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There are important things first-time home buyers need to know about the cash-to-close requirements for FHA home loans. Do you know what your obligations are at closing time? Do you know which costs you’ll pay on closing day and which may be due earlier?

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

FHA Loans and Cash-To-Close: What You Need to Know

April 4, 2022

FHA Loans and Cash-To-Close: What You Need to Know
There are important things first-time home buyers need to know about the cash-to-close requirements for FHA home loans. Do you know what your obligations are at closing time? Do you know which costs you’ll pay on closing day and which may be due earlier?

There are home inspection fees, appraisal fees, the FHA Up-Front Mortgage Insurance Premium, and other expenses. Some can be included in the loan amount, others must be paid in cash. A home inspection fee would not be paid at closing time, but your Up-Front Mortgage Insurance Premium would be.

For new borrowers, a portion of the early confusion around these expenses is because some don’t understand the FHA approach toward down payment costs and the other expenses you’ll pay at closing time.

One of the most important? Closing cost money is not part of the down payment. When you pay in cash at closing time for the FHA Up-Front Mortgage Insurance Premium and other expenses, that money is NOT considered part of your FHA loan down payment and is not deducted from the amount you owe as money down.

HUD 4000.1, the FHA Single-Family Lender’s Handbook, says the FHA home loan down payment is an expense above and beyond the other closing costs you’ll pay. 

You can soften the financial blow of this by negotiating to have the seller pay a certain percentage of closing costs on your behalf. Such agreements are known as “seller concessions” and the seller can contribute up to six percent of the price of the home toward closing costs ONLY.

The seller is not allowed to provide down payment funds, which is one way FHA loan rules keep cash to close and the down payment amount separate.

If the seller cannot contribute toward the down payment, who can? FHA loan rules permit the use of down payment assistance programs or financial help from someone who will not profit from the sale of the property.

Those may include (but are not limited to) state or local agencies that provide down ayment assistance programs.

And you are also allowed to get down payment help from a family member, friend, co-worker, employer, etc. The payment assistance or closing cost gift funds from a third party will require verification of the source of those funds by the lender.

FHA loan rules require there to be documentation for these funds to prove they did not come from sources like a payday loan or credit card cash advance. Your down payment money cannot come from such sources.

Ask a loan officer about how to proceed with a downpayment gift. You will be told how to document the money and what to do with the funds once you have received them. Follow your lender’s instructions to the letter, otherwise, you may not be permitted to use those gift funds at closing time as part of your down payment and/or closing costs where applicable.

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