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FHA Guidelines On Property Tax Prorations And Sellers Concessions

FHA Guidelines On Property Tax Prorations And Sellers Concessions

This BLOG On FHA Guidelines On Property Tax Prorations And Sellers Concessions Was UPDATED On September 2nd, 2018

New FHA Guidelines On Property Tax Prorations And Sellers Concessions

FHA Guidelines On Property Tax Prorations And Sellers Concessions were updated with HUD’s FHA 4000.1 Handbook which revised the older FHA 4001 Handbook

  • New FHA Guidelines were implemented
  • FHA Guidelines On Property Tax Prorations state that certain states such as the state of Illinois where property taxes are paid in arrears, property tax prorations can be used towards the down payment on a home purchase
  • However, the FHA mortgage loan borrower needs to show the 3.5% down payment of the home purchase in their bank account
  • Cannot use the property tax prorations as verified funds
  • For example, on a $100,000 home purchase, borrower needs to show 3.5% of the $100,000 purchase price in their bank account or $3,500
  • The $3,500 needs to be verified by the mortgage underwriter prior to the underwriter issuing a clear to close
  • Any shortage of funds to close needs to be addressed before the mortgage loan underwriter will issue a clear to close

Home Purchase In Illinois

On states where property taxes are paid in arrears, such as Illinois, the home buyer may have the prior year’s property taxes that is due to them at closing by sellers:

  • On the above example, if the property taxes on the $100,000 home purchase were $3,000
    • the home buyer was due the $3,000 property tax prorations
    • then FHA Guidelines On Property Tax Prorations And Sellers Concessions state that the $3,000 in property tax prorations can be used towards the down payment on this home buyer’s home purchase
  • The net due at closing on this home purchase is $3,500 less the $3,000 in property tax prorations or $500
  • The home buyer needs to come up with $500 at closing for his or her down payment plus the closing costs
  • Home Buyers can use property tax prorations for closing costs as well in the event if they have the property tax proration credits left over after applying for their down payment
  • Closing costs can be paid with sellers concessions or lenders credit towards closing costs
  • We will cover sellers concessions in the next paragraph extensively in detail
  • Lenders credit towards closing costs are when the mortgage lender will credit home buyers part or most of the closing costs in lieu of the mortgage loan borrower getting a higher mortgage rate

FHA Guidelines On Property Tax Prorations And Sellers Concessions On Sellers Concessions

FHA Guidelines On Property Tax Prorations And Sellers Concessions allows home sellers to give home buyers sellers concessions so the home buyer can cover most or all of the home buyer’s closing costs.

  • FHA allows up to 6% of sellers concessions credits by home sellers to offer to home buyers for their closing costs
  • Sellers Concessions cannot be used for down payment on a home purchase
  • Sellers concessions can only be used for closing costs
  • There are two types of costs involved on a home purchase
  • Down payment on a home purchase and closing costs
  • Closing costs on a home purchase includes the following:
    • loan origination fees
    • credit reporting fees
    • title charges
    • homeowners insurance
    • attorneys fees
    • inspection fees
    • other third party charges that a home buyer may occur in the home buying process

What Can Sellers Concessions Be Used For

  • Home buyers can also use sellers concessions to buy down mortgage rates by buying points
  • Home Buyers cannot have seller concession overages
  • Sellers concessions overages needs to go back to the home seller
  • Home sellers cannot give a kick back on seller concession overages.

FHA Home Purchase With No Down Payment Or Closing Costs

Home buyers purchasing a home in a state where property taxes are paid in arrears like the state of Illinois, they may be able to purchase a home with a FHA Loan with very little or no down payment and no closing costs. This holds true if buyers have enough property tax proration credits and sellers concessions.

  • I have closed many home loans where the home buyer did not have to bring any money to closing
  • Many of them got cash back at closing along with the keys to their homes
  • Remember that on states that property taxes are paid in arrears, buyers can use the property tax prorations for the down payment on the home purchase
  • If the property tax proration credits are greater than the down payment required, then buyers will get the difference back in cash
  • All closing costs can be paid with sellers concessions and/or lender’s credit towards home buyers closing costs

Benefits Of Buying Homes In Illinois

The benefits of buying homes in Illinois is that Illinois home buyers get property tax prorations. Sellers owe buyers one year’s property tax proration credit at closing. This is due to property taxes being paid in arrears. Home Buyers who need to qualify for mortgage in Illinois with a national direct lender with no lender overlays, contact us at Gustan Cho Associates at 262-716-8151 or email us at gcho@gustancho.com. Loan Cabin Inc.| Gustan Cho Associates has no lender overlays on FHA, VA, USDA, and Conventional Loans.

  1. Thomas says

    I live in Texas and am looking at purchasing a new construction how. I would be the first resident in the neighborhood so there are no comps. Will they use an estimate of my taxes for qualifying or the actual tax value of the raw land? In the past they’ve used the tax value of the raw land but I’m not sure if that is still the case.

    1. Gustan Cho, NMLS 873293 says

      With new construction, it depends on the lender on how they estimate property taxes. Some lenders use 1% while others use 2%. Has otherhomes in the area sold?

    2. Gustan Cho, NMLS 873293 says

      Michael Gracz of Gustan Cho Associates is licensed in Texas and is an expert with helping first time home buyers. Michael Gracz of Gustan Cho Associates is also an expert on non-qm loans and bank statement mortgage loans for self employed borrowers.

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