First-time home buyers with low credit scores usually start out by saving for their Federal Housing Administration (FHA) down payment. They often leave out closing costs in their budget because they do not know the amount involved in the process of getting an FHA loan.
These closing costs are often not included in the loan, therefore, lenders have to make provisions for that on their own. So, relative to other loan types like VA loans and conventional loans, do FHA loans have lower closing costs?
Do FHA Loans have Lower Closing Costs?
No, FHA loans don’t have lower closing costs. FHA loans include closing costs that are in the same range as conventional loans. According to the FHA loan rules, a borrower cannot avoid closing costs no matter how they are paid. In addition, closing costs are regarded as an exclusion from the 3.5% down payment.
Similar to that of a conventional mortgage loan, FHA loans see closing costs around 2% to 6% of the property cost. These closing costs are mostly comprised of these three fees:
- Lender fees: During your mortgage acquiring process, the lender incurs certain costs. These may include fees for underwriting, document preparation, origination fee. These are included in closing costs.
- Pre-paid Fees: These fees are included with the intention of covering future costs. They could be listed as flood and hazard insurance premiums, real estate taxes, tax and insurance escrow deposits, and per diem interest.
- Third-Party Fees: Third-party providers initially cover certain services involved in the mortgage processes. They include fees for recording, credit reports, appraisal, title insurance, flood certification, and attorney, amongst others.
If you are perplexed at any point, having a great brokerage like CA Flat Fee on your side helps a lot in terms of breaking down these costs and the appropriate times to make various payments.
Detailed Breakdown of FHA Closing Costs
Here is the latest list of FHA closing costs. Note that these costs are estimates and may vary minimally depending upon your situation, the lender used, third parties included, location, and credit score.
- Loan Origination Charge (0.5% – 1%)
- Credit Report ($25)
- Underwriting Fee ($350 – $975)
- Document Preparation Fee ($50-$100)
- Home Inspection ($300-$400)
- Discount Points (1%)
- Appraisal ($450)
- Survey ($400-$500)
- Attorney Fee ($750)
- Title Search ($100)
- Flood Certification Fee ($15)
- Title Insurance ($900 – $1200)
- Tax Service Fee ($50)
- Recording Fees ($70)
- Wire Transfer Fee ($25)
- Pre-Paid Property Tax (Varies based upon property taxes of the home).
- Tax Escrows (Varies based upon property taxes of the home).
- Notary Fees ($10)
- Homeowner’s Insurance ($400-$1200)
- Upfront Mortgage Insurance MIP (1.75%)
Also, your realtor is a major deciding factor in enjoying a hassle-free purchase process. Using an FHA loan for purchase might require some guidance that CA Flat Fee can provide every step of the way up until closing.
Main Criteria Needed to Apply for FHA Loans
FHA loans are available to individuals with low credit scores. There are two main categories here:
- FHA allows for credit scores lower than 580, this category does not qualify for the low down payment advantage. This way, you can only get FHA loans if you can afford a down payment of 10%.
- If you have a credit score of 580 or higher, you’ll have access to FHA loans with a minimum down payment of 3.5%.
Whereas to apply for a conventional loan, you will need a credit score of at least 620, and a down payment between 3% and 20%. You might begin to see reasons why many first home buyers opt for FHA loans.
Right after going through the strenuous loan process, getting an efficient realtor from CA Flat Fee should top your list. This would make the home purchase process a lot faster and easier.
Can You Finance FHA Closing Costs?
The FHA guidelines allow you to finance some closing costs or roll them into the loan. Remember, closing costs do not include your down payment of at least 3.5% of the loan. The closing costs can be financed by the seller, the lender, or they can be presented as a gift.
FHA guidelines allow sellers to contribute up to 6% of the property’s buying price towards closing costs. This is a significant clause to consider in negotiating closing cost credit from the seller.
While you can get lower closing rates by negotiating with the FHA lenders, it is important to know that you may be at risk of getting billed at higher rates. Higher rates influence how much you pay per month and over the next 15 or 30 years.
Drawbacks of using FHA Loans
As appealing as FHA loans may appear, there are several drawbacks to using an FHA loan.
- Non-negotiable Mortgage Insurance: Borrowers who make a down payment of 3.5% are mandated to pay mortgage insurance premiums for the entire life of the loan. The only way to eliminate this payment is to refinance into another loan type.
- Higher Interest Rates: Given that the FHA loans’ credit score requirements are low; they understand that there’s a greater chance in default on the loan. To protect themselves from this additional risk, your lender will charge a higher interest rate. Keep in mind that a higher interest rate is equivalent to a higher monthly payment spread over the years.
- Strict Appraisal Process: To qualify for an FHA loan, the home you want to buy has to meet certain standards that include health and safety standards set by the Department of Housing and Urban Development (HUD). The home will also need to go through the FHA’s strict appraisal process before approval.
- Zero Bidding Edge: If you are up against other bidders, an FHA loan may not help your situation much. Home sellers do not find situations like this appealing.
In the grand scheme of things, FHA loans sometimes end up having higher closing costs among other factors that you should be aware of as a home seller or buyer. This understanding will go a long way in your decision-making as a homebuyer. In this regard from a great realtor from CA Flat Fee is your best bet.