Costs in VA and FHA transactions

Two TAR forms can help with the details.

Under the TREC contract forms, the itemized expenses under paragraph 12 are the same to the respective party regardless of the type of financing the buyer will obtain. Yet the VA and FHA don’t permit the buyer to pay certain costs (non-allowables). In VA and FHA transactions, the parties insert in paragraph 12A(1)(b) an amount that, at a minimum, the parties expect will cover the non-allowables.

TAR forms 1935 (Seller’s Estimated Net Proceeds) and 1936 (Buyer’s Estimated Costs) were designed to mirror the way costs are outlined in the TREC contracts.

When using TAR 1936 in VA and FHA transactions, the user should include estimates of all of the buyer’s expenses, as those costs are listed in the TREC contract forms, which include charges to the buyer for the non-allowables. For example, the loan-processing and underwriter fees may be non-allowables, but the TREC contract form says the buyer will pay any processing or underwriter fees. In TAR 1936 under Estimated Costs, the user should insert estimates for these fees (assuming that lenders in that area typically charge such fees). The user can look to the good-faith estimate the buyer received when the buyer applied for the loan for some guidance. Under Estimated Total Cash Due at Closing in the blank entitled Less Para. 12 Allowances, the user should then insert the amount that was negotiated in paragraph 12A(1)(b) to pay for the non-allowables charged to the buyer. This accounting more accurately reflects how non-allowables under the TREC contract forms are treated.

Likewise, when using TAR 1935 in VA and FHA transactions, the user should not increase the seller’s estimated costs to include non-allowable expenses. For example, assume that the escrow fee in a VA transaction is a non-allowable. The user should not increase the escrow fee estimate in form 1935 to cover the full cost of the escrow fee, since the contract provides that the buyer and seller will each pay one half of the fee. Instead, the user should insert one half of the escrow fee, because the amount in paragraph 12A(1)(b) is used to cover such non-allowable expenses. The amount in paragraph 12A(1)(b) is a separate line item under the Estimated Costs in form 1935.

Costs in VA transactions

In VA transactions, the veteran may pay a maximum of:

1. reasonable and customary amounts of the itemized fees and charges designated by the VA
2. a flat charge by the lender that may not exceed 1% of the loan amount
3. reasonable discount points

The itemized fees and charges (as long as they are reasonable) designated by VA that the veteran may pay are:

1. appraisal and compliance inspections (VA appraisals only; not required by lender or parties)
2. recording fees
3. credit report
4. prepaid items
5. hazard insurance
6. flood-zone determination
7. survey (if required by lender or veteran)
8. title examination and title insurance
9. VA funding fee
10. other fees only if specifically authorized by the VA at lender’s request and are customary for a buyer to pay in the particular jurisdiction

In addition to the itemized fees and charges designated by the VA, the lender may charge the veteran a flat charge not to exceed 1% of the loan amount. This fee is to cover all of the lender’s costs that are not reimbursable as "itemized fees and charges." The following are types of fees the lender must cover out of the flat fee:

1. lender-required appraisals that are in addition to the VA-required appraisal
2. lender-required inspections
3. loan closing or settlement fees
4. document-preparation fees
5. preparing loan papers or conveyance fees
6. attorney’s services other than title work
7. photographs
8. interest rate lock-in fees
9. postage and other mailing charges, stationery, telephone calls, and other overhead
10. amortization schedules, pass books, and memberships or entrance fees
11. escrow fees
12. notary fees
13. commitment fees or marketing fees of any secondary purchaser of the mortgage
14. trustee’s fees or charges
15. application or processing fees
16. fees for preparation of truth-in-lending disclosure statement
17. fees charged by loan brokers, finders or other third parties
18. tax service fees

If the buyer pays a flat fee to the lender for such costs, the seller should not be charged for the non-allowables covered by that charge to the buyer. If the buyer pays a flat fee to the lender, this may be itemized in TAR 1936 under Estimated Costs.

The seller, lender, or any other party may pay fees and charges, including discount points, on behalf of the veteran. The VA limits charges "made against or paid by the borrower." The VA does not limit the payment of fees and charges by other parties, except that "excessive" seller concessions are not permitted. Any concession, or combination of concessions, from the seller greater than 4% of the value of the property is excessive, but a seller’s concession does not include payment of closing costs or reasonable discount points.

One common question is how to structure the "zero-dollar move-in" type of VA transaction under the TREC contract form. The most direct way is to determine if the lender will charge the buyer the flat charge (not to exceed 1% of the loan amount), estimate the total cost of the itemized fees and charges (see the good faith estimate for guidance), and add the amounts in 1 and 2 and insert that sum into paragraph 12A(1)(b).

Costs in FHA transactions

In FHA transactions, the borrower may not pay the following:

1. fees for the lender’s attorney (except as noted below)
2. broker administration, processing, or transaction fees (fees by broker to comply with government regulations)
3. broker’s fees unless the broker exclusively represents the buyer and is to be paid by buyer
4. energy report fee over $200
5. finder’s fees and kickbacks
6. home-inspection fee over $300
7. manufactured-home foundation certification in excess of $200
8. photos
9. processing fee
10. fee to record an assignment of the mortgage
11. servicing fee
12. tax service fee
13. underwriter fee

The buyer may engage an attorney but the cost for the buyer’s attorney may not be financed. Attorney’s fees in connection with the closing, such document preparation, are permitted.

Sellers or other persons may contribute up to 6% of the property’s sale price toward the buyer’s actual closing costs, prepaid expenses, or discount points. Closing costs normally paid by the borrower are contributions if paid by the seller. If the seller or other person pays any of the allowable closing costs, these contributions may not be included as part of the borrower’s required statutory 3% cash investment.

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