FHA Concessions, a Low Appraisal, and a "Just Bump the Rebuttal" Suggestion
Diego is pre-approved for an FHA loan at 96.5% LTV on a $318,000 contract for 88 Aster Lane. Closing costs and prepaids total $18,900. The contract gives Diego a $15,000 seller credit toward closing costs, a $3,500 seller-paid roof repair credit, and the seller also agreed to pay Diego's $2,400 HOA transfer and capital contribution fees. The appraisal came back at $306,000. Diego has $24,000 in savings plus a $5,000 gift from his mother that landed in his account ten days ago; no gift letter has been signed. The listing agent tells Diego's agent, "Don't worry about the appraisal - we'll push a rebuttal and the lender will just use the contract price."
1. Do the seller concessions comply with FHA limits? Show the arithmetic and what must change.
Read the worked answer
They exceed the cap and, separately, exceed the buyer's actual costs.
- FHA 6% concession limit: 6% × $318,000 = $19,080.
- Total seller contributions offered: $15,000 + $3,500 + $2,400 = $20,900. That is $1,820 over the FHA ceiling.
- Second ceiling - actual costs: a seller credit cannot exceed the buyer's real closing costs and prepaids, and any surplus cannot be handed back as cash. Actual costs are $18,900.
Binding number: $18,900. The credit is capped at the lower of the 6% limit ($19,080) and actual costs ($18,900), so $2,000 of the offered credit disappears.
Ways to restructure: reduce the credit to $18,900 and let the price stay; or convert the excess into a price reduction (which also lowers the loan amount and the 6% ceiling); or shift the $2,400 HOA fees to the buyer. Recalculate after any price change - the cap moves with the price.
Trap: remembering "6%" and stopping there. The actual-cost ceiling binds first here, and it is the one agents miss.
2. The appraisal is $306,000. Compute Diego's realistic cash requirement if the price stays at $318,000, and say whether he can close.
Read the worked answer
FHA lends on the lesser of the contract price or the appraised value - here, $306,000.
- Maximum base loan: 96.5% × $306,000 = $295,290 (upfront MIP of 1.75% is typically financed on top).
- Total acquisition cost: $318,000 price + $18,900 costs = $336,900.
- Less loan of $295,290 and less the usable credit of $18,900 = $22,710 cash.
- Cross-check: 3.5% of $306,000 = $10,710 down payment, plus the $12,000 appraisal gap = $22,710. Same number.
Can he close? Available funds are $24,000 + $5,000 = $29,000, so yes - with roughly $6,300 of cushion. But he is far thinner than he thought: he is bringing $22,710 instead of $10,710 because the appraisal, not the price, sets the loan.
Critical condition: the $5,000 gift needs a signed gift letter and documentation of the donor's ability to give and the transfer. If the gift cannot be documented, he still has $24,000, which covers $22,710 only barely - no room for the lender's cash-to-close overage or a moving budget. The licensee should model both scenarios before removing any financing contingency.
Alternative: renegotiate the price to $306,000. The loan stays $295,290, the down payment drops to $10,710, and the gap disappears entirely.
3. Evaluate the listing agent's "we'll just push a rebuttal and the lender will use the contract price" statement. What may Diego's agent properly do?
Read the worked answer
The statement is wrong on the rule and risky on the conduct.
- On the rule: for FHA, the loan is underwritten on the lesser of the sales price or the appraised value. A rebuttal does not change that formula; it can only change the appraised value if new, verifiable market data supports it. There is no mechanism by which the lender "just uses the contract price."
- On the conduct: a reconsideration of value is legitimate when supported by comparable sales the appraiser did not consider. Pressuring an appraiser to hit a contract number - or hinting that a deal dies if the value doesn't come in - implicates appraiser independence rules and Illinois appraiser licensing law. A licensee may not attempt to influence an appraiser's judgment.
- What Diego's agent should do: supply the lender with three to five genuinely better comps and let the appraiser decide; simultaneously prepare Diego for the $22,710 cash scenario; and keep the financing/appraisal contingency in place until a written commitment is issued. Relying on the listing agent's assurance is how buyers lose earnest money.
- Consumer-protection point: if the listing agent repeats that assurance to Diego directly, Diego's agent should correct it in writing rather than let the buyer budget on a false premise.