FHA Allowable Seller Paid Closing Costs Amount to Decrease

The costs of getting a mortgage backed by the Federal Housing Administration are about to go up for some home buyers.

FHA-backed loans are wildly popular with first-time buyers for an obvious reason—they require a minimum down payment of 3.5%, far lower than what private lenders offer.

But the loans are quite popular for one other reason—they allow sellers to kick in more cash for closing costs. The FHA currently allow sellers to pay for loan origination, escrow, and other costs for up to 6% of the price of the home.

That could change as soon as next month. The FHA published a notice yesterday that it planned to follow through on moves announced earlier this year to cap those closing cost concessions at 3% of the price of the home.

The FHA’s reasons for doing this are twofold. First, the change will bring the FHA much closer to what the rest of the industry allows. But the other concern was that home sellers have an incentive to sell the home at an inflated price on the front end to recover the money that they’re spending on closing costs on the back end.