Much has been w
ritten and said since January about HUD reducing the seller concession limit on FHA loans from 6% down to 3% of the sales price. Unfortunately, a lot of it is false information. On January 20, 2010, HUD announced a series of policy changes. Some approved, some not. The seller concession limit was one of the proposed changes as indicated below:
Reduce allowable seller concessions from 6% to 3%
- The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
- This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
Link to HUD Announcement - January 20, 2010
To date, no approval has been granted for the seller concession change, nor has an implementation date been announced should the change be approved. The topic was again brought up on March 11, 2010 during a hearing before the House Financial Services Subcommittee on Housing and Community Opportunity.
Below is a exert of the written testimony of David H. Stevens, Assistant Secretary of Housing - Federal Housing Administration.
"FHA Reforms, Legislative Proposals, and Contributions to the HUD FY 2011 Budget"
Reducing Seller Concessions
"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. As seen in the table below, FHA's experience shows that loans with high levels of seller concessions are significantly more likely to go to claim. Experience to-date on loans insured from FY 2003 to FY 2008 suggests that claim rates on high-concession loans are 50 percent higher or more than those on low-concession loans."
| FHA Single-Family Insurance To-Date Claim Rate Comparison Low (0-3%) vs. High (3.1-6%) Seller Concessions5 As of December 31, 2009 |
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| Endorsement Fiscal Year | Low Concessions | High Concessions | Ratio High/low |
| 2003 | 6.5% | 10.7% | 1.65 |
| 2004 | 6.6 | 11.6 | 1.76 |
| 2005 | 7.2 | 11.2 | 1.54 |
| 2006 | 6.5 | 9.5 | 1.46 |
| 2007 | 4.6 | 6.3 | 1.36 |
| 2008 | 1.0 | 1.5 | 1.60 |
Source: US Department of Housing and Urban Development, Federal Housing Administration; January 2010.
Link to HUD Testimony - March 11, 2010
This data, of course, does not factor in the seller assisted down payment assistance programs in previous years. The use of those programs ended in late 2008.
Many news outlets and industry people overlooked the word "proposal" and went directly to implementation. This is case where you cant believe everything that you read. Until approval is granted and a new policy goes into effect, the seller concession limit on FHA loans remains at 6%.
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