Can closing costs be financed into an FHA loan, or do they absolutely have to be paid at the time of closing? Or does this vary by lender?
Closing costs on a FHA loan can be financed in if you do not exceed the LTV threshold. Simply put you can't go over 96.5% LTV on a purchase and assuming you only put down 3.5% you would have to pay the closing costs or have the seller pay closing costs which you would negotiate when you made an offer. If you were refinancing with an FHA loan and your current LTV was at 92%, you could finance closing costs as long as you do not go over the established LTV limits for FHA. Another options is to have your broker or banker try and pay the closing costs through Yield Spread Premium. How much a broker or banker may pay of your closing costs can widely vary and will result in an increase of your interest rate. On a purchase try and negotiate seller paid closing costs to cover so your net out of pocket is only the 3.5% down payment.
Hope that helps!
There is very little variance by lender when it comes to FHA rules. They all follow the same guidelines, established by FHA, so that the loans can be securitized following FHA rules.
Some closing costs can be financed: Notably, the 1.75% (points) that go toward the Upfront Mortgage Insurance Premium (UMIP).
Of course, sellers, and others (RE agents, lender's, etc) MAY contribute to paying for closing costs, usually up to 6% of the purchase price. However, each line item must be paid in it's entirety, no partial payments allowed.
If you elect to use seller financing of closing costs, it is a good idea to have your loan originator lay it out on a spreadsheet, so you can use the optimal amount, and have it carefully explained. You may find that you cannot use up every last dollar to your advantage, but that varies by transaction.
You will always need to bring the minimum downpayment, curently 3.5% of the purchase price. Sellers and RE agents cannot contribute to that.
Plainly speaking, closing costs must be paid at closing in PURCHASE loans - you cannot directly finance them into the loan. This applies to FHA and most other loan products as well (there may be community banks offering second mortgages to cover closing costs, but these will be few and far between).
In REFINANCE transactions, the costs to close can be included in your loan amount (or "rolled in"), provided they don't top the maximum loan amount in your county or the maximum percentage of your home's value available for borrowing (called your "LTV" or "Loan to Value" ratio).
One way of "backing into" financing the costs of a purchase closing, however, is to have the SELLER pay your closing costs. A seller may concede between 3 and 6% of the price of the home to cover your costs on an FHA loan. . . This is disclosed as part of your initial offer to the seller, who calculates accordingly.
So, if you are offering $200,000 for the home with a 3% concession, the seller will provide $6,000 at the closing to help you with your costs, and will then take 194,000 for the home. Ostensibly, the seller has factored this in when he or she is accepting your offer - so in a way, you are simply building the costs of buying into your price - and consequently, into your loan. The appraisal of the property must support the $200,000 price, and the concessions must be spent entirely on costs - any part that is not used is forefeited to the seller (you cannot walk away with cash at the table).
(By the same token, a real estate agent or mortgage loan officer can also offer the same "concession", but they are not often making enough money to pay for all your costs)
The other indirect way to cover your costs is to agree to take a slightly higher RATE on the loan, in exchange for the lender paying some or all of your costs. The lender agrees to front you a "lender credit" for your costs, knowing that they will collect more interest monthly over the life of the loan. This is often (misleadingly) referred to as a "no closing cost" loan. There is, of course, a cost - in the form of a higher than market interest rate - but the cost is indirect so that the dollar figure does not appear on the closing documents and you do not have to pay it "out of pocket" at the closing table.
All closing costs on an FHA loan must be paid by the buyer or the seller. The only cost that is financed is the up front mortgage insurance premium paid to HUD. Currently, FHA requires an up front mortgage insurance premium in the amount of 1.75% of the loan amount. The seller can give the buyer a concession of up to 6% of the sales price to cover the closing costs. The concession can only cover actual closing costs and if there is any concession left over, it cannot be applied toward the statutory 3.5% downpayment or credited back to the buyer. The best use of any excess concession is to pay points to get a lower interest rate.
Yes, Justin, they can be "financed" as long as you can come up with the minimum required down payment, which would be 3.5 per cent of the purchase price. The way FHA allows the closing costs to be financed is that the seller can pay closing costs and prepaids up to 6 per cent of the sales price.
As an example, let's say the seller's net bottom line price without paying closing costs is $100,000. Your required down payment would be $3,500. Let's say closing costs amount to 3.5 per cent and prepaids another 1.25 per cent for a total of 4.75 per cent for the two items combined. That amounts to $4,750 in the example we are discussing. So, if the seller's bottom line is $100,000, in order to "finance" the closing costs, what you would do is add $4,750 to the offer price, making it $104,750 and ask the seller to pay $4,750 towards closing costs and prepaids, which still nets the seller their required $100,000.
Regarding the down payment requirement of 3.5 per cent (which now becomes 3.5 per cent of $104,750), FHA allows that money to come from a Gift from a relative if you don't have quite enough money saved up. FHA is the most flexible loan program out there in regards to both the down payment and allowing closing costs and prepaids to be included. In the example above, the property would have to appraise for $104,750 to make it work.
Depending on the type of transaction (Purchase or Refinance) the closing cost can be rolled into the loan. Assuming that you are doing a refinance, the closing cost will simply be added to the principal balance of the loan. If you are borrowing 100,000.00 at 5.5% and your closing cost are 5,000, then your new loan will be 105,000.00 at 5.5%. If you do not have enough equity in the property, then you may be asked to either lower the loan amount or pay the closing cost out of pocket.
If the loan is a purchase transaction, then you will not be able to roll in the closing cost. What you can do instead is ask for sellers concession, maximum 6% of the loan amount, that will cover all your closing cost unless your taxes and insurance are extremely high.
Closing cost do vary from one lender to the next, but the ability to roll in closing cost on refinance transaction is consistent everywhere.
The new FHA streamline refinance program for FHA loans endorsed by 6/2009 does not allow any closing costs to be rolled into the new loan, other than HUD's very minor MIP fee. As such, either the lender or borrower is responsible for covering closing costs and escrow setup at closing. I typically cover all my clients' closing costs, and often part of their new escrow setup as well. Typically, clients will bring a payment or so to closing, then skip a month's payment and get a refund on their existing escrow account within 30 days of closing.