FHA Home Loan Rules for Closing Costs

June 2, 2018

What are the FHA home loan rules for closing costs? There are a variety of areas where closing cost guidelines come into play including what expenses are considered part of the borrower’s required cash to close, but also the source for the funds to close and more.

FHA loan rules or lender requirements may vary depending on whether the FHA mortgage loan is an automatic or manual approval transaction, and the examples we use here do not reflect an individual lender’s requirements. You will need to consult the lender to see what such rules may be at that financial institution.

FHA loan rules governing cash to close are found in the FHA Loan Handbook, HUD 4000.1. An example of the requirements in this area for manual underwriting includes the following:

“The Mortgagee must document all funds that are used for the purpose of qualifying for or closing a Mortgage, including those to satisfy debt or pay costs outside of closing.”

This section also tasks the lender for insuring that the FHA borrower has “sufficient funds from an acceptable source” to close the deal.

Why is this important? Because FHA loan rules don’t allow funds for the downpayment (which is part of the required cash to close the FHA mortgage loan) to come from certain types of loans such as payday loans, credit card cash advances, or “gift” funds that actually have strings attached. (Those rules apply to both manual and automatically underwritten FHA mortgages.)

The rules for cash to close may vary not just for manual or automatic underwriting, but also for the nature of your FHA mortgage-a new purchase loan or a refinance loan. For new purchases, HUD 4000.1 says:

“For a purchase transaction, the amount of cash needed by the Borrower to close an FHA-insured Mortgage is the difference between the total cost to acquire the Property and the total mortgage amount.”

But for FHA refinance loans, the cash needed to close is defined as:

“...the difference between the total payoff requirements of the Mortgage being refinanced and the total mortgage amount.”

Closing costs can include a lender’s origination fees, pre-paid items such as per diem interest, and discount points where applicable. Some FHA home loan transactions may permit the borrower to finance a reasonable amount of discount points, while others may not.

The Up Front Mortgage Insurance Premium (UFMIP) is also a closing cost the borrower needs to pay unless the borrower wants to consider financing the UFMIP-something only permitted if the applicant chooses to finance the entire amount. No partial payments of the UFMIP are permitted. It must be paid 100% up front or financed 100% into the loan amount.

In some cases, real estate tax credits may be used as part of the cash to close. According to HUD 4000.1:

“Where real estate taxes are paid in arrears, the seller’s real estate tax credit may be used to meet the MRI, if the Mortgagee documents that the Borrower had sufficient assets to meet the MRI and the Borrower paid closing costs at the time of underwriting.”

Speak to a loan officer if you are not sure how these rules may apply to your transaction.

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