April 26, 2011
In recent blog posts we’ve discussed the fact that the FHA does not set interest rates on the loans it insures. Forces in the marketplace already determine the state of housing market interest, for the FHA to get involved in setting rates for FHA-guaranteed loans would involve a whole new layer of effort and study to keep up with ever-changing market conditions.
Instead, the FHA allows lenders and borrowers to negotiate the rates. What the FHA does do is to control the fees and charges associated with an FHA loan. FHA rules state fees and costs must be “reasonable and customary”.
For example, FHA rules allow the lender to collect an origination fee. For loans through the end of 2009, the fee was limited to one percent. The one percent fee cap was eliminated for loans originated after that time, but the FHA does not allow the lender to charge a tax service fee.
When it comes to closing costs, the FHA has rules to prevent lenders from charging disproportionate amounts based on the loan. The FHA official site says, “Aggregate closing costs charged to a borrower may not violate the FHA tiered pricing rules which prohibit a lender from charging higher prices for low balance loans than the lender charges for higher balance loans.”
In addition, the FHA places caps on fees to prevent “variation” that isn’t warranted. “A lender’s mortgage charge rate (discount points, origination and other fees) may not provide for a variation of more than two percent on its FHA mortgages within a geographic area; and any such variation must be based on actual variations in fees or costs to the lender to make the loan.”
Under the rules, FHA borrowers may not be charged without reason, they cannot be charged for services that aren’t delivered, and they can’t be charged for expenses the bank must pay as the cost of doing business on an FHA loan. Markups are also not allowed–the buyer cannot pay more for a service rendered in the FHA loan process than it is worth. Title examination fees, appraisal fees, and other expenses cannot be artificially inflated.
One thing to keep in mind about loan fees–FHA rules allow sellers to “contribute up to six percent of the property’s sales price toward the buyer’s actual closing costs, prepaid expenses, discount points, and other financing concessions.”
This can be a powerful tool in the negotiation to purchase a home. FHA loan terms, rates and expenses may vary from bank to bank–the FHA encourages borrowers to shop around for a lender to get the best possible terms and conditions for the loan. In the end it’s the borrower’s decision on which lender to work with and that’s a choice that should not be taken lightly…even with a potential contribution from the seller.
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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