The New Sub-Prime

The proliferation of FHA loans that are being pushed on buyers, making them believe they can afford more expensive homes if they get the seller to pay up to 6% of the closing costs, has just gotten out of hand!

Nearly every buyer coming through the door, with a pre-qualification letter from a lender, is expecting the seller to absorb a large portion of the costs traditionally charged to buyers. And why is that? Well, it's really back to the issue of banks not wanting to loan money, whether they got bail-out funds or not. They're looking for government backed loans to carry them through. And they have no difficulty trying to push buyers into properties they really can't afford. Time was when Realtors were blamed for that...now the truth comes out!

FHA loans do ALLOW for up to 6% of the sale price of the home as a CONTRIBUTION from the seller. But now most of the buyers can't afford the homes without this infusion from the seller...and it amounts to blackmail. A contribution is something traditionally considered to be voluntary. But the way the banks are getting hold of the borrowers and morphing their buying power puts the seller into a situation that's anything but voluntary.

In this terrible market for sellers, where there are loads of homes listed for incredibly low prices, often well below what they cost years before, the sellers are being told to bite the bullet even harder. If they don't accept these conditions then the buyer moves on, looking for someone else who is desperate and will 'cave'.

This practice is painting an untrue picture of actual sales prices. If the seller is forced to give the buyer 6% back on the sale price, is it fair to report the full contract price in the county records and to charge the seller for title insurance and transfer tax on the deed at the full price? This misrepresentation just skews the tax rolls and inflates the recorded prices. If you look up past sales and think a particular home sold for $200,000, think again. If the seller had to give back 6% or lose the deal, then the sale price just sank to $188,000. Do the math at any price point you like. It's a huge chunk for sellers to give up, especially now.

Haven't we, as consumers, learned out lesson yet? I know that giving each other a helping hand or a leg up is part of the wonderful American spirit. But this 6% 'shakedown' isn't right. Approximately 3% will usually cover the buyer's necessary closing costs. Most sellers understand that and, if they are able, are often willing to go that far to help make a deal come together. But why 6%? What's the other 3% for? The other 3% is going toward covering all the costs built into the loan...all those charges due to the lenders...who keep this charade going!

It's the new 'sub prime'.