How Does the FHA Regulate Interest Rates and Closing Costs?

December 22, 2010

If you're looking for an FHA mortgage as a first time home buyer, you've got quite a lot to learn about the home loan process--chances are you've already taken in some new vocabulary about the business of buying and selling a home. For FHA home loans, that learning curve also includes extra things to understand about how FHA loans compared to conventional loans.

It's easy to make certain assumptions about government home loans, especially where interest rates are concerned. Did you know the FHA and HUD do not regulate, set or control interest rates on FHA home loans? Interest rates for FHA mortgages are governed by the same principles and market forces as conventional loans. The FHA loan difference is in the terms of the loan and how it is underwritten.

Interest rates must be negotiated between the borrower and the lender and the rate a loan applicant gets can depend on a variety of factors including credit score. Some FHA loan applicants assume credit scores are the determining factor in eligibility for an FHA home loan the same as conventional loans; the FHA's process differs from conventional loans and credit score is not viewed the same for an FHA mortgage. But that doesn't mean the lender won't set interest rates accordingly.

The FHA also does not set specific limits or caps on closing costs, but FHA requirements do say they must be "reasonable and customary." What does the FHA consider to be unreasonable? That may determined by the FHA on a case-by-case basis but some items may not be charged to the borrower and are already spelled out for the borrower's protection.

The borrower must conform to all restrictions and limitations set down by FHA lender policy--many such restrictions prevent the lender from passing on typical costs of doing business to the borrower. The borrower can't pay for items the lender would pay for regardless such as tax service fees or other items.