Can FHA Closing Costs be Rolled into the Loan?
FHA loans offer home buyers some great benefits ranging from the low-down payment requirement to very competitive rates. These loans are extremely popular with first time home buyers who have very little in savings for the down payment and even less money available for closing costs.
Can FHA Closing Costs Be Rolled into the Loan?
FHA guidelines do permit some of the closing costs to be rolled into the loan. They are clear that the down payment amount of 3.5% required to close the loan may not be financed and must be paid for independently.
Typical closing costs for an FHA Loan
You can expect your FHA closing costs to be anywhere from 2%-4% of the loan amount. You will have standard fees that you cannot avoid and will need to be paid regardless as to which lender you choose. Some of these fees or closing costs include your credit report, home inspection or appraisal, the title search and title insurance, and flood certification just to name a few.
Next, you will have some lender based fees which may vary from lender to lender. These fees include discount points, origination fees, and possibly an underwriting fee.
Finally, you have unavoidable fees that are FHA specific such as the upfront mortgage insurance premium. Read our article about FHA mortgage insurance premiums for more information.
If you would like to see a detailed breakdown of all FHA closing costs that you may incur, then read our article on FHA closing costs.
The Property Appraisal is the Key
If you are trying to finance the FHA closing costs, the home will need to appraise for the purchase price plus the closing cost amount that you are trying to finance.
For example, if the purchase price is $200k and you expect to have closing costs of $6k, then the home will need to appraise for $206k.
Rolling the Closing Costs into an FHA Refinance
If you are refinancing your home, a popular option is the FHA streamline refinance which does not require a new appraisal. However, if you want to include your closing costs, then a new appraisal will be required. Read our article on FHA streamline refinances.
For a standard FHA refinance, you can refinance your existing mortgage up to 85% of the home’s value today. This value will be determined by a new appraisal and the closing costs can be added into the loan amount.
Which Closing Costs Cannot be Rolled into an FHA Loan?
There are some closing costs which cannot be rolled into the loan. These costs include all of the prepaid fees at closing such as your prepaid interest, prepaid taxes, homeowner’s insurance premium, interest owed at closing, and your escrows for taxes and insurance.
Your lender can provide you with a good faith estimate which should outline all of these costs for you. It is important to note that the lender does not generate these costs, but instead they are the messenger. You will negotiate your homeowner’s insurance with your agent, your taxes are determined by your township and the prepaid interest will depend upon which day of the month you close.
You can see that the majority of the FHA closing costs can be financed. Especially those big ticket items such as the mortgage insurance premiums
FHA Closing Cost Assistance Programs
Many people are asking whether there are FHA closing cost assistance programs. A program like this is not common and if available, would be found locally. Most assistance programs are down payment assistance programs. In theory, you could find a down payment assistance program and then use the money that you do have to help offset some of your closing costs.
The most realistic way to have your FHA closing costs paid for is to negotiate that with the seller.
Can the Seller pay for the closing costs?
Your closing costs can also be covered by the seller. Often, the home sale negotiation will result in the seller paying for the buyer’s closing costs. For FHA loans, the seller may contribute up to 6% of the home value as a seller concession for closing costs. We see this as a very common option today with real estate transactions. In fact, some home sellers plan to use this as a strategy to get buyers to pay full price for the home.
No Closing Cost FHA Loan
You have options to close on an FHA loan without paying closing costs. These are the most effective ways to eliminate having to pay for closing costs at closing.
Seller Closing Cost Contribution – The seller is allowed to contribute up to 6% of the purchase price towards your closing costs. This is the best way to have your closing costs covered.
Lender Closing Cost Credit – The lender can cover your closing costs, but this would be in exchange for a higher interest rate. It is important to do the math to see whether this makes sense financially.
Closing Cost Assistance – There are programs which can help with closing costs and they are similar to the down payment assistance programs. Read our article on FHA closing cost assistance.
In the end, there are ways to finance the majority of the closing costs. We also mentioned that some or all of those costs can also be covered by the seller or even by gift funds if you are fortunate enough to have a relative who can help. The closing costs should not prevent you from purchasing a home with an FHA loan. You have so many options with this program that home ownership should be as simple as finding the home that you want.
Additional Helpful Articles
FHA Repair Requirements – This is an excellent article that reviews what repairs must be made to the home for it to be FHA compliant. – From Bill Gassett
How to Avoid Closing Cost Sticker Shock – Prepare yourself for how much you will need to spend on closing costs and find ways to reduce them. – From Paul Sian
Home Buying Closing Costs – This article reviews a detailed list of general closing costs. This is for conventional as well as FHA mortgages. – From Petra Norris