FHA proposes seller credit for the HECM for Purchase program

The Federal Housing Administration (FHA) announced this week the publication of newly proposed guidance for the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) program in the Federal Register (FR), which in certain circumstances can include “an ‘interested party contribution’ [of] up to six percent of the sales price,” the notice reads.

News of the publication of this notice during a panel event at the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting and Expo in Nashville this week was met with rapturous applause by attendees. In comparison with the traditional HECM product, H4P has maintained a stubbornly low penetration rate for several years in the single digits, which itself is only within the roughly 1-2% penetration rate of the wider mortgage industry.

“‘Interested party contribution’ will be defined as a payment by an interested party or combination of parties toward the borrower’s origination fees, other closing costs including any items paid outside of closing, prepaid items, and discount points,” the notice said.

The new guidance is aimed to further align the H4P program with other forward FHA programs, “expanding the list of acceptable funding sources, including premium pricing,” the notice explained.

“This FR Notice creates closer alignment between HECM for Purchase and forward mortgages with regard to interested party contributions,” FHA said in an announcement of the proposal. “This permits HECM for Purchase borrowers to now accept up to six percent of the sales price from an interested party, such as a seller, builder, developer, real estate agent, mortgagee, third-party originator, or other parties with an interest in the transaction.”

FHA said if this proposal is enacted, it would be “the first time FHA will permit the use of premium pricing in the HECM program. Under this FR Notice, HECM for Purchase borrowers may be able to take advantage of premium pricing and receive a credit from the mortgagee, or third party originator, to reduce their actual closing costs in exchange for a certain initial mortgage interest rate.”

The FHA encouraged interested stakeholders to review the FR Notice and submit comments through Nov. 24.

According to data shared earlier this year by FHA officials during a California NRMLA meeting, the H4P product maintained a penetration rate of 6% based on HECM endorsement figures from the U.S. Department of Housing and Urban Development (HUD) in 2022.