FHA to cut Seller Contribution to Closing Costs to 3% of Sales Price

Within the next few months, it’s going to get a little tougher for FHA buyers.  Starting sometime this summer, FHA will make official its announced policy of limiting the seller contribution to buyer’s closing costs (aka “seller subsidy”) to 3% of the purchase price, down from 6%.

What fees make up the buyer’s closing costs?

The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:

  • Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
  • Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
  • Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge.  Broker’s and attorney’s fees are scattered throughout the closing statement sections.
  • Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
  • Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

In our local DC and Northern Virginia area, traditionally closing costs have run about 3% anyway, so the impact will likely be minimal for most buyers in our area.  But for those buyers who are struggling to come up with cash for the down payment AND closing costs, this reduction could put a last minute wrench in their purchase.  Plan accordingly.

Read More: Buyer’s Closing Costs

Learn More: Attend a free first time home buyer class.

Read More: Will new FHA rules kill condo sales?

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