When you're in the process of trying to buy a home,finding a mortgage loanthat meets your needs can be difficult. An FHA loan may provide opportunities not offered by other mortgages. Still, closing costs are part of the deal. If you're considering an FHA loan to pay for your dream home, it's important to know the details of FHA closing costs and how to pay them.
What's an FHA loan?
AnFHA (Federal Housing Administration) loanis a home mortgage loan designed to help first-time homebuyers and others who might want a lower down payment option. You may be eligible for an FHA loan even if you've had a previous bankruptcy or foreclosure. An FHA loan may be easier to qualifyfor because it's insured by the Federal Housing Administration. Some reasons you may consider an FHA loan include:
- Lower down payment
- Potentially lower credit score
To get an FHA loan, you'll work with an FHA-approved lender. They can help you determine if an FHA home loan is the best option for you. Like any loan, there are certain requirements you'll need to meet to qualify for an FHA loan. Current requirements for an FHA loan include:
- A credit score of at least 580 to qualify for a 3.5% down payment
- A credit score of at least 500 to qualify with a 10% down payment
- A down payment of at least 3.5%
- Debt-to-income ratioof less than 43%
- Proof of steady income
- The home must be your primary residence
- Mortgage insurance premiums
Be sure to discuss this with your lender as some lenders may have tighter restrictions.
What are closing costs in a mortgage?
Closing costs, including prepaids, are fees that must be paid to finalize your mortgage loan. Your mortgage loan covers a percentage of the sales price of the property you’re purchasing while closing costs cover the costs that accumulate during the homebuying and mortgage loan process. You’ll receive a Loan Estimate t at time of application and a Closing Disclosure three days before your scheduledclosing day from your lender. These documents include details of your loan and an itemized list of closing costs.
FHA Loan closing costs
The closing costs in your FHA loan will be similar to those of a conventional mortgage loan. These costs typically will be around 2% to 6% of the cost of your property. Your costs will be tied to things like your loan amount state the property is located in and lender fees. Some of the costs include:
- Lender fees:Your lender accumulates certain costs while taking care of your mortgage. You'll pay for theseat closing. Lender fees may include an origination fee, underwriting fee, document preparation fee, andinterest rate lock fee.
- Third-party fees:Some services included in the mortgage process are taken care of by third-party providers. These may include fees for the title insurance, notary, credit report, recording, appraisal, courier, attorney, and flood certification.
- Pre-paid fees:These are fees that are paid in advance to cover the costs that will be incurred in the future.They may be listed as mortgage insurance, escrow deposit, flood and hazard insurance premiums, real estate taxes and per diem interest.
- FHA Upfront mortgage insurance (UFMIP):Since your FHA loan is insured by the Federal Housing Administration, you'll be required to finance or pay 1.75% of your loan amount as a one-time upfront fee to protect the lender if you default. Additionally, ongoing monthly MIP costs are also associated with your FHA loan.You’ll need to pay for at least two months as part of your closing cost and a monthly charge is included as part of your monthly payment.
How to calculate your FHA loan closing costs
Sometimes, an FHA loan can give you the opportunity to buy a home when you otherwise wouldn't get approved for a mortgage loan. The appraisal process is also slightly more complicated than for conventional home loans. Since your home must meet FHA property requirements, the appraisal may be more expensive. Besides these expenses, your closing costs will include the typical costs listed above.
Since there are many factors making each home purchase unique, many facts are included when determining the closing costs for your FHA loan. Luckily, the amount of your closing costs isn't a secret that you have to wait to be revealed on closing day. Here's what to expect with your FHA loan closing costs.
- Loan Estimate:Within 3 days of applying for a loan, your lender must send you a Loan Estimate which will explain details about the terms of your loan and estimated closing costs.
- Closing costs calculator:Using a closing cost calculator can provide an estimate of your potential closing costs.
Who pays FHA loan closing costs
Every FHA loan includes closing costs, but they can be reduced. While closing costs are generally considered to be the responsibility of the homebuyer, you may not have to pay for everything yourself. One of the biggest advantages of an FHA loan is the ability to avoid large upfront costs.To avoid or offset high closing costs that could derail your home purchase, consider some of these options.
1. Use a gift
The FHA allows money gifted from family or other eligible donors to be used to cover both your down payment and closing costs. The FHA also allows gifts from your employer, a labor union or from charitable organizations. You can also use funds from government agencies or public entities that provide assistance to low-to-moderate income or first-time buyers.
2. Include the costs in your loan payments
If you can afford and qualify with a higher monthly payment, , it's possible to have most or all of your closing costs rolled into your interest rate through premium or par pricing. It's important to remember that when closing costs are rolled into your interest rate, your monthly mortgage payments will be higher.
3. Ask the seller to pay closing costs
If closing costs are the only thing preventing you from completing your purchase, the seller may agree to pay for some or all of them. FHA rules allow the seller or another third party to pay up to 6% of the property sales price toward closing costs or other prepaid expenses. Consider asking for any seller assistance during the contract negotiation.
4. Apply for assistance
Some banks and housing finance agencies offer FHA closing cost assistance programs. Additionally, you may be eligible forstate grants or programsdesigned to help homeowners with the up-front costs associated with a mortgage loan. Typically, to qualify for closing cost assistance, the residence must be a single-familyhome and your primary residence. Some types of assistance are only for first-time homeowners.
5. Negotiate with the lender
In some cases, there’s some wiggle room when it comes to lender fees. If your lender wants to compete for your business, they’re often willing to help you with lower closing costs. Comparing quotes from other lenders can help you navigate the negotiation.
These options are designed to help you anticipate, understand and manage the closing costs for your FHA loan. It's important to remember that yourdown paymentis separate from closing costs.
While closing costs are part of an FHA loan, they don't have to be a deal-breaker. To learn more about FHA loans and how to pay the closing costs,speak to a Home Lending Advisor.
