Understanding Closing Costs for Your FHA Loan

Closing cost graphic The closing costs for FHA loans consist of the fees charged by the mortgage lender and the various other parties involved in the loan process, and are typically between 3 to 6 percent of the loan amount. These costs also include a premium for mortgage insurance and pre-paid items.

However, closing costs can be significantly higher in states (i.e. New York) with higher tax rates. When you apply for a mortgage, your mortgage lender will provide you with an estimate of your loan's closing costs. Then, three days before you're scheduled to become the official owner, you'll receive a final breakdown of these fees in a closing disclosure.

What Are the Closing Costs on an FHA Loan?

Unfortunately one of the necessary evils of purchasing a home are closing costs. Closing costs can be separated into four parts. A fee paid to the Federal Housing Administration (FHA), third party fees, fees paid to the lender and lastly prepaid expenses.

Closing costs vary significantly across the United States and U.S. territories. The following fees may or may not be required in your state. Your bank or an approved FHA lender can provide you with a targeted closing cost estimate.

FHA Funding Fee (paid to HUD/FHA)

One of the fees you may be charged at closing is the FHA funding fee, or upfront mortgage insurance premium (MIP). This is a one-time payment that's 1.75 percent of your loan amount, regardless of the term or down payment amount.

The funding fee may be paid in cash at settlement, financed with the loan, paid by the seller or lender. Here's an example of a financed funding fee.

Sales price less minimum down payment of 3.5%. $100,000 - 3.5% = $96,500

X 1.75%

= $1,688.75 funding fee

$96,500 add the funding fee to the mortgage

$1,688.75

= $98,189 FHA mortgage with financed funding fee

Typical Closing Costs on an FHA Loan

Settlement costs will vary from state to state and from county to county.

When you make loan application, the lender will provide you with an itemized list of necessary closing costs. This estimate is known as a Closing Disclosure.

Your lender will also provide you with an updated Closing Disclosure three business days prior to closing. This will include a breakdown of all closing costs. Let's examine some of the most typical closing expenses that you might find on your disclosure.

Application Fee(Lender)

Some lenders charge an application fee as opposed to an appraisal and credit report cost. Or, in addition to the appraisal and credit report, the lender may impose an application fee for completing your loan application. Depending on the lending institution, this cost might reach $500. This might be a one-time fee or a deposit towards future closing expenses. Your application cost is non-refundable, even if your loan request is declined.

Appraisal Fee (third party)

Your lender will request an appraisal from a third-party appraisal management company, which will send an FHA certified appraiser to the home to determine its value and determine whether the home meets the FHA guidelines. In order to verify that the house is move-in ready, they also do basic safety inspections.

A typical single-family home appraisal costs $300 to $450, depending on size, value, condition, and detail. Large properties cost more to appraise. In places with greater living expenses, the range might be $500 to $800 or more.

Attorney Fee (third party)

In some states, the settlement cannot take place without the presence of an attorney (i.e. New York). If you need legal assistance, you should be prepared to spend at least $1,500 or more. Notary public and title insurance agents are permitted to facilitate the settlement in certain states, but not others.

Overnight Mailing Fee (third party)

Document delivery for mortgages is paid for by courier fees. If your lender charges courier fees, be prepared to pay about $30.

Credit Report Fee (third party)

Credit reporting costs cover the cost of acquiring a credit report and viewing a credit score. The average cost of a credit report is $25.

Discount Points (paid to lender)

You can purchase discount points from lenders to pay money upfront on your loan and lower your interest rate (essentially, buying down your rate to save interest over the life of the home loan).

One percent of the loan amount is equal to one discount point. One point will cost you $1,000 if you take out a mortgage for $100,000, for instance. A point on a loan for $200,000 costs $2,000 dollars. Discount points are optional, unlike other fees.

Deed Transfer Tax (third party)

You could be required to pay a deed transfer tax if you purchase or sell a house, but this will depend on the state in which the transaction takes place. Real property is any building that is linked to the land, and this charge is added when the deed is sold or transferred for such a property.

This particular sales tax is applicable not only to the transfer of ownership, but also to the reassignment of any interest that is associated with a piece of real estate.

The vast majority of states levy deed transfer taxes on title transfers that occur inside their own jurisdictions.

Flood Certification (third party)

You might have to pay $15 to $25 for a flood certification. The goal of the flood certification is to ascertain whether the subject property is located within a flood plain.

If the home is located in a flood plain or is very near to one, you will be required to purchase flood insurance.

Homeowners Association Fee (third party)

If the property is part of an homeowner's association, the expense of shifting the responsibility for paying HOA dues from the seller to the purchaser is covered by the HOA transfer fee. It is a check to ensure that the seller is up to date on all HOA payments. Additionally, it gives you a copy of the financials of the organization, as well as the dates for payments and deadlines.

The rules of your HOA will determine how much you will have to pay for the transfer of your property. This fee will not be needed of you if you live in a community that does not have a homeowners association (HOA).

Mortgage Recordation Fee (third party)

When registering a change in ownership of a piece of property, state and municipal governments will each assess their own set of recording costs. These charges are generally included in the larger group of expenditures that are referred to collectively as "closing costs."

The recrdation charge may be less than $100, or can be over1% of the loan amount depending on the state (i.e. Maryland).

Origination Fee (paid to lender)

The expenditures that are connected with the processing and underwriting of loans are supported by the fees associated with the loan's origination. In exchange for processing your loan application and preparing the necessary paperwork, your lender requires that you pay this fee. You should budget around one percent of the total value of your loan for the origination fees. In the section of your Loan Estimate titled "Origination Fees," this will be included alongside mortgage discount points.

Pest Inspection (third party)

Although the Federal Housing Administration (FHA) does not require pest inspections, lenders are permitted to request them if they so want.

Before a loan may be closed in certain regions of the country, an inspection of the property to check for vermin is required (i.e. Florida).

In the event that the appraiser finds a problem with wood-boring insects or any other kind of pest, he or she may stipulate that a more thorough inspection be performed by a qualified pest inspector.

Settlement/closing Fee (third party)

The settlement fee is paid to the attorney or closing company to explain the purchase documents and obtain everyone's signatures.

Title Search (third party)

The process of determining and confirming a property's legal ownership involves an investigation into its public records, which is referred to as a title search.

Searches of titles are performed using a wide variety of resources, some of which include deeds, tax liens, property records, and court judgments, among others. Individuals and organizations may make inquiries at any time to find out what claims or liens, if any, are attached to the piece of property in issue by placing an order for a search that is often carried out by a title insurance company.

A sale involving real estate cannot be finalized without a clear title being shown. In the event that a title search reveals the existence of a lien on the property, the transaction cannot be finalized.

Title Insurance (third party)

Title insurance is a policy that protects home buyers and mortgage lenders against damages or financial losses caused by a defective title owing to title defects.

Title insurance protects home buyers and mortgage lenders against damages or financial losses caused by a bad title.

The majority of title insurance plans cover all of the typical claims that might be made against a title, such as unpaid liens and taxes, as well as wills that are in dispute with one another.

There are many different situations that might result in a title difficulty, which can also damage your legal ownership of a property and render a title "bad." These possibilities range from violations of the building code to legal problems. It's possible, for instance, that after buying a piece of property, you'll find out that the seller doesn't truly have any legal claim to it, or that their claim is being contested by another party.

Underwriting Fee (lender)

There is a possibility that your lender may charge you an underwriting fee in order to pay the costs of originating, processing, underwriting (of course), and closing your mortgage loan. In a nutshell, the underwriting fee is a closing expense that is paid directly by the borrower to the lender. This charge is used to pay the lender's overhead and administrative costs, as well as to earn money off of your mortgage.

It is possible that a borrower's lender may charge an origination fee, administrative fee, or processing cost rather than an underwriting fee. Lenders use a variety of terms to refer to fees and expenditures. When you acquire a mortgage, you are responsible for paying all of these costs, regardless of what you name them.

It is also important to point out that some lenders claim that they do not charge certain costs while, in reality, they impose fees that are similar to those charged by other lenders but use a different term for them. Borrowers should concentrate less on the vocabulary employed and more on the entire cost of the fees levied by the lender rather than the word itself.

Escrow and Prepaid Expenses

Esacrow graphic In addition to the closing costs, home buyers are required to pay a variety of expenses at settlement (or prior to settlement). For example, a homeowner's insurance policy is purchased prior to final settlement.

Prepaid expenses also include prepaid real estate taxes and tax prorations.

If the seller has prepaid their property taxes for the year, you are required to reimburse the seller for property taxes for the time you own the property. Another prepaid cost is setting up a real estate tax escrow.

Let's say you're closing on December 1st, and the property taxes are due January 1st. The settlement company will collect enough tax dollars at settlement to pay the real estate tax bill when it's due.

Per Diem Interest

The interest charged on a loan on a daily basis is referred to as "per diem interest." At the time of loan closing or refinancing, per diem interest is paid at settlement. Per diem interest is the cost of the loan from the settlement date to the last day of the month. Think of per diem interest as an interest only mortgage payment for the closing month.

Can Closing Costs Be Included in Loan FHA

The FHA regulations do allow for part of the closing fees to be included into the loan to a certain extent. They make it quite apparent that the amount of the down payment, which is necessary to conclude the loan and is 3.5 percent, cannot be financed and must be paid for separately. The FHA funding fee may be rolled into the loan.

FHA Loan Closing Costs Paid by Seller

The FHA does not require the seller to pay any closing or prepaid costs on behalf of the home buyer.

However, the home seller may pay a percentage of the buyer's closing costs and prepaid costs.

The amount that can be negotiated within the sales contract to help the buyer(s) is limited to 6% of the purchase price.

The buyer's down payment cannot be paid by the home seller or financed in the loan.

Can FHA Closing Costs Be Gifted?

Closing costs can be a big expense for home buyers when they buy a home. The FHA permits home buyers to obtain a monetary gift from their employer, labor union, relative(s) or close friendtoavoidhaving to pay all of the closing costs and prepaid expenses. It is important toconsiderall of the options available toavoidpaying the closing costs personally.

Does the FHA Loan Cover Closing Costs?

The FHA loan program does not cover the closing costs of a home purchase. Borrowers are responsible for paying all of the costs associated with the purchase of a home, including the down payment, closing costs, and any prepaid expenses.

Conclusion

In conclusion, FHA loans are a great option for homebuyers who may not have the savings for a traditional down payment. However, it's important to be aware of the additional costs associated with an FHA loan, such as closing costs. Shop around and compare offers from multiple lenders to make sure you're getting the best deal on your FHA loan.

SOURCE:
What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?
Closing Disclosure Explainer