Ever get confused over what the difference is between financing concessions and sales concessions? How about if it’s considered a seller contribution or a seller concession? What is an interested party contribution and what does it mean for the loan?
These are just some of the questions the Regional Underwriting team frequently fields. In this post, we’re going to help clarify what the differences are between concessions and contributions, and what and who may be involved in each.
First, let’s look at the definitions of interested party, interested party contributions, financing concessions and sales concessions.
Who Is an Interested Party?
Both Fannie Mae and Freddie Mac define an interested party to a transaction as includes but is not limited to the property seller, the builder/developer, the real estate agent or broker, or an affiliate who may benefit from the sale of the property and/or the sale of the property at the highest price possible. A lender or employer is not considered an interested party to a sales transaction unless it is the property seller, or another interested party to the transaction.
Further, Fannie Mae and Freddie Mac state gift funds or gift of equity from a related person who is also the seller of the subject property are not subject to the requirements of interested party contributions provided that the donor has no affiliation with the builder, real estate agent or any other interested party to the transaction, and all the requirements pertaining to gift funds or gift of equity from a related person are met.
Interested Party Contributions
Fannie Mae Section B3-4.1-02 states that interested party contributions (will be referred to as IPC from here on) are costs that are normally the responsibility of the property purchaser that are paid directly or individually by someone else who has a financial interest in, or can influence terms and the sale or transfer of the subject property.
Freddie Mac Section 5501.5 states IPCs may include either financing and/or sales concessions. They consider that funds from the seller, the originating lender, an employer, a municipality, a non-profit organization or a related person are subject to the interested party contributions requirements if the contributing party is affiliated with any of the interested parties (i.e. a builder, developer, seller of the property or real estate agent).
These funds can be from an interested party that flow through a third-party organization or a non-profit agency to the borrower and can be used to pay costs associated with the mortgage transaction on the borrower’s behalf. The funds may also be donated to a third party, which in turn provides the funds to pay some or all the borrower’s closing costs.
For more detail information please refer to Fannie Mae Section B3-4.1-02 and Freddie Mac Section 5501.5. Enact follows Fannie Mae and Freddie Mac definitions of IPCs.
What Is a Financing Concession?
Freddie Mac defines financing concessions as funds that originate from an interested party to the transaction as described in Section 5505.5(a) that are used to reduce permanently the interest rate on the mortgage, fund a buydown plan to temporarily subsidize the borrower’s monthly payment on the mortgage (see Section 4202.4), or make contributions in any way related to the borrower’s closing costs, including up to 12 months of homeowner association dues. Funds paid by the property seller that are fees or costs customarily paid by the property seller according to local convention are not subject to the maximum financing concession limitations.
Fannie Mae and Freddie Mac state typical fees and/or closing costs paid by a seller in accordance with local customs, known as common and customary fees or costs, are not subject to IPCs. Financing concessions typically include:
- Origination fees,
- Discount points,
- Commitment fees,
- Appraisal costs,
- Transfer taxes,
- Attorney fees,
- Survey charges,
- Title insurance premiums or charges,
- Real estate tax service fees, and
- Funds to subsidize a temporary or permanent interest rate buydown (if those fees are not considered common and customary fees or costs based on local custom)
Financing concessions can also include prepaid items such as:
- Interest charges (limited to no more than 30 days of interest),
- Real estate taxes covering any period after the settlement dated (only if the taxes are being impounded by the servicer for future payments),
- Property insurance premiums (limited to no more than 14 months),
- Homeowners association assessments (HOA) covering any period after the settlement date but limited to no more than 12 months,
- Initial and/or renewal mortgage insurance premium, and
- Escrow accruals required for renewal of borrower-purchased mortgage insurance coverage
A legitimate pro-rate of real estate tax credit in places where real estate taxes are paid in arrears is not considered a financing concession and is not subject to IPC limits.
What Is a Sales Concession?
Fannie Mae and Freddie Mac state sales concessions are IPCs that take the form of non-realty items. They may include cash, furniture, vacations, automobiles, decorator allowances, moving costs, securities and other giveaways, as well as financing concessions that exceed Fannie Mae and Freddie Mac limits. Fannie Mae also states IPCs that exceed the limits are considered sales concessions. Consequently, the value of sales concessions must be deducted from the sales price when calculating LTV and combined LTV ratios for underwriting and eligibility purposes.
Freddie Mac further states that IPCs can include reimbursement to the borrower for payment of fees charged to process or negotiate a short sale (commonly referred to as short sale processing fees, short sale negotiation fees, buyer discount fees or short sale buyer fees) .
What Are the Maximum Permitted Financing Concessions Allowed?
Below is a table that both Fannie Mae and Freddie Mac have set up for all of us.
|Occupancy Type||LTV/CLTV Ratio||Maximum IPC|
|Primary residence or second home||Greater than 90%||3%|
|75.01 – 90%||6%|
|75% or less||9%|
|Investment Property||All CLTV||2%|
Fannie Mae does have an exception for the loans secured for HomePath Properties. Please see Section B5-4.2-03.
The dollar amount of any excess financing concessions, the value of any contributions and/or the dollar amount of any short sale fee reimbursement granted by an interested party to the transaction must be deducted from the purchase price. The LTV ratio is then calculated using the lower of the reduced purchase price (after the reduction for all sales concessions has been made) or the appraised value of the mortgage premises.
How Do You Calculate This Amount?
One method is to use the purchase price or the appraised value, whichever is less, for the starting point. If the purchase price is $100,000 and the appraised value is $120,000 you would use the $100,000. If the loan amount is $89,000 the LTV would then be 89% and thus 6% is the maximum IPC or $6,000. If the loan amount is $90,000, it would still be 6%; if the loan amount were $90,500, it would be an LTV over 90% and thus 3% ($2,715) is the figure one would use.
It’s best practice to read the sales contract to see if there are any seller contributions and what the dollar figure is. You will find sometimes it is a percentage. The one issue to be aware of is if they use the percentage and the actual financing concession is less, the actual figure is what will be used. The buyer will not get back the excess amount to make it to the 3%. An example of that is the actual figure for a 90% loan is $3,150 but the 6% is $6,000 you would work off the $3,150 figure.
Now comes the fun part – what happens if the 90% financing concession figure is $7,000? You will look and see that $6,000 is the allowable and thus you have excess of $1,000. You would use for a sales price the $100,000 minus the $1,000 is $99,000. The loan amount is 90% of $99,000 which is $89,100. This is the same way you will calculate if there is a sales concession.
How about another example – what happens if it is a non-realty item like furniture? The sales contract states there is furniture and a value of $1,500, you will take the sales price of $100,000 minus the $1,500 for the purpose of LTV only of $98,500 and then figure the loan amount for it to be 90% which is $88,650. Your closing disclosure will show the actual sales price of $100,000 but for loan amount you will need to do the above calculation. The reason is that the buyer is not allowed to get cash out of the transaction. There are times where, if the concession is furniture, the sales contract as well as the appraisal could have comments that the items have no value. If this happens, you do not have to take the above steps.
If you have questions, please do not hesitate to give a call to a member of the Regional Underwriter team at 800-444-5664 option 2.
Pat Norr is a Regional Underwriter consultant. She is a Certified Residential Underwriter. She has been in the industry for 40 years, 22 of which have been with Enact.