A Common FHA Loan Closing Costs Question
April 14, 2014
There are many typical questions about FHA loan closing costs. For example, some wonder if the closing costs can be viewed as part of the required FHA loan down payment. (That is not possible, the closing costs and down payment are two separate things.)
When it comes to closing costs, the FHA loan rulebook has guidelines that cover how much of the closing costs and what kind can be paid on the borrower’s behalf by the seller. Some contributions by the seller are permitted but there’s a cap on how much of a percentage of the overall price can be covered in this way.
Some FHA loan applicants wonder if there are any provisions for the lender to pay closing costs--if there are rules that govern how much a seller can contribute, are there similar guidelines for the lender?
The practice of the lender contributing toward closing costs is allowed in a certain way under VA home loan rules. This practice is known as “premium pricing” and may be offered as a perk or incentive to qualified borrowers.
Borrowers should take note--FHA loan applicants may not always be eligible for premium pricing (this may depend on credit scores and other financial qualifying information). But for those who are offered premium pricing, the FHA has specific guidelines for how it may be done.
The rules for FHA home loans found in HUD 4155.1 Chapter Five, Section A spell out the requirements for premium pricing as follows:
“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
When it comes to closing costs, the FHA loan rulebook has guidelines that cover how much of the closing costs and what kind can be paid on the borrower’s behalf by the seller. Some contributions by the seller are permitted but there’s a cap on how much of a percentage of the overall price can be covered in this way.
Some FHA loan applicants wonder if there are any provisions for the lender to pay closing costs--if there are rules that govern how much a seller can contribute, are there similar guidelines for the lender?
The practice of the lender contributing toward closing costs is allowed in a certain way under VA home loan rules. This practice is known as “premium pricing” and may be offered as a perk or incentive to qualified borrowers.
Borrowers should take note--FHA loan applicants may not always be eligible for premium pricing (this may depend on credit scores and other financial qualifying information). But for those who are offered premium pricing, the FHA has specific guidelines for how it may be done.
The rules for FHA home loans found in HUD 4155.1 Chapter Five, Section A spell out the requirements for premium pricing as follows:
“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”
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