What Are Typical Closing Costs for FHA Mortgage Loans?
The Federal Housing Administration (FHA) continues to offer low- to moderate-income borrowers affordable mortgage options since its inception in 1934. FHA mortgage insurance is government-backed by the U.S. Department of Housing and Urban Development (HUD). It protects lenders that fund the loans by reimbursing their losses if the homeowner defaults on the loan.
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Identification
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FHA allows the lender to "collect fair, reasonable, and customary fees and charges from the borrower" for loan-related services called closing costs, according to the FHA Handbook. Closing costs for a purchase or refinance transaction may also include third party service fees, such as escrow, title insurance and appraisal.
Significance
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The borrower must pay these costs at closing, or settlement, in order for the lender to release funds and title to transfer. There have been several changes to FHA's closing costs policy since the agency re-emerged as a driving force in the depressed housing market after 2006. It continues, however, to prohibit "mark-ups" -- charges to the borrower that are higher than those actually charged to the lender. According to the Home Buying Institute, average closing costs are between three and five percent of the refinanced loan amount or a purchase transaction's sales price.
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Types
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Closing costs are generally borrower-paid, seller-paid or lender-paid. FHA categorizes closing costs as "allowable" or "non-allowable." Allowable fees are those that can be charged to and paid by the borrower. It includes -- but is not limited to -- credit reports, loan origination, attorney and document preparation fees. Prior to 2006, FHA had a substantial list of non-allowable items, but has since reduced it to one: a tax service fee. The seller or lender must cover this cost, which is less than $100, according to the Home Buying Institute.
Features
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"FHA no longer limits the origination fee to one percent of the mortgage amount for its standard mortgage insurance programs," said the FHA Handbook of its insurance programs for one-to four unit properties. The standard for origination fees is, thus, the customary rate for the market area.
The Home Equity Conversion Mortgage (HECM) -- FHA's reverse mortgage program -- origination fee is capped, however, at two percent of the loan amount. FHA's 203k rehabilitation insurance program caps the fee at 1.5 percent of the rehabilitation allocation amount or $350, whichever is greater. The 203k loan combines an acquisition loan and construction loan for properties in need of repair or remodeling.
Warning
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Federal regulation known as the Real Estate Settlement and Procedures Act (RESPA) governs the rules of disclosure for FHA loans on one- to four-unit residences. Lender must provide applicants with a Good Faith Estimate that itemizes the closing costs expected for their transaction. The GFE is a tool for loan shopping that allows borrowers to compare closing costs among lenders.
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References
- HUD: FHA History
- FHA Outreach: Handbook 4155.1: Closing Costs and Other Fees
- Home Buying Institute: Closing Costs on FHA Home Loans
- FHA Outreach: Handbook 4155.1: Section 203(k) Rehabilitation Home Mortgage Insurance and Streamlined Limited Repair Program
- FHA Outreach: Handbook 4155.1: General Information on Settlement Requirements
Resources
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