Do you have questions about allowable FHA closing costs in 2016, particularly the ones paid by the home buyer / borrower? If so, you’re in the right place. Below, you will find a list of closing costs that mortgage lenders are allowed to charge for FHA loans.
Allowable FHA Closing Costs in 2016
The Department of Housing and Urban Development (HUD) sets all guidelines for allowable FHA closing costs and fees. These charges can add up to between 3% and 5% of the loan amount. According to HUD, mortgage lenders are required to make sure the fees charged to the borrower (i.e., home buyer) “comply with all applicable federal, state and local laws and disclosure requirements.”
HUD also prohibits lenders from using closing costs to help the borrower meet the Minimum Required Investment (MRI). Under current FHA guidelines, borrowers are required to make a down payment of 3.5% of the purchase price or appraised value, whichever is less. This down payment must be above and beyond the standard closing costs charged by the lender. In other words, mortgage lenders cannot count the borrower’s closing costs toward the 3.5% minimum down payment — they are two separate things.
Note: The following information was adapted from HUD Handbook 4000.1, the “Single Family Housing Policy Handbook,” which took effect in September 2015.
Collecting ‘Customary and Reasonable’ Fees
Mortgage lenders are permitted to charge FHA borrowers “reasonable and customary fees that do not exceed the actual cost of the service provided.” The lender, or mortgagee, has to make sure that the combined charges do not violate the Federal Housing Administration’s “Tiered Pricing” rules, as defined below.
Mortgage lenders can charge discount points when making FHA loans. (A discount point is a fee, typically paid at closing, that lowers the borrower’s interest rate. Borrowers often use this strategy to secure a lower rate, with the goal of saving money over time.) Discount points are commonly added to a home buyer’s FHA closing costs.
Mortgage Origination Fees
HUD guidelines for 2015 – 2016 state that mortgage lenders may charge an origination fee when generating FHA loans. These fees are used to cover the procedural costs associated with originating a home loan. They are typically paid on closing day, along with all other FHA closing costs. Mortgage origination fees range from 0.5% to 1% on average, but they can fall outside that range as well.
HUD-approved mortgagees / lenders must ensure that the origination fees they charge comply with the Real Estate Settlement Procedures Act (RESPA). Learn more about these fees.
Lock-in and Rate Lock Fees
Lenders can also charge lock-in or rate lock fees that are consistent with Federal Housing and Administration and CFPB requirements. According to current HUD guidelines, the “Mortgagee [lender] may charge the Borrower lock-in and rate lock fees only if the Mortgagee provides a lock-in or commitment agreement guaranteeing the interest rate and/or discount points for a period of not less than 15 Days prior to the anticipated closing.”
According to the Federal Reserve, a rate lock / commitment is a mortgage lender’s written promise to hold a specific interest rate and a certain number of points for a borrower, typically for a specified time period during which the loan application is being processed. These fees are a common part of FHA closing costs.
Complying With the Qualified Mortgage
When mortgage lenders charge fees and points on FHA loans, they must ensure that those costs comply with the Federal Housing Administration’s Qualified Mortgage Rule, which you’ll find here.
With regard to closing costs, HUD’s definition of a Qualified Mortgage (QM) states that the FHA loan must “limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Title I, Title II Manufactured Housing, Section 184,Section 184A loans and others).”
When charging mortgage-related fees (collectively referred to as FHA closing costs), lenders must ensure the aggregate fees and charges do not violate the Tiered Pricing rule defined below.
Definitions for Tiered Pricing
- Area refers to a metropolitan statistical area (MSA) as established by the Office of Management and Budget.
- Mortgage Charge refers to the origination fee, discount points, interest rate, or any other amount of money charged to the borrower for an FHA-insured home loan.
- Mortgage Charge Rate refers to the total amount of Mortgage Charges (defined above) for a loan. The rate is expressed as a percentage of the initial principal amount of the mortgage.
- Tiered Pricing refers to any variance in Mortgage Charge Rates (defined above) of “more than two percentage points from the Mortgagee’s reasonable and customary rate for insured Mortgages for dwellings located within the area.”
If there are variations in the Mortgage Charge Rate, the lender / mortgagee must document that they are “based on actual variations in fees or costs” incurred by the mortgagee when making the FHA loan.
Standards and Limits for Mortgage Charge Rates
The lender may not generate an FHA-insured home loan with a Mortgage Charge Rate that varies by more than two percentage points from the “Mortgagee’s reasonable and customary rate for insured Mortgages for dwellings located within the area.”
To find out if a particular loan exceeds the two-percentage-point variance limit, the lender must compare the charge rate(s) for mortgages “of the same type, from the same area, and made on the same day or during some other reasonably limited period.”
Additional Non-Lender Fees and Charges
HUD’s guidelines for allowable closing costs are mostly focused on the lender’s fees, such as those mentioned above. As a home buyer, you might be charged additional fees from other third parties.
The home appraisal is a good example. The appraisal fee is usually paid directly to the appraiser, not the lender. Therefore, home buyers who use FHA loans may encounter additional closing costs not covered in this article.
Disclaimers: This article provides an overview of the rules and requirements for allowable FHA closing costs in 2015 and 2016. It is based on information provided in HUD Handbook 4000.1, the Single Family Housing Policy Handbook. This website is not an official source for FHA-related policies or guidelines. Additionally, there is a chance that this information may become outdated over time as HUD updates their guidelines. For the latest and most accurate information regarding FHA closing costs paid by the buyer, please refer to the aforementioned handbook (available on allregs.com) or visit HUD.gov.