Borrowers with loans backed by the Federal Housing Administration benefit from a low down payment requirement, affordable and competitive financing options, and flexible underwriting standards. The FHA insures loans made to riskier borrowers, promising to reimburse the lender if the borrower defaults. Borrowers pay an up-front and monthly premium for this government mortgage insurance. Despite these differences, FHA borrowers bear most of the same expenses that conventional loan borrowers pay when buying or refinancing a home.
Changing the Course of Costs
An FHA "allowable fee" is a closing cost that FHA rules say a borrower can be required to pay. FHA borrowers pay for all of the "customary and reasonable" fees that borrowers for other types of financing pay, to the extent that the allowable fees are also typical for an area and market. In contrast, FHA non-allowable fees can't be covered by the borrower. In 2006, the FHA reduced its list of non-allowable fees to only one item. This change made FHA loans more competitive with other loan types and helped resolve a problem that FHA borrowers had previously faced: Home sellers often avoided FHA buyers because the numerous non-allowable fees increased selling costs.
The Customary and Reasonable Standard
Several parties take part in an FHA purchase or refinance. Underwriters, under the guidance of jurisdictional FHA Homeownership Centers, determine which fees fit the FHA's standard for "customary and reasonable" costs. In general, FHA borrowers cover the following allowable items: loan origination fees, called origination points; verification of deposit fees for underwriter confirmation of borrower's funds; appraisal and home inspection fees; title insurance and escrow fees; credit reports; deed recording and transfer fees; notary, wire transfer and messenger fees; and utility bill payoffs.
Limiting Allowable Amounts
FHA-approved lenders charge an origination fee for the service of processing, underwriting and funding -- originating -- a loan. The FHA used to cap such fees at 1 percent of the loan amount, but as of the time of publication, there are no caps on the origination fee that an FHA lender can charge on most loans. The FHA only limits the origination fee on its reverse mortgage insurance program, known as the Home Equity Conversion Mortgage, in which borrowers age 62 and older who have substantial equity in their homes can receive payments, either in consistent installments or lump sum, from their equity. A Home Equity Conversion Mortgage origination fee can't exceed 2 percent of the loan amount.
Non-Allowable Tax Service Fee
Lenders may hire a third-party tax servicing company to monitor your property taxes and handle payment to the taxing authority. The lender incurs a fee for this service, known as a tax service fee. A tax service fee is the FHA's only non-allowable fee. Tax service providers help ensure that the lender collects sufficient funds to cover upcoming tax bills, which helps protect the property's title against tax liens. Tax servicing directly benefits the lender, rather than the borrower. Although it is helpful, it isn't necessary, so the FHA prohibits lenders from passing this cost on to borrowers.
- FHA.com: FHA Requirements: Closing Costs
- Department of Housing and Urban Development: Revised Borrower’s Closing Costs Guidelines: Mortgagee Letter 2006-04
- MortgageLoan.com: HUD Lifts Cap on FHA Mortgage Origination Fees
- Quicken Loans: Tax Service Fee
- Department of Housing and Urban Development: Mortgagee Letter 2011-13: Elimination of FHA’s origination fee cap for the 203(k) Rehabilitation Mortgage Insurance Program
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