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FHA Loan Closing Costs and Down Payment

July 27, 2015

2015-14A recent reader question in our comments section asked about whether closing costs are including in the FHA minimum 3.5% down payment. Is it true that an FHA loan down payment amount may include closing costs?

To fully understand this issue, it’s good to know what can be included in closing costs for your FHA home loan. Closing costs include (but are not limited to) the following:

Lender’s origination fee
Deposit verification fees
Attorney’s fees
Appraisal fees and compliance inspection fees
The participating lender’s origination fee
Any title insurance or title examination
Property surveys
Credit report fees
Certification fees

Note that these fees do not have anything to do with the sales price or appraised value of the home. FHA loan rules say that the loan amount for an FHA mortgage is determined as follows:

“For case numbers assigned on or after January 1, 2009, the maximum loan amount is based on the lesser of the sales price or appraised value multiplied by 96.50% (LTV).”

That information is found in a FAQ section of the FHA official site at FHA.gov, which adds that the minimum down payment is 3.5% of the amount listed above. We can infer from that that the minimum required down payment would not include any money paid for the closing costs listed above or any other closing costs.

Why? It seems reasonable to assume that the closing costs are not part of the sales price of the home or its appraised value. But in order to get the full letter of the FHA loan rules in this area without speculating, we must examine the following as found on the FHA official site.

–The minimum downpayment is 3.5%.
–Closing costs may not be financed or used to help meet the minimum 3.5% downpayment.
–The total first mortgage, including any financed upfront mortgage insurance premium (UFMIP), may not exceed 100% LTV/CLTV.
–The loan amount may not exceed the statutory limit for the area except by the amount of the UFMIP.
–The CLTV is not limited to 100% (of the lesser of the sales price or appraised value) when the FHA first lien is combined with a subordinate lien from an instrumentality of government or government agency that is providing down payment and/or closing cost assistance in the form of secondary financing.

As you can see from above, closing costs may not be considered part of the down payment. They are separate and must be paid above and beyond the down payment amount, which is why it’s a good idea to begin planning and saving for a new home loan as early as possible.

Do you have questions about FHA mortgages? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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