January 24, 2014
A reader asks, “I have read in several places on the web that it is possible to finance your closing costs into a FHA loan. However, many of these sources are at least a couple of years old. Is this possible?”
To start, let’s examine what the FHA official site has to say about FHA loans and closing costs. At www.HUD.gov on the page titled Let FHA Loans Help You, we find the following:
“FHA might be just what you need. Your down payment can be as low as 3.5% of the purchase price, and most of your closing costs and fees can be included in the loan. Available on 1-4 unit properties.”
Some closing costs may be financed, some may be paid by the seller within the boundaries of the FHA loan program’s rules, and the borrower can pay some closing costs out of pocket. The requirements for closing costs may vary depending on the nature of the loan whether it’s a new purchase FHA mortgage, a Streamline Refinance loan or an FHA Cash Out Refinancing loan.
One thing the borrower cannot do with closing costs, regardless of how they are paid, is use those costs as part of the FHA loan down payment. Closing costs do NOT count towards the minimum 3.5% down payment and are considered separate from the down payment. The rules for this are found in HUD 4155.1 Chapter Two Section A which clearly states:
“Closing costs (non-recurring closing costs, pre-paid expenses, and discount points) may not be used to help meet the borrower’s minimum required investment.”
When it comes to the seller (or another third party) contributing toward closing costs, FHA loan rules state:
“The seller and/or third party may contribute up to six percent of the lesser of the property’s sales price or the appraised value toward the buyer’s closing costs, prepaid expenses, discount points and other financing concessions.
The six percent limit also includes
- third party payment for permanent and temporary interest rate buydowns, and other payment supplements
- payments of mortgage interest for fixed rate mortgages
- mortgage payment protection insurance, and
- payment of the upfront mortgage insurance premium (UFMIP).
Note: Contributions exceeding six percent are considered inducements to purchase.”
To finance closing costs into the loan amount, speak to your loan officer about your needs and you can make arrangements to finance allowable closing costs into the FHA loan amount.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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