Most people consider FHA loans to be better than conventional loans because their requirements lean closer to the friendly side. However, initial requirements aside, how different are FHA loans from conventional mortgages when it comes to closing costs? Does FHA help with closing costs?
Does FHA Help With Closing Costs?
No, taking an FHA loan does not help with closing costs. The closing costs of a real estate deal funded by an FHA-approved lender are about the same amount range for deals funded by traditional creditors: 2% to 6% of the property’s cost price. In some cases, in fact, you might have to pay more.
What Are FHA Loans?
FHA loans are mortgages whose requirements are specially designed to favor low or medium-income borrowers looking to purchase a home. FHA loans are guaranteed by the Federal Housing Administration and can only be issued by FHA-approved institutions in order to protect the interests of lenders. Because of this, it is easier to qualify for them than conventional loans.
With FHA loans, the rules are simple – the higher your credit score, the lower the down payment you would be required to make. For instance, if your credit score falls between 500 and 579 points, then you would be required to part with 10% of the property’s cost price as a down payment.
However, if your credit score is higher than 580, then you would only be required to pay as low as 3.5% of the property’s value, to get a mortgage that covers up to 97.75% of the property’s value. These requirements are way easier than that of conventional lenders, some of whom require minimum credit scores of 680.
What Are FHA Loans Closing Costs?
The closing costs on an FHA loan include the fees charged by the lender, third-party fees, insurance mortgage, and all other costs involved in the real estate transaction. It typically costs between 2% and 6% of the total value of the sales price of the property.
While FHA loans help you to save more cash by requiring a low down payment, there are a few factors that come into play with FHA loans that make their closing costs slightly higher than those of conventional lenders. These factors are:
FHA Home Appraisals
If you are looking to get an FHA loan, you are required to carry out a property appraisal that meets the standards of the FHA. An FHA home appraisal consists of two stages. In the first stage, the FHA appraiser visits the home in person and thoroughly inspects the property, and in the second stage, market research is conducted.
This home appraisal would cost a few hundred dollars and is higher than the price of a traditional home appraisal.
Mortgage Insurance Premium (MIP)
FHA loans require an upfront Mortgage Insurance Premium (MIP) that constitutes about 1.75% of your loan amount. For example, if your loan amount is $300,000, 1.75% of that would be $5,250. On the bright side, you have the option of including this fee in your loan amount.
This means that rather than receiving a mortgage of $300,000, the total amount you would be getting would be $305,250.
How to Reduce Closing Costs for Buyers
If your closing costs seem too overwhelming, there are a couple of ways through which you could get help to reduce them. Here are the most popular ones:
Negotiate With Seller
With FHA loans, sellers are allowed to contribute up to 6% of the property purchase price to cover a buyer’s closing cost. For instance, if the purchase price is $300,000, then your seller can assist you in covering closing costs worth $18,000.
This mostly works if you have a motivated seller who is looking to close the transaction as soon as possible, or if you are paying a good price for the property. FHA guidelines apply here.
Roll Closing Costs Into Mortgage
In the event that your seller is not willing to help you with your closing costs, then you have the option of requesting your lender to roll some closing costs into your mortgage amount. Technically, you still pay this back and if your lender agrees to do this, then they would charge you a higher percentage of interest on your mortgage.
However, at the point of closing, you would have successfully reduced closing costs to be paid out of pocket.
Frequently Asked Questions
Are FHA Loans Better Than Conventional Loans?
The choice between an FHA loan and a conventional loan should be made depending on your financial conditions. FHA loans are more lenient on people with lower credit scores and so, they might be a better option for you if you are experiencing some financial challenges.
However, if you do have a pretty solid financial footing, then you could decide to go for conventional loans.
Why Do Home Sellers Prefer Conventional Loans Over FHA Loans?
Some home sellers may prefer conventional loans over FHA loans because the latter requires a special FHA home appraisal before closing. These home appraisals are usually more thorough, and for the deal to continue, the property has to meet the standards of the Department of Housing and Urban Development.
This extra step and the added uncertainty that it brings might easily put some sellers off.
Are Realtor Fees Part of Closing Costs?
Yes, realtor fees make up closing costs. However, they are paid by only the seller. These fees cover the costs of the real estate agents involved in the transaction, which are the listing agent and the buyer’s agent. Basically, there are two types of realtors: traditional realtors and flat fee realtors.
With traditional realtors, the amount the fee costs usually varies based on the value of the property. This is because they typically charge a fee of around 3% each of the property’s sales price.
With flat fee realtors, however, the cost of realtor fees is a fixed price that does not change, irrespective of the price value of the home. For instance, with CA Flat Fee realtors, the listing fee for homes is a price of $5,000.
Closing costs are quite unavoidable in any real estate transaction. With FHA loans, while the closing costs might be a tad bit higher, the requirements for taking a loan are less strict, thereby giving people with low credit scores a chance to own their dream home.