Denver Home Sellers Restricted on Buyer Credits
Beginning this summer, new FHA regulations will reduce allowable seller concessions from 6% to 3% according to a recent announcement from US Department of Housing and Urban Development. Every new regulation that comes out is designed to protect consumers in some way. This new policy will be put in place to restrict inflating property values in order to pad the purchase price with lending fees, closing costs and repairs. The less desirable effect of this policy change will effect Denver home sellers as well as home buyers if there is a need to give a credit to the buyer for home repairs that the seller cannot complete prior to closing.
3% Seller Credit Used to Pay Buyer Closing Costs
FHA loans require that a buyer have 3.5% down payment ( rumored to be increasing to 5% some time this summer ) in order to get an FHA loan. Many home buyers have to save and scrape together just enough for that down payment. Since much of their money goes towards the down payment, they do not have and extra 3% to pay for closing costs, escrows, insurance, pre-paid interest, and appraisals so they ask the seller to contribute that money on their behalf. Many sellers agree to these terms because they understand that the buyer for their home doesn’t have the additional funds and if they did not make those contributions, the buyer would not be able to purchase the home.
And Then Comes the Dreaded Inspection
Imagine that the full 3% seller concession has to be used for closing costs etc. Now imagine that a few items show up on the home inspection that require repairs. On FHA loans, the FHA appraiser also inspects the home to make sure that the property is FHA insurable. Lets pretend that an independent inspector that is hired by the buyer finds repairs that should be made totaling $2,000. In the past, the seller could credit $2,000 to the buyer at closing for the repairs and the buyer did the work after closing. That type of credit will quickly become a thing of the past for many real estate transactions. The transaction would no longer be in compliance with the new policy because seller concessions exceed 3%.
There is Risk for Sellers Who Make Repairs
Many sellers prefer to give buyers a credit at closing for repairs instead of fixing the problem or perceived problem. They prefer that because there is risk in doing the repairs. Have you ever heard of a real estate closing that didn’t happen? In my 17 years of selling real estate I can assure you that financing can fall apart the day of the closing. The sellers may have spent money to complete repairs needed to close the deal only to end up empty handed at the closing. Just to complicate things even more, what if the transaction is a short sale and the seller doesn’t have any money to do the repairs? How would you comply with the policy and get the repairs done?
Creative Solutions Required to Navigate the New FHA Policy
This policy isn’t even in place yet, but the announcement will be made in February. I am looking for ideas from lenders, Realtors and others in the industry to address this issue that will effect real estate transactions in Denver this summer. One idea that I have is to have a check cut to the contractor at closing from the sellers proceeds. The credit to the contractor would be in compliance because it is on the HUD and disclosed to all parties. The buyer would hold on to the check until the work is complete. The only problem that I see is that a red flag will go up for the lender asking what that credit to the contractor is for. One thing to be sure of, expect delays during the next few months while everyone figures out what they can do and not do.