FHA Loan Closing Cost Rules

September 16, 2013

There are many frequently asked questions about FHA loan closing costs. One of those frequently asked questions goes something like this:

“Can you have the closing costs added to your mortgage loan in California? Or do you have to pay them before escrow closes?”

FHA loans have some general rules about closing costs that are not state-specific. State law may affect some individual aspects of the FHA loan process but in general, let’s look at what FHA loan rules say about closing costs in HUD 4155.1 Chapter Five, Section A:

“Lenders may pay a borrower’s closing costs, and/or prepaid items by ‘premium pricing.’ Closing costs paid in this manner do not need to be included as part of the seller contribution limitation. The funds derived from a premium priced mortgage

• may never be used to pay any portion of the borrower’s down payment

• must be disclosed on the GFE and the HUD-1 Settlement Statement

• must be used to reduce the principal balance if the premium pricing agreement establishes a specific dollar amount for closing costs and prepaid expenses, with any remaining funds in excess of actual costs reverting to the borrower, and

• may not be used for payment of

- debts
- collection accounts
- escrow shortages or missed mortgage payments, or
- judgments.”

Particularly important is the line which mentions down payments. Your down payment--the “required minimum investment” up front--can never be included in the amount of the loan. This payment is always due at or before closing time. The minimum required investment for new purchase FHA home loans is 3.5%.

The closing costs on your FHA loan above and beyond the down payment may include broker fees, seller credits, discount points and other expenses as described in Chapter Five of HUD 4155.1.

Closing costs are required to be paid at or before the time the loan closes. Ask your loan officer about making such payments to your specific financial institution.