HOEPA and first-time buyers: when a small FHA loan trips the high-cost triggers

A first-time buyer’s FHA or conventional loan is almost never high-cost, yet the points-and-fees trigger on a small loan and the APR trigger on a low-score file are closer than most assume. HFA loans are exempt; first-time borrowers also get a counseling rule of their own.

HOEPA was written for predatory refinances, but its coverage is purpose-based: any consumer loan secured by a principal dwelling, including a purchase. For a first-time buyer the question is not whether the law applies but whether the loan crosses a trigger — and on a $120,000 starter home with a 600 credit score, it can.

The two triggers that matter on a first loan

A first-lien purchase loan is high-cost if its APR exceeds the average prime offer rate by more than 6.5 percentage points, or if points and fees exceed 5% of the total loan amount (a different, lower dollar-based test applies below a threshold of roughly $26,000, indexed annually). The FHA upfront premium is excluded from points and fees, and the annual premium is in the APR but not the fee test. What pushes first-time files toward the fee trigger is stacking: a 1% origination fee, a lender-paid broker fee, a processing fee, an underwriting fee and non-bona-fide discount points on a small loan. On a $100,000 loan, $5,000 in points and fees is the line. Subordinate liens have their own trigger at 8.5 points over APOR, which is why a private, interest-bearing second should be examined; HFA seconds are exempt.

What happens if a loan is high-cost

The lender must obtain a certification that you received counseling from a HUD-approved counselor specific to this loan, deliver a special disclosure three business days before closing, and may not include a balloon payment, a prepayment penalty or most late-fee and modification charges. FHA and the GSEs will not purchase or insure a high-cost loan, so a first-time buyer whose file crosses the line will generally see the lender restructure fees rather than proceed. That restructuring is the tell: if a loan officer mentions “getting under the high-cost test,” ask for the revised Loan Estimate and check what moved.

The first-time-borrower counseling rule

Regulation Z adds a rule aimed squarely at this profile: a lender may not make a loan that permits negative amortization to a first-time borrower unless the borrower has completed homeownership counseling from a HUD-approved counselor. Negative-amortization purchase loans are essentially absent from the first-time market today, but the rule is a useful signal — if a product with a payment that does not cover interest is offered to you, counseling is mandatory and the product is almost certainly the wrong one. Separately, every lender must give you a list of HUD-approved counseling agencies within three business days of application, regardless of whether the loan is high-cost. See how to use a HUD housing counselor.

Exemptions worth knowing

Loans originated by a state housing finance agency and USDA Section 502 direct loans are outside HOEPA; so are construction-only loans. A buyer using an HFA first mortgage with a deferred second therefore has no HOEPA coverage on either lien, which is fine — the agency’s own fee caps are usually tighter than the federal trigger. The protections you rely on instead are the QM points-and-fees cap and the tolerances on the Loan Estimate.

What to check

• On loans under roughly $150,000, add up Section A charges plus any broker fee and compare to 5% of the loan — the high-cost fee trigger.
• Treat any mention of “structuring around the high-cost test” as a reason to ask for the fee breakdown before and after.
• Decline any purchase product with negative amortization; for a first-time borrower it requires HUD counseling and is rarely suitable.
• Expect the HUD counseling agency list within three business days of application on every loan, high-cost or not.

Frequently asked questions

Can an FHA loan be a high-cost mortgage under HOEPA?

In theory yes, since HOEPA covers any consumer-purpose loan secured by a principal dwelling, but in practice FHA will not insure a loan that crosses the thresholds, and the upfront premium is excluded from the points-and-fees test. Where FHA files get close is small loan amounts with stacked lender fees or a low-score borrower with a high rate. Lenders typically reduce fees to stay under the triggers.

Is down payment assistance from my state ever a high-cost loan?

No. Loans originated under a state housing finance agency program are exempt from HOEPA, and most HFA seconds carry 0% or a low fixed rate with no fees in any case. A privately funded second lien, for example from a seller or a non-HFA lender, is covered and has a higher APR trigger of 8.5 points over the prime offer rate. Ask who the lender on any second lien is.

The rule in full: HOEPA and high-cost mortgage rules. The borrower profile: First-time home buyers. Related guides: FHA vs conventional for a first-time buyer: which loan wins, and when · 3% down conventional loans: HomeReady, Home Possible and Conventional 97 · HUD-approved housing counselors: free help that servicers take seriously · Foreclosure rescue scams: the six patterns and the federal rule that bans upfront fees.

Other federal rules for first-time home buyers

TILA / Reg Z · RESPA · TRID disclosures · ECOA · Fair Housing Act · HMDA · SAFE Act / NMLS · ATR / QM · HPA / PMI · Servicing rules · FCRA · Flood insurance · MARS rule · SCRA · LO compensation

HOEPA for other borrowers

Conventional borrowers · Veterans · Self-employed · Investors · Retirees · Bad credit · Foreign nationals · Physicians · Heroes · Rural buyers · Condo & second home · Refinancing