Are you interesting in learning about allowable FHA closing costs? Whether you obtain an FHA mortgage loan to finance the purchase of a house or if you are deciding whether or not to accept FHA financing on a home that you are selling, it's important to understand exactly what is involved in this type of financing arrangement.
About Allowable FHA Closing Costs
Changes to FHA Closing Cost Requirements
Before 2006, there were specific closing costs allowed by FHA as well as certain items that were expressly disallowed from being charged to borrowers. These specific restrictions were lifted, making it acceptable for mortgage lenders to charge closing costs that are considered "customary and reasonable" for the value of the mortgage that they are financing in the area where the home is located.
Lenders who write FHA loans are required to comply with the agency's tiered pricing rules. This rule specifies that lenders cannot charge higher rates for small loans than for those with higher values. It also places limitations on what can be considered "customary and reasonable" in terms of fees. For example, if discount points vary more than two points for loans within a specific market area, the variability must be directly attributable to actual costs associated with the loan that the lender has to pay.
There is now only one specific item that is excluded from allowable FHA closing costs. Borrowers obtaining FHA mortgage loans may not be required to pay a tax service fee. This fee is a charge associated with setting up and managing the escrow account associated with the loan, which is used to hold and disburse monies paid in with the mortgage payment that are to be held and applied toward annual property tax and insurance expenses. This fee is still required, but must be paid by the seller. The charge may vary, but typically runs a few hundred dollars.
Implications of FHA Closing Cost Changes
The removal of itemized restrictions on allowable FHA closing costs has led to a significant change in lending practices. For example, before 2006, lenders were not allowed to charge more than a one percent origination fee on most FHA mortgage loans. However, that requirement was lifted and it is now permissible for lenders to charge origination fees that are in line with customary charges in the area where the loan is being made.
Additionally, before the new FHA regulations went into effect, many sellers were hesitant to accept FHA financing because the restrictions mandated that a significant portion of the closing costs be paid by the sellers. Since the change, however, buyers and sellers can negotiate about who will be responsible for paying the various costs associated with bringing a mortgage loan to closing.
Negotiating Payment of Closing Costs
Sellers are no longer required to pay specific closing costs, but can be asked by the buyer to cover closing cost expenses up to a maximum of six percent of the purchase price of the home. In reality, closing costs for FHA loans typically do not exceed 3.75 percent of the cost of the home, making it possible for buyers who are able to negotiate with sellers to pay the full allowed percentage to use the additional funds for other purposes. For example, additional seller-paid closing costs can be used to cover the cost of purchasing points as a way to buy down their interest rate.
Additional FHA Loan Requirements
It is necessary for buyers to make a minimum down payment of 3.5 percent of the total purchase price when seeking FHA financing. This is an expense that buyers must cover themselves. They may not rely on sellers to provide funds to cover the down payment requirement for their loans.
