In Mortgagee Letter 2006-04, FHA rescinded paragraph 5-2 of handbook HUD 4000.2 REV-3 that lists the closing costs and fees that may be charged by the mortgagee to the mortgagor on an FHA loan. According to ML 2006-04, "mortgagees may charge and collect from mortgagors those customary and reasonable costs necessary to close the mortgage." It is up to the mortgagee to decide what fees are customary and reasonable for each transaction. Please be aware though that FHA will not allow "mark ups." Only the actual cost for the service may be charged to the mortgagor. Fees that may not be included are tax service fees and origination fees that are greater than 1% on forward mortgages.

To clarify the announcement in ML 2006-04, ML 2006-07 was issued and states, "the rescission of paragraph 5-2 of handbook HUD 4000.2 REV-3 announced in ML 2006-04 applies to FHA-insured forward mortgages only and not FHA-insured Home Equity Conversion Mortgages (HECM). " Therefore, ML 2006-04 did not change the closing cost charges that a HECM mortgagee may charge a HECM mortgagor.

The rescission of paragraph 5-2 was FHA's attempt to align its business process with industry practice and to make the program (FHA-insured financing) more attractive and, thus, encourage greater participation. If you have any questions regarding the contents of this article, please contact DocMagic's Compliance Department.