Closing Costs on FHA Home Loans: 2013 Update

Introduction: Much of the FHA home loan information found online today is outdated. While some aspects of the program have remained the same over the years, there have been several changes to the closing cost policy. Many of these outdated articles claim that you can pay a lot less in the way of closing costs on the FHA home loan. But this is not always the case in 2013.

FHA home loans have been getting a lot of press lately. In fact, all things mortgage-related have been in the news, as a result of our economic situation. But the FHA loan in particular has generated a lot of interest among home buyers lately. Why? Because it’s a way to get a good loan in a troubled economy, possibly while saving money at the same time. This is what drives the rising popularity of FHA financing.

There are many benefits to using a government-insured mortgage to buy a house. But in this article, I’ll focus on the closings costs associated with FHA loans. These loans are insured by the Federal Housing Authority, a branch of the federal government. Many people think the government actually provides the funding for these mortgages, but that’s not the case. Private lenders offer FHA loans directly to consumers. The government simply insures the loans and establishes the guidelines for the program.

Closing Costs Defined

When you hear the phrase real estate closing costs, it generally refers to a group of fees the buyer and/or seller must pay during the closing or settlement process. These costs include such things as mortgage origination fees, attorney fees, tax adjustments, appraisal fees and more. Basically, whenever somebody moves a piece of paper during the mortgage application process, a fee is charged.

Collectively, these things are referred to as closing costs, because you must pay them during the closing process when buying or refinancing your home. On average, these costs can add up to between 3% and 5% of the loan amount. So on a mortgage loan of $250,000, the closing costs could easily exceed $10,000. That’s a big chunk of change, especially for a first-time home buyer.

FHA Closing Costs in 2013

In the past, a key benefit of the FHA loan program was that it  limited certain closing costs. Under the guidelines set forth by the Department of Housing and Urban Development (HUD), a borrower can only be charged for FHA loan closing costs that are “customary and necessary” to close the mortgage. While this may sound a bit vague, it basically means that third-party costs cannot be marked up and passed along to you, the borrower.

The FHA has a list of closing costs that can be charged to a borrower. These are referred to as “allowable costs.” Anything that is not on the list is, by definition, considered as non-allowable.

Allowable fees for an FHA loan can include costs for the following types of services:

  • Mortgage origination
  • Deposit verification
  • Attorney services
  • Home appraisal
  • Title insurance and examination
  • Document prep
  • Survey of the property
  • Pulling credit reports

In the past, there used to be several things on the non-allowable lists (i.e., closings costs that could not be charged). But in 2006, the FHA basically eliminated this list. Or, to be exact, they reduced the list to just one item. Currently, the only non-allowable closing cost for FHA loans is the fee for tax services. According to guidelines published by the Department of Housing and Urban Development (HUD), this fee must be paid by the seller or the lender. But the fee for this service is typically less than $100.

FHA Loan Benefits

There are still plenty of benefits to getting an FHA home loan. You might have an easier time getting approved for the loan than you would without government backing. You may also get by with a smaller down payment than on a traditional / conventional mortgage. But saving a lot of money on closing costs is no longer a major benefit of the FHA loan program. There’s a lot of outdated information online to the contrary. But the truth is you will still pay most of the traditional closing costs, even with an FHA-backed mortgage.

Disclaimer: Over the past few years, HUD has made many changes to the Federal Housing Administration’s loan program. Most of these changes are intended to reduce costs and increase revenues. As a result of past (and future) changes to the program, this article may contain outdated information by the time you read it. We encourage you to visit the official HUD website for the latest information about the program.