April 24, 2014
A reader asks, “Is there a cap on what borrower can pay in order to close an FHA loan? In other words, after the down payment, is borrower limited in what they can pay to close the deal?”
There’s no set dollar amount limit on closing costs per se–all home loans are different–but FHA loan rules as spelled out in HUD 4155.1 do explain what expenses a borrower can be charged and what he or she is not allowed to be charged. For example, in Chapter Five, Section A, we learn:
“Lenders may charge and collect from borrowers those customary and reasonable costs necessary to close the mortgage loan. Borrowers may not pay a tax service fee.” Additionally, “FHA no longer limits the origination fee to one percent of the mortgage amount for its standard mortgage insurance programs.”
“However, both the Home Equity Conversion Mortgage (HECM) and Section 203(k) Rehabilitation Mortgage Insurance programs retain their statutory origination fee caps.”
FHA loans permit the seller or other third party to contribute up to six percent (but no more) of the sales price or appraised value (whichever is lower) to the borrower’s closing costs. FHA loan rules also spell out how broker fees can be paid. From Chapter Five:
“If a borrower is represented by a real estate broker and must pay any fee directly to the broker, that expense must
• be included in the total of the borrower’s settlement requirements, and
• appear on the HUD-1 Settlement Statement.
If the seller pays the broker fee as part of the sales commission, it is not considered an inducement to purchase, or part of the seller contributions limitation, as long as the seller is paying only the normal sales commission for that market.”
The lender is responsible for estimating all expenses including closing costs plus all “reasonable costs necessary to close the mortgage loan” according to HUD 4155.1. That estimate must include, where applicable:
- 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.
For more information on closing costs, talk to your lender or contact the FHA directly for assistance.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting 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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