FHA of Federal Housing Administration loans are widely considered to be a better choice for mortgages than conventional loans. This is because they require a lower credit score and minimum down payment. One gets curious, however, about how different they are from conventional mortgages when it comes to closing costs. Do FHA loans have lower closing costs?
Do FHA Loans Have Lower Closing Costs?
No, FHA loans do not have lower closing costs. Your closing costs would be around the same range as a conventional mortgage loan. This implies that you would be parting with about 2% to 6% of the house’s cost price. You might even have to pay some extras.
For instance, a FHA home appraisal that costs an extra $50; the process is somewhat more complicated than a standard appraisal.
How Do FHA Loans Work?
A Federal Housing Administration (FHA) loan is a mortgage that is specially designed to favor low and moderate-income borrowers. It is backed by the federal government and issued by FHA-approved lending institutions. These institutions are also in charge of assessing your qualification for the loan via your credit score.
Your credit score typically determines the amount of money you would have to part with as a down payment. For instance:
- With a credit score between 500 and 579, you would be required to make a down payment of 10% of the total value of the home you’re looking to buy.
- If your credit score is 580 and above, you qualify for a mortgage with a required down payment of only 3.5%.
There are quite a number of differences between the working of FHA loans and that of conventional mortgage loans. It is advisable that you are aware of these differences, before making a choice on which lender to go with. However, one of the greatest perks of an FHA loan is the low down payment rates.
What Are Closing Costs?
Closing costs are charges incurred at the closing of a real estate transaction. They include the fees charged by third parties such as real estate attorneys, or mortgage lenders, for their services, as well as taxes, insurance premiums, and record filings.
There are two main things to note about closing costs:
- The law makes it mandatory for all closing costs to be disclosed and agreed upon before the real estate deal is signed
- Closing costs apply to both buyers and sellers alike.
However, closing costs can be negotiated and this is where your AZ Flat Fee real estate agent could play a huge role. You could save some costs with proper negotiations from a trained and trusted real estate agent.
What Are the Closing Costs for Buyers?
Closing costs for buyers come in two categories:
- The cost incurred from the purchase of a home and taking a loan
- The cost incurred from ownership and maintenance of a home
Examples of major fees under the first category are:
Property Appraisal Fee
The property appraisal fee goes to the company that assesses the market value of the home you are about to purchase. It usually costs about $300 to $500.
Credit Report Fee
A lender charges this fee to cover the cost of getting your records from the reporting agencies. This fee should cost around $15 to $30.
Lender Title Insurance
This is payment to the title company that protects a lender in the event that an ownership dispute arises. It is usually a one-time fee.
Examples of major fees under the second category are:
This payment is calculated based on the value of the property and usually goes to the local government within which the property is located.
Also known as home insurance, this is payment made to cover interior and exterior damages to the home, amongst other things.
Homeowners Association Fee
Homeowners associations mostly only exist in a planned development such as estates. If the home you are looking to purchase falls within the area, you automatically become a member of the association and are expected to pay the necessary dues.
What Are the Closing Costs for Sellers?
Closing costs for sellers comprise the following:
Real Estate Commission
This commission settles the charges for the real estate agents, listing agent and buyer’s agent, in charge of the house. With traditional agencies, the charge is usually around 6%, equally split between both agents. This implies that the amount of money the seller parts as the commission is determined by the amount the home is sold for.
However, if the seller uses a flat fee agent like AZ Flat Fee, he can save comprehensively on commission fees by paying only a flat fee. This fee covers full service ranging from listing to marketing to even paperwork.
This is the cost incurred during the legal transfer of ownership from the seller to the buyer. This tax varies based on geographical location.
How Can Buyers Reduce Their Closing Costs?
A major way through which you could reduce your closing cost is by shopping around with different lenders, insurance agents, title companies, etc. for the purpose of comparing fees. This goes a long way in helping you save cost, as you get to pick the companies that offer quality services at lower prices.
Although some closing cost fees are fixed, negotiating with your lender over the fees that aren’t fixed is another way to save costs. You should especially watch out for unnecessary fees that your lender might be adding to your loan. Your AZ Flat Fee real estate agent would be in the best position to negotiate and expertly cut out unnecessary fees.
Including Closing Costs in Your Mortgage
If closing costs are proving to be too high, your lender might offer to include them in your mortgage. However, lenders charge a high-interest rate for doing this, which means in the long run, you end up paying interest on these costs.
This also implies a higher interest on your mortgage, so, this option should only be considered as a last resort.
Appealing to Sellers
This is a very common practice in real estate buying and selling. You could ask the seller to help you cover a percentage of your closing costs. Your AZ Flat Fee agent can be instrumental in making this happen during the negotiation process.
What Are the Types of Closing Cost Fees?
Asides from the ones mentioned above, here is a list of fees you might see outlined in your closing disclosure form issued by your lender:
- Application fee
- Attorney fee
- Closing fee
- Courier fee
- Escrow deposit
- FHA MIP
- Flood determination and monitoring fee
- Lender’s title insurance
- Origination fee
- Pest inspection
- Private Mortgage Insurance (PMI)
- Prepaid daily interest charges
- Rate lock fee
- Survey fee
- Title search fee
- Underwriting fee
- VA funding fee
Are FHA Loans Harder to Close?
Statistics from Ellie Mae’s Origination Insight Report from May 2019 show that FHA loans see about 73% of 90-day closure. This makes it quite successful. In other words, FHA loans close quite early as well, similar to conventional loans.
Is There a PMI on an FHA Loan?
Private Mortgage Insurance (PMI) isn’t a requirement for FHA mortgage loans. However, they do require payments of mortgage insurance premium (MIP) and Up Front Mortgage Insurance Premium respectively.
After putting all the factors above in place, it is quite clear that closing costs are an unavoidable expense, whether with FHA loans or conventional loans. One thing to note, however, is that FHA loans make up for whatever slight increase they might add to your closing cost by offering you a better chance at payment than conventional loans.