FHA allows buyers to finance their upfront mortgage insurance premium (MIP) equal to 1.75% of the loan amount.
So, while FHA loans are ostensibly 96.5% loan-to-value, they are effectively around 98.2% loan-to-value loans because almost every FHA loan includes the financed upfront MIP.
Aaand… this is NOT what Fannie and Freddie are allowing with respect to real estate commissions.
Maximum Allowable Seller Concessions
There were a lot of scary things to come out of the 1990s, including beanie babies, high-waisted jeans, angst-filled music, frumpy Eddie Bauer clothes, and…fanny packs.
But – even scarier were the huge seller credits for closing costs we used to see, as they would sometimes exceed the allowable limits set by Fannie Mae, Freddie Mac, and FHA.
Fannie and Freddie have the following seller credit limits:
FHA allows for credits up to 6% of the purchase price. Jumbo loans vary, with caps from 3% to 6%.
In the olden days, when people thought wearing flannel in the summertime made them look cool, these credit or “concession” limits were an issue because seller credits for closing costs would sometimes exceed the limits.
This is because the market was softer and sellers were more willing to offer large concessions and because purchase prices were much lower in general, making it more likely that concessions would exceed the limits.
Fannie’s Big Announcement on Monday! Woohoo! (Or Not)
On Monday, Fannie Mae and Freddie released a “clarification” – agent commissions are not counted toward IPC limits.
IPCs are “Interested Party Contributions.”
And IPCs are the same thing as those seller credits I discuss above, as the seller is clearly an “interested party” (to a transaction), and Fannie and Freddie rightly limit the amount of contributions interested parties can offer to a buyer to make a transaction work.
All that Fannie and Freddie said on Monday was that seller credits for agent commissions will not count against the seller concession limits (FHA made a similar clarification in March).
Hence, a seller can offer a 6% credit for closing costs and an additional 2.5% credit for a buyer’s agent commission (to a buyer with 20% down), and that seller will not be in violation of the IPC limits, otherwise known as the maximum allowable seller credits (discussed above).
Aaaand… this is pretty much how it always has been. It is particularly uneventful because we so seldom see large seller credits nowadays. So, nothing has really changed.
I am writing this blog because we were getting questions yesterday from agents who seemed to believe that Fannie and Freddie were going to allow for the direct financing of commissions – when that is not the case.
