May 8, 2013
A reader asks, “I have applied for an FHA loan. However, the home price is over the FHA limit in our area. We have enough money to get to the maximum loan amount, but we are not clear if that will be sufficient or if we will still need an additional 3.5% on top of that?”
“As an example only – Let’s say the house costs $365,000 but the maximum FHA loan amount is $330,000. If we put down 35,000 to bring the loan amount to $330,000 will we still be required to put down more money?”
The answer to this question is a bit complex, but we’ll quote the FHA loan rules word-for-word for maximum clarity.
According to the FHA loan rulebook, HUD 4155.1 Chapter Five Section B, “Under most FHA programs, the borrower is required to make a minimum downpayment into the transaction of at least 3.5% of the lesser of the appraised value of the property or the sales price.” (Emphasis ours.)
“Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and fees at the time of settlement. Funds used to cover the required minimum downpayment, as well as closing costs and fees, must come from acceptable sources and must be verified and properly documented.”
In order to close the loan, FHA rules also state, in HUD 4155.1 Chapter Five Section A:
“In addition to the minimum downpayment requirement described in HUD 4155.1 5.B.1.a, (editor’s note-the rule mentioned above) additional borrower expenses must be included in the total amount of cash that the borrower must provide at mortgage settlement. Such additional expenses include, but are not limited to:
- closing costs, such as those customary and reasonable costs necessary to close the mortgage loan
- prepaid items
- discount points
- non-realty or personal property
- upfront mortgage insurance premium (UFMIP) amounts
- repairs and improvements
- real estate broker fees
- mortgage broker fees
- premium pricing on FHA-insured mortgages, and
- yield spread premiums.”
And finally, the FHA loan rules state, “The amount of cash needed by the borrower to close an FHA-insured mortgage is the difference between the total cost to acquire the property, including the expenses listed in HUD 4155.1 5.A.1.a (editor’s note–see above) and the amount of the mortgage, excluding any UFMIP.”
In essence, what these rules seem to be saying is that if the appraised value of the home is lower than the sales price of the property, the borrower will need to bring the difference to the closing in cash–in addition to the other expenses referenced in the rules–the “total cost” of the property verses the amount of the loan.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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