ostrander
Real Estate Broker, Serving Big Rapids and West Central MI
Lake and Lodge Realty LLC

Good afternoon Lenn. Imagine a market without Government setting up road blocks at every turns. Ahhhhh.

August 07, 2012 03:50 PM
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Lenn Harley
Real Estate Broker - Virginia & Maryland
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

George.  THANK YOU for the clarification because it is reality. 

I read the FHA verbiage in the Federal Registry when they first proposed limiting seller paid closing cost from 6% to 3% and they clearly, at least to me, believe that buyers/sellers do add the closing cost to the list price and that appraisers accept the contract prices with closing costs over list.

Nothing is farther from practice in my area. 

We do have buyers who ask for high dollar closing costs contribution from sellers and then insist on also offering lower than list prices.   Sellers then counter back to list unless it's a bank owned property.  If it is bank owned, there may not even be a counter because the property will have sold to a buyer smart enough to give the seller their asking price if they expect closing close too.

The hardest thing that I know to overcome in real estate is the average home buyer's instinct to "make an offer", even when asking for 3, 4, 5, % credit from the seller.

Oh well.

August 08, 2012 03:36 AM
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Lenn Harley
Real Estate Broker - Virginia & Maryland
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate

Randy.  Just imagining that makes me smile.

August 08, 2012 03:37 AM
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Lenn Harley

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