Can I finance my closing costs with the FHA mortgage program in 2014?

Editor’s note: This week’s reader Q&A comes from a first-time home buyer in the Philadelphia area who is considering an FHA loan to buy a house. He wanted to know if HUD allows borrowers to finance their closing costs when using this program. The short answer is no, they don’t allow it. But there are other ways to accomplish the same goal. Read on to find out how!

Reader question: “From what I have gathered, the FHA mortgage program lets me make a down payment as low as 3.5% of the home value. I can cover that, and I can definitely keep up with the monthly payments for the loan size I am seeking. But the closing costs are a different story. I might not be able to come up with that extra amount for some time. And I want to buy before home prices and interest rates rise any further. So my question is, can I finance my closing costs with an FHA mortgage in 2014?”

Technically, You Cannot Finance Closing Costs With an FHA Loan

Just to be clear, when you say you want to finance your closing costs with your FHA loan, you are talking about rolling those costs into the loan amount and having them be amortized into your monthly payments over the full term. So they would essentially become part of your monthly payments, instead of you having to pay them up front at closing.

Is that kind of scenario you are talking about? If so, the answer is no. You cannot finance your closing costs into an FHA-insured mortgage loan.

According to current guidelines issued by the Department of Housing and Urban Development (HUD), FHA loans can cover up to 96.5% of the purchase price. The actual funding is provided by a lender in the private sector, as with other types of loans. The lender receives insurance protection from the federal government via the Federal Housing Administration.

Stated differently, the FHA will not pay your closing costs for you. For a standard home-purchase scenario, the maximum loan amount is 96.5% of the “lesser of the appraiser’s estimate of value or the adjusted sales price” (source: HUD Mortgagee Letter 08-23). The home buyer / borrower must pay the remaining 3.5% as a down payment, along with any costs incurred during the processing and closing of the loan.

Read: No change to FHA down payments in 2014

Nowhere does it state that the borrower can finance or “roll” those fees into the mortgage. But there’s another way to accomplish the same goal, and it abides by all of HUD’s rules and guidelines. You could ask for a seller concession or contribution…

Asking the Seller to Pay

There’s another way to handle this. You could pay a higher amount for the home and then ask the seller to pay some or all of your closing costs (depending on how much they are). Under 2014 FHA mortgage rules, the seller is allowed to pay for some of the buyer’s costs, up to 6% of the purchase price in most cases. This is referred to as a contribution or “concession.”

From the seller’s perspective, it all comes out the same. They net more from the sale of the home, and they turn around and pay that same amount back to the buyer, as a concession toward their closing costs. The idea is that everyone gets what they want, and the deal goes through.

Read: Getting the seller to pay your closing costs

In some cases, the buyer can get the seller to pay some of the closing costs without even elevating the sale price. In this scenario, you would agree to pay the original asking price (or close to it) while asking the seller to contribute toward your closing fees. You would not inflate the sale price, as described in the earlier scenario. There are different ways to go about it, but they are all very market-dependent…

Seller Concessions are Market Dependent

To recap: The Federal Housing Administration will not let you roll your closing costs into the loan. So, technically speaking, you cannot finance those costs into the amount being borrowed. They must be paid by someone, either by the buyer or seller (or by both).

But FHA does allow you to ask for seller assistance, up to 6% of the purchase price in a typical home-buying scenario. If you can get the seller to agree to this type of “concession,” you are essentially accomplishing the same goal. You avoid having to pay all of the closing costs up front, which seems to be what you are after.

But this is all very market-dependent. What you can get away with, in terms of closing cost concessions or contributions from the seller, will largely depend on the type of real estate market you are in.

  • If you are in a hot market where properties are selling fast with multiple offers, you probably won’t find a seller willing to “bend” on this issue. Why would they?
  • If you’re in a slower market with plenty of inventory but few buyers, sellers will typically go above and beyond to land a contract. So they’ll be more likely to contribute to your closing fees.
  • And, of course, there is a broad spectrum in between these extremes.

Ask your real estate agent about this and other financing strategies. He or she should be able to tell you how likely, or unlikely, it is based on local market conditions. They have probably “been there and done that” a time or two.

Disclaimer: This article answers the question, Can I finance my closing costs with an FHA loan in 2014? We have made every effort to fact-check this article to ensure accuracy. But the Department of Housing and Urban Development makes frequent and ongoing changes to this program. So there is a change this article will become less accurate over time. This information is not meant to replace official program guidelines, which can be found on the HUD.gov website. If you have any questions about the program, closing cost rules, or seller concessions, refer to the aforementioned website or speak to an FHA mortgage lender. You may also wish to speak with a HUD-approved housing counselor or counseling agency.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author