January 2, 2013
Our very first reader question of 2013! A reader asks, “We had a property under-contract for sale at an attractive price in exchange for a 12/31 close…but they were unable to close. The property appraised at the sales price. Now we have an offer at a higher price…also using FHA financing. Will the previous lower appraised value be a problem for us?”
Not to be deliberately vague, but it really depends on how you define “problem”.
According to FHA loan rules, “The maximum mortgage amount that FHA will insure on a purchase is calculated by multiplying the appropriate loan-to-value (LTV) factor by the lesser of the property’s sales price, subject to certain required adjustments, or appraised value. In order for FHA to insure this maximum loan amount, the borrower must make a required investment of at least 3.5% of the lesser of the appraised value or the sales price of the property.”
So according to this reading of the FHA loan rules, the borrower and seller have an appraised value of X, with a borrower offering a dollar amount of Y. If the borrower doesn’t have a problem making up the difference between the X amount of the appraised value and the Y amount of the offer, it seems the deal could move forward. However, if the buyer can’t or won’t pay the difference between the appraised value and the sale price, the seller definitely has a problem.
However, the seller is permitted to contribute a certain amount towards the purchase. Consider this from the FHA loan rulebook, HUD 4155.1 Chapter Two Section Three:
“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.” What does that amount include? According to Chapter Three:
“The six percent limit also includes
— third party payment for permanent and temporary interest rate buydowns, and other payment supplements
— payments of mortgage interest for fixed rate mortgages
— mortgage payment protection insurance, and
— payment of the upfront mortgage insurance premium (UFMIP).
Note: Contributions exceeding six percent are considered inducements to purchase.”
So there is a way to sweeten the deal should a seller choose to do so. Buyer and seller should carefully consider this option and make sure they understand the rules as they apply to seller contributions toward the purchase. For more information on these rules, contact the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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