As one can tell from the answers outlined above, there is some confusion and inconsistencies in the underwriting policies of VA and FHA relative to the topic of charging Tax Service fees to borrowers.
Unfortunately, this confusion can lead to deficient underwriting review ratings with lenders being asked to make refunds (copies of checks or evidence of pay down of the principal) of these charges to borrowers.
In order to avoid having to make such refunds, I am providing a summary of both VA’s and FHA’s current policies on this topic.
Veterans Administration (VA) Loans
The VA allows a lender to charge a Veteran borrower certain third-party costs and fees associated with a loan. The VA also allows a 1% Origination Fee to be charged on every VA loan. If 1% is charged, the Veteran purchaser may NOT be charged for any “unallowable” closing costs. If 1% is not charged, the Veteran purchaser can be charged for “unallowable” items up to the 1% cap.
Tax Service fees are an example of an “unallowable” charge. For example, if the lender is charging the Veteran purchaser an Origination Fee of .5% – then “unallowable” fees can also be charged but the total cannot exceed the remaining .5% of the loan amount. Be careful; however, as there are certain fees that can NEVER be charged to a Veteran purchaser. Some examples are Termite/Pest Inspection fees, Attorney fees (other than performing title work), Mortgage Broker fee, Realtor Commission and prepayment penalties.
HUD/FHA Insured Loans
In HUD’s Handbook 4155.1 5.A.2.a – it is stated that “lenders may charge and collect from borrowers those customary and reasonable costs necessary to close the mortgage loan. Borrowers may not pay a Tax Service fee”. As a result, a Tax Service fee is the only closing cost item specifically referenced by HUD as being a unallowable charge to an FHA borrower.
However, HUD’s draft 4000.1 Handbook, which is now set to become effective for loan transactions in which the FHA case number was assigned on and after September 14, 2015, fails to address the topic of whether or not a Tax Service fee is an allowable charge for an FHA borrower.
As a result, the Department published a revised listing of Frequently Asked Questions (FAQs) on June 17, 2015. On page #76 of this 114-page document, (yes – there are that many questions) it is indicated that “HB 4000.1 does not prohibit the charging of a Tax Service Fee. The Mortgagee or sponsored TPO may charge and collect from Borrowers those customary and reasonable closing costs necessary to close the Mortgage”. Therefore, beginning with FHA loan transactions that obtain their FHA case number on and after September 14, 2015 – a Tax Service fee may be charged to an FHA borrower as long as it is determined to be customary & reasonable.
To access the entire 114 page listing of FAQs referenced above go to the www.fha.gov website and type 4000.1 in the Search box – then the FAQ page.