On February 23, 2012, the United States Department of Housing and Urban Development published a revised proposal to reduce the maximum concession that a seller or other interested third party may provide to a borrower purchasing a home with an FHA-insured single-family mortgage loan. The revised proposal would reduce the current concession limit from 6 percent of home’s value to the greater of 3 percent of the home’s value or $6,000, and also narrow the items that may be paid with a concession. Comments on the revised proposal are due by March 26, 2012.

Under current rules, a seller of a home or other interested third party may assist the borrower in purchasing a home with FHA financing by paying certain permitted costs up to a limit of 6 percent of the lesser of the sales price or appraised value of the home. While such payments, referred to as "concessions," in excess of the 6 percent amount are not prohibited, the maximum loan amount must be reduced on a dollar-for-dollar basis to the extent a concession exceeds the amount. Also, if an interested party provides anything to a borrower that is not an item that may be included in a concession, the item is considered an inducement and requires a dollar-for-dollar reduction in the maximum loan amount.

Background

In July 2010, HUD proposed three changes to reform the FHA-insured loan program based on significant losses incurred by the program that resulted in the capital reserve for the Mutual Mortgage Insurance Fund falling below the statutorily mandated ratio of 2 percent of the FHA- insured loans covered by the Fund. HUD proposed to:

  • Reduce the maximum amount of concessions from sellers or other interested third parties (before a reduction in the loan amount is required) from 6 to 3 percent of the home’s value
  • Establish a minimum qualifying borrower credit score of 500 and impose a maximum loan-to-value ratio of 90 percent for a borrower with a credit score below 580
  • Require that when a loan must be manually underwritten, because the borrower has a limited or nontraditional credit history and a “Refer” risk classification is provided by FHA’s TOTAL Mortgage Score Card, that certain maximum loan-to-value ratio, debt ratio, credit score, and cash reserve requirements be satisfied

HUD published a final rule in September 2010 implementing the second proposal, although because of the housing crisis HUD currently “is providing a special, temporary allowance” so that borrower’s with lower credit scores can obtain loans with higher loan-to-value ratios. (See the August 2010 Mortgagee Letter regarding the special, temporary allowance.) In connection with the revised concession proposal, HUD advises that it “is in the process of implementing another notice tightening the underwriting standards for mortgage loan transactions that are manually underwritten.”

Revised Proposal

Based on comments to the July 2010 concession proposal that a reduction of the limit from 6 to 3 percent would have “a disproportionately negative impact on low- and moderate-income borrowers purchasing lower priced homes,” HUD decided to revise the proposal to impose a maximum limit of the greater of 3 percent of the home’s value or $6,000.

HUD also proposes to revise the items that may be covered by an interested third-party concession to exclude payment supplements such as homeowner’s association fees, mortgage interest, and charges for mortgage payment protection plans. HUD advises it “believes that these types of payment supplements, while permissible under current seller concession guidance, are really inducements to purchase and should be treated as such.” HUD also advises that it believes the affect of the change will be minimal because a review of FHA loans “revealed that sellers typically offer concessions that pay for borrowers’ actual costs to acquire the property, and not payment supplements.”

Finally, HUD advises that the July 2010 proposal “clarified the definition of Interested Third Party.” The July 2010 proposal includes a footnote that identifies a party with an interest in the transaction “to include the seller, builder, developer, mortgage broker, lender, or settlement company.” In the revised proposal, HUD defines an interested third party as the “[s]eller or other interested party such as a real estate agent, builder, developer, mortgage broker, lender, and/or settlement company.”