There are a lot of rules about the closing costs associated with an FHA mortgage loan. For example, the rules in HUD 4155.1 state that closing costs cannot be considered part of the borrower’s required down payment. The minimum cash investment requirement is separate from the FHA loan closing costs and must be paid in addition to those costs.
There are rules governing how much a seller can contribute to closing costs, and there are rules about what costs can and cannot be charged to the borrower. Some FHA loan applicants may wonder if there are any provisions for the lender to pay closing costs; after all, the seller may contribute so why not the lender?
This practice is allowed under VA home loan rules–it’s known as “premium pricing” and may be offered as a perk or incentive to qualified borrowers. Not all FHA loan applicants may be eligible for premium pricing depending on credit scores and other financial qualifying data. But for those who are offered premium pricing, the FHA has specific guidelines for how it may be done.
In HUD 4155.1 Chapter Five, Section A, we find the following instructions about premium pricing:
“Lenders may pay a borrower’s closing costs, and/or prepaid items by ‘premium pricing.’ Closing costs paid in this manner do not need to be included as part of the seller contribution limitation. The funds derived from a premium priced mortgage
• may never be used to pay any portion of the borrower’s downpayment
• must be disclosed on the GFE and the HUD-1 Settlement Statement
• must be used to reduce the principal balance if the premium pricing
agreement establishes a specific dollar amount for closing costs and prepaid expenses, with any remaining funds in excess of actual costs reverting to the borrower, and
• may not be used for payment of
− collection accounts
− escrow shortages or missed mortgage payments, or
Speak to a loan officer to find out if you are eligible for premium pricing on your FHA loan.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.