The Department of Housing and Urban Development handles FHA loans. They set the guidelines regarding underwriting. They also decide which costs are allowed and not allowed. The FHA loan is known for its low down payment needs as well as affordable closing costs. Before you take out an FHA loan, you should know what the FHA non-allowable costs are. It helps you be a more informed borrower when shopping for a loan.
The Amount of Closing Costs
First, know that closing costs can total as much as 5% of your loan amount. They usually average around 3%, but knowing the maximum can help you plan. On a $150,000 loan, this means $4,500-$7,500. That’s a large amount of money to save. Keep in mind, the closing costs you pay for don’t count toward your down payment. For the FHA loan, you must put down at least 3.5% of the purchase price. The closing costs are separate from this number. On a $150,000 home, you must put down at least $5,250 plus the closing costs.
The Costs Must Meet the Service
Lenders can charge for a variety of services. What they can’t do is charge more than the service is worth. In other words, the charges should be usual and customary. You can figure out which lender exceeds these amounts by getting quotes from several lenders. If one seems significantly higher than another, their costs likely are not usual and customary.
The List of Non-Allowable Costs
Now that you know what the FHA can charge. Let’s look at the things they can’t charge you for on an FHA loan.
- Communication costs – Any costs charged for phone calls, in-person visits, or other methods of communication pertaining to the mortgage are not allowed
- Lender’s use of an independent contractor to complete any necessary services on the loan
- Costs involved with obtaining the current mortgage payoff
- Extra fees for staff members of the mortgage company, such as an attorney
Paying the Allowed Costs
Just like there are non-allowable costs on an FHA loan, there are plenty of allowable costs. These are the costs you find on many other loans. They include:
- Discount points
- Credit report
- Title search fees
These fees can vary from lender to lender. This is why you should shop around with different lenders. See what closing costs are offered to you. You shouldn’t necessarily take the lowest closing cost loan, though. It depends on the interest rate and the term. Look at the big picture before deciding.
The good news is that the FHA has your back. They don’t allow you to pay costs that are unnecessary. This helps you save money in the long run. If you end up with a lender that charges these items, the seller or lender will have to pay them. You can negotiate this with either a higher selling price for the seller or with a higher interest rate with the lender.
In the end, it works out the same. If you pay a higher interest rate, the lender makes more money from you. This is how they make up paying for some of your closing costs. If the seller pays the costs, you pay a higher selling price. You end up with a higher mortgage payment to pay the closing costs that you weren’t allowed to pay.
It all works out to be about the same in the end. In the end, it depends on how you want to pay the closing costs on your FHA loan.