On May 28, the Washington Post reported that change is in the air, when it comes to FHA mortgage loans. Specifically, the Federal Housing Administration is halving the seller concession percentage from 6% down to 3%.

The seller concession is one reason FHA loans are so much more attractive than Fannie Mae or Freddy Mac options.Simply put, the concession allows buyers to ask the seller to pay for some of the closing costs of the FHA loan (i.e, loan origination, escrow costs, etc), up to 6% of the selling price of the home.

One problem with the concession, according to FHA officials, is that there is a significant risk for inflation of the appraised value of the home. Many times the amount of closing costs the seller agrees to pay is tacked on to the selling price of the home.

For example, let’s say you’re going to purchase a $100,000 loan and you apply for an FHA mortgage loan. In that instance, if the seller agrees to pay the maximum concession of $6,000 and these costs are added to the selling price, the selling price is inflated to $106,000. If an appraiser doesn’t notice the concessions added in, the FHA could end up insuring a mortgage loan on a home that is appraised below the selling price (Washington Post).

In 2007, the FHA announced that they would no longer allow borrowers to take part in seller financed down payment programs, which are typically handled by a non-profit organization. Briefly put, in those cases the seller’s charity of choice helps cash-strapped mortgagees pay for their down payment (Washington Post).

There is a catch, however; typically, the total amount of the down payment is added to the overall cost of the house, just as seller concessions are.  And in reality, it’s not the seller whose contributing to the charity at all, the borrower is.

While the seller financed down payment program had been a boon to depressed housing markets, it got be an unwieldy facet of FHA; in fact, former FHA housing secretary Alphonse R. Jackson told senators that these types of loans have driven the FHA "to the brink of insolvency." In 2000, these types of mortgages made up less than 2% of FHA insured mortgages. By 2007, that percentage jumped to 35%.