The Federal Housing Administration's mortgage programs appeal to cash-strapped borrowers because of the minimal monetary contribution involved. The government-insured loans, which are funded by approved private lenders, usually require only a 3.5-percent down payment, or an equally low amount of equity if refinancing. In the event that the estimated closing costs on your FHA transaction don't pan out exactly as calculated, you may receive a limited amount of cash back at closing.
Cash Back Rules on Refinances
A cash-out refinance is intended to give the borrower more than $500 cash back at closing. You can cash out a portion of your home's equity and borrow up to 85 percent of your home's value with the FHA's cash-out program. You can receive less, up to $500 cash back, when closing a "rate and term" refinance -- also known as a "no cash out" refinance -- or when closing a streamline refinance. Both of those refinances change your monthly payment, although the streamline refinance must result in a lower monthly payment or better loan terms, and can be completed without an appraisal or credit and income reviews.
Cash Back Provisions on Purchases
The FHA lender and escrow holder require you to bring a certain amount of money to the closing table on a purchase. The lender reviews the final settlement costs escrow outlines on the Department of Housing and Urban Development's Settlement Statement, or "HUD-1," before releasing loan funds. To ensure that the account has enough money to settle all closing costs, the escrow holder usually asks for an amount in excess of what the lender requires. This is known as a "refundable pad" or "cushion," usually ranging between $100 and several hundred dollars, depending on the home price. Buyers typically receive close to this amount back after closing.
Variables That Affect Cash Back
Although the FHA doesn't name a maximum dollar amount you can receive back at closing, it doesn't allow you to receive more than you put into the transaction. In general, FHA buyers must contribute a down payment and cover closing costs, which, in total, equal about 6 percent of the sale price. At closing, you can receive the difference between the total amount you were required to contribute, and the actual charges paid out through settlement. The proximity between the estimated closing date and actual closing date affects the amount you receive back. If you close later than anticipated, you will owe more in prepaid mortgage interest and prepaid property taxes, which cuts into your refund.
RESPA Regulations And Cash Back
The Real Estate Settlement and Procedures Act prohibits FHA borrowers from receiving cash back at closing outside of escrow or on the side. This means that your lender, seller or an agent may not give you cash after closing. The RESPA rules also prohibit a lender from changing its fees, and require that the final HUD-1 fees match most of its initial estimated fees. In general, your lender's own fees can't change, and fees for service providers your lender chooses may change by no more than 10 percent. Other fees can change more dramatically if you choose the service providers.
- Department of Housing and Urban Development: Chapter 3. Maximum Mortgage Amounts on Refinance Transactions:
- Department of Housing and Urban Development: Good Faith Estimate: Instructions
- ClosingCorp. "ClosingCorp Reports Average Mortgage Closing Cost Data for 2019," Pages 1, 3, and 4. Accessed August 15, 2020.
- U.S. Congress. "12 USC Ch. 27: Real Estate Settlement Procedures." Accessed August 15, 2020.
- U.S. Department of Housing and Urban Development. "Mortgage Insurance Premiums," Page 1. Accessed August 15, 2020.
- Consumer Financial Protection Bureau. "What Is Private Mortgage Insurance?" Accessed August 15, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.