March 18, 2022
What do you need to know about FHA home loans, cash to close, and your obligations at closing time? If you are a first-time homebuyer it’s easy to get confused (initially) about the difference between your down payment money, closing cost funds, and other expenses like the home inspection.
Some of the early confusion comes because some do not understand the FHA philosophy about the down payment and the other expenses associated with closing day.
When you pay closing costs, that money is not lumped into your downpayment requirement. In other words, if you pay X amount of money at closing time for things like the FHA Up-Front Mortgage Insurance Premium and other expenses, that money is NOT considered part of your FHA loan downpayment.
HUD 4000.1, the FHA Single-Family Lender’s Handbook, says the FHA home loan down payment is a completely separate payment and does not get reduced by the amount of money you pay for closing costs.
FHA home loan rules about cash to close say that these expenses can be offset a bit by negotiating with the seller to pay a certain percentage of closing costs on your behalf. The seller can pay up to six percent of the price of the home in closing costs.
But the seller can NEVER provide down payment funds, which is another way FHA loan rules keep cash to close and the downpayment completely separate.
FHA loan rules permit the use of downpayment assistance programs or financial help from someone who will not profit from the sale of the property, including state or local agencies that provide downpayment assistance programs.
For any down payment assistance or closing cost gift funds from a third party, the source of those funds must be verified by the lender in a way acceptable to the FHA and that financial institution. There must be a paper trail for these funds to show they did not come from unapproved sources like a payday loan or credit card cash advance.
Closing costs and down payment money are both required to close the deal, but you should expect all sources of these funds to be given the kind of scrutiny your credit report gets at application time.
FHA loan closing costs will include a combination of mandatory fees such as the lender’s funding fee or loan origination fee, the appraisal fee, title fees, and other expenses as permitted under the FHA loan program.
Some costs are optional, like paying for discount points to reduce the interest rate on the mortgage or paying the FHA Up-Front Mortgage Insurance Premium in cash. You can choose to finance certain closing costs, but remember that anything you add into the mortgage loan amount may increase the amount you owe each month.