Saturday, March 2, 2013

Filling in the Blank on the FHA/VA Addendum

As many of you are aware, FHA and VA only allow borrowers under their loan programs to pay certain costs associated with the closing of those loans. In the industry, the costs that are not allowed to be paid by borrowers under those programs are known as FHA or VA "non-allowable charges." There are a few other unique factors associated with FHA and VA loans such that the Tennessee Association of Realtors and Crye-Leike have promulgated a form addendum to the residential purchase and sale agreement to deal with them (Form F47 on the Crye-Leike intranet). One question that seems to come up quite a bit is how to complete the blank in paragraph 8 of that Addendum, "Non-Allowable Settlement Charges or Closing Costs."

The blank that appears in that paragraph calls for a maximum amount that the seller will contribute toward the FHA/VA non-allowable charges. So by way of example, if the parties insert $100 in that blank and the lender charges $200 in FHA/VA non-allowable charges, then the seller would have the opportunity object to the additional $100 and the deal may be cancelled. Some confusion is created by the fact that the paragraph further states that any amount paid toward non-allowable charges will be part of, and not in additionto, any amount the seller agreed to pay toward all of the buyer's closing costs. So if the seller agrees to pay $3,000 in buyer closing costs in the Special Stipulations paragraph, and the buyer gets an FHA loan, then any FHA non-allowable charges will be included in that $3,000.

That still leaves the question about what number to fill in the blank unanswered. My suggestion is to use a number which will be sufficient to cover all of the expected non-allowable charges for the particular loan program. Since FHA non-allowable charges will vary from VA non-allowable charges, and both will even vary among lenders, it behooves the selling agent to discuss the amount of those charges with the proposed lender before completing the blank. If the lender says to expect $75 in FHA non-allowable charges, you may want to put $125 in the blank as a cushion. This will prevent the problem mentioned earlier where the non-allowable charges exceed the limitation and the parties may cancel the deal. As a fail-safe, if the seller will be paying a certain percentage or amount of closing costs in general, you could insert that same amount in the blank. Using the earlier example, if the seller agreed to pay $3,000 in buyer closing costs in the Special Stipulations paragraph, then you could also insert $3,000 in the blank in paragraph 8 of the FHA/VA addendum.  Theoretically, this would protect the deal in the event the non-allowable charges were significantly higher than expected.

Please contact your Realty Title representative with any specific questions you may have on this issue.

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