FHA Settlement Requirements

For every mortgage transaction, the lender is responsible for the estimation of the FHA Settlement Requirements to arrive at the cash amount needed for closing. At settlement, the borrower provide this amount, which also includes the following expenses:

Closing Costs

These include the appraisal fee, inspection fees, loan origination fee, the cost of the credit report, settlement fee, deposit verification fees, and other non-recurring costs approved by the FHA.

Prepaid Items

These will cover hazard insurance and mortgage insurance premiums as well as taxes and per diem interest. The prepaid estimate must include at least 15 days of per diem interest as calculated by the lender.

For loans that do not close as scheduled, the per diem interest may be credited to the borrower until mortgage payments begin the following month. However, this credit does not count towards the minimum cash investment.

Discount Points

The discount points that the borrower pays are added to the total cash investment, but cannot be counted for meeting the minimum requirement.

Non-realty or Personal Property

Non-realty or personal property items paid for separately by the borrower, which includes the amount subtracted from the sales price to calculate the maximum mortgage, are included in the loan’s total cash requirements.

Closing Costs NOT Eligible Towards the Cash Investment Requirement

These costs, which include commitment fees, ineligible real estate broker fees and allowable fees that do not meet the investment requirement, will be included to calculate the cash amount for the closing.

Up-front Mortgage Insurance Premiums

All cash payments of UFMIPs that are financed into the mortgage will get added to the cash settlement requirements.

Repairs and Improvements

These fall under the borrower’s total cash requirements if they cannot be financed into the mortgage.

Real Estate Broker Fees

A real estate buyer-broker may be representing the borrower and charge the borrower a fee. This expense, though paid directly to the broker, is also included in the settlement requirements and appears on the HUD-1 Settlement Statement.

Mortgage Broker Fees

The borrower may have to pay a fee directly to a mortgage broker. This expense would also be included in the settlement requirements and appear on the HUD-1 Settlement Statement.

Premium Pricing on FHA-insured Mortgages

“Premium pricing” may be used by the lender to pay the borrower’s allowable closing costs. The proceeds from a premium priced mortgage cannot be used towards the borrower’s down payment, nor to pay down debts, escrow shortages or missed mortgage payments. However, they must go towards lowering the principal balance if a specific dollar amount has been established and agreed upon for closing costs and prepaid items.