You can negotiate many of the costs associated with getting a loan backed by the Federal Housing Administration to buy or refinance a home. The FHA insures approved lenders against default, allowing them to finance otherwise risky borrowers, such as borrowers with minimal down payments, credit challenges, and high debt loads. An FHA origination fee can constitute a large portion of your closing costs, so it is often worthwhile to try to lower the fee. Who pays the fee is usually also negotiable.
What's the Point?
An FHA lender can charge an origination fee as compensation for processing, underwriting and funding your loan. The FHA allows a lender to charge an origination fee that is in line with the market, or deemed reasonable and customary by the local FHA office. Only the FHA's reverse mortgage program, known as the Home Equity Conversion Mortgage, has specific origination fee caps as of the time of publication. You pay an adjusted origination fee at closing -- which includes your lender's compensation plus any additional amount you pay or receive in exchange for a lower or higher interest rate -- known as "points." One point equals one percent of the loan amount.
A Borrower Closing Cost
The origination fee covers your cost to obtain FHA-backed financing, so it is traditionally a borrower-paid cost. In a refinance, you usually cover it by paying out-of-pocket or by adding it to the new FHA loan balance. In a purchase, you usually pay for it out-of-pocket, in addition to the other costs needed to close, such as the FHA's minimum 3.5-percent down payment. Because FHA loans are intended for borrowers of modest means, borrowers can cover the charge by other means.
Seller May Pay
On a purchase transaction, you can negotiate to have the seller cover all or a portion of your closing costs. This seller's concession can cover your loan origination fee, or points. The FHA allows a seller to credit you up to 6 percent of the purchase price for closing costs as of the time of publication. The FHA may increase or lower the maximum seller contribution, depending on its risk-management needs. The sales contract must outline an exact amount -- as a fixed dollar amount or a percentage -- when you negotiate a seller concession.
Other Ways to Negotiate Origination
Total closing costs typically equal between 3 percent and 6 percent of your loan amount, depending on where you live, according to the Federal Reserve Board. The origination fee is usually at least 1 percent of your loan amount, but may exceed this when you pay discount points for a lower interest rate. You might also pay less if you negotiate a lower origination fee directly with the lender or receive a credit from your lender in exchange for a higher interest rate. The lender gives you a credit if you negotiate what is often referred to as a "no-closing-cost loan."
- Department of Housing and Urban Development: Handbook 4155.1
- FHA.com: What You Should Know About FHA Loan Origination Fees
- FHA.com: FHA Requirements: Closing Costs
- FHA.com: FHA Seller Concession Rules and Possible Changes
- The Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- Bankrate.com: Is No-Closing-Cost Mortgage For You?
- Comstock Images/Stockbyte/Getty Images