An FHA loan is a mortgage loan insured by the U.S. government acting through the Federal Housing Administration (FHA), which is a branch of the U.S. Department of Housing and Urban Development (HUD). A mortgage lender provides the mortgage loan, and HUD insures the loan. Lenders charge origination fees on FHA loans as they do on traditional mortgage loans.
Significance
An origination fee for an FHA loan is a fancy title for a fee the mortgage lender charges to recoup its administration costs in setting up the FHA loan. To”arise” a loan, the lender must process your application, prepare closing documents and execute the transaction. This requires paying an employee or independent broker, or so the lending company recovers its costs by charging a loan origination fee.
Size
The amount a lender may charge for a loan origination fee is not unlimited. HUD regulations don’t allow origination fees to exceed 1% of the principal amount of certain FHA loans, such as reverse mortgages and rehabilitation loans. Consequently, if you borrow $200,000, the fee your lender fees you can’t exceed $2,000 on these loans. But for the most typical type of FHA mortgage loan, creditors can control any origination fee which complies with a federal law called the Real Estate Settlement Procedures Act, or RESPA, which generally requires that origination fees have to be fair according to what other creditors in precisely the same area charge.
Payment
The borrower, meaning the individual obtaining the FHA loan, typically pays the loan origination charge. This is one of the many closing costs you’ll pay at settlement. However, HUD allows buyers to negotiate for sellers to pay the origination fee on FHA loans.
Types
Lenders call origination fees various items, but the effect is always the same. You pay the lender a fee as a condition of obtaining the loan. Some lenders predict these loan discount fees, points or discount points. A point is simply 1 percent of the amount of the loan. A point on a $200,000 loan, as an instance, is just $2,000. Therefore a lender which requires a borrower to pay one point at final is simply requiring the borrower to pay a $2,000 loan origination charge.
Pro Insight
Lenders also regularly charge an additional fee called a loan discount fee or a curiosity discount fee. This fee appears like the origination fee, but it serves a different purpose. The loan discount fee allows you to purchase a lower interest rate on your loan. You may, as an instance, qualify for a 6% interest rate, unless you pay half a point, in which case you might qualify for a lower 5.5 percent interest rate.