I received a fax from my friend Jackie, a loan originator in New Jersey. It outlines why The Advisory Committee on Professional Ethics in the State of New Jersey has decided a seller concession is unethical and should be disapproved. It might only be a matter of time for New York and the Fed to follow. A seller concession is when the seller agrees to pay the buyer’s closing costs or credit money back for repairs. The Seller does not really pay the money- there is a “credit” given in the contract. I call this monopoly money! This will allow the contract price to be increased by that dollar amount and will thus increase the mortgage size accordingly.There are rules, however. In order to use a seller concession, it must be disclosed in the contract of sale, disclosed in the appraisal and the value of the home must be appraised for the total of the purchase price and the seller concession. There are also dollar limits presented for a maximum of 6% of the purchase price.

     This has been a technique used for years, right or wrong, to allow a borrower to obtain a larger loan amount. It was truly invented to help people that needed to get a higher loan amount to cover the closing costs. It is also used in FHA loans. However, the system allows all borrowers including investors to use seller concessions. This opened the door for fraud and deceit by investors, realtors and loan officers. (Which is causing the tizzy….) Obviously it is coming back to bite the lenders by way of lower home values proven in foreclosure proceedings. Instead of disallowing this technique for inventors or making the requirements stricter, they will probably do away with it all together. Yes, this will affect the little guy that really needed the seller concession to reach the American Dream. Too bad……