For first-time homebuyers or buyers with low-to-moderate income or credit, an FHA loan is an excellent option.
Offering minimal down payment requirements and lower premiums, this type of mortgage, backed by the Federal Housing Administration, helps expand the American dream to a much larger audience. The basics of a conventional mortgage remain, though, and while closing costs on an FHA might be lower, they do still exist. If you are considering an FHA loan for your next (or maybe first!) home purchase, let’s take a look at the closing costs that could apply and what assistance is available to help you get that cash to the table.
One of the most notable differences between a conventional mortgage and an FHA backed loan are the lower down payment requirements. With an FHA loan, borrowers can get approved with sometimes as little as 3.5% down, making the hope for a new home much more accessible for a lot of people. That being said, with a smaller down payment comes a price, and that price is paid via a Mortgage Insurance Premium or MIP. An MIP fee is typically tacked on to monthly payments until the loan is paid-in-full, but it is adjusted yearly based on the remaining principal each year. *Please note that for those who opt to put at least 10% down, MIP is only owed for 11 years. Regardless of how much you put down, though, a one-time fee of 1.75% of the amount borrowed is required at closing. This particular cost is also able to be added in to loan, as well, if the borrower so chooses.
Homebuyers should expect to find an assortment of lender fees upon closing, as well. These fees include anything from loan origination fees to underwriting fees to fees owed for document preparation. This is also where any applicable discount points you may have purchased to help lower that interest rate would appear. In addition to the fees owed to the lender, there will be third party fees applied, as well. Appraisals (required for FHA loans), notary fees, title fees, recording fees, courier fees, and any applicable flood certification fees would fall under this category.
There will also be some items that require payment before you get to closing which should be taken into consideration. Taxes and insurance deposits into an escrow account as well as any necessary flood insurance premiums will all need to be handled before you reach closing.
Yes, closing costs can eat into the down payment you were hoping to put down, but they don’t have to devour the entire thing. Lots of borrowers decide to finance at least a portion of the closing costs into the loan instead. While this does increase the monthly premium, it is often by a small amount, offering much more flexibility for buyers at a relatively minor cost.
Though buyers are typically responsible for the majority of closing fees, if negotiations have not yet finished, you might see if the seller is willing to cover some of the closing costs for you. We do currently find ourselves in a pretty hot real estate market, so this option is likely less available. However, for certain sellers who find themselves in a pinch to offload a property, there may be more wiggle room than you might expect. Just remember that it never hurts to ask! You (and your wallet) might just be surprised at the answer.
Should the seller be unwilling to negotiate, FHA loans also allow for at least some portion of the down payment or closing costs to be covered by gift funds. This monetary gift can be provided by close family or even an employer or labor union and typically only requires an accompanying letter explaining that the gift does not require repayment.
If you find yourself in need of additional down payment or closing cost assistance, there are a multitude of governmental and charitable programs available to help first-time or low-income homebuyers. Many of these exist as grants that do not even require repayment, while others may waive repayment if you remain in the home for a set number of years. Most of these programs vary greatly by state, so begin your search by contacting your state’s Housing Finance Authority to inquire on what assistance might be available in your area.
FHA lending can be confusing, and Ruoff is here to help explain how it all works to help you decide if it makes the most sense for your next purchase. FHA loans have helped millions of homeowners secure the house of their dreams, so why not you? This type of loan might be just the right fit for your family, too, providing your situation fits the given criteria and you can cover those closing costs when it really counts.