As a first-time homeowner, you may need to consider applying for an FHA loan. FHA loans have similar characteristics to conventional loans but have easier qualifications. They are also more affordable compared to other loan types.
Everyone who applies for an FHA loan needs to pay FHA closing costs. The closing costs for FHA loans have little variation from conventional loans. Therefore, when settling for an FHA loan, it is important to calculate the details of the FHA closing costs and the terms for payment.
What is an FHA Loan?
FHA loan, also known as the Federal Housing Administration loan, is a mortgage type that assists first-time property buyers who want a lower down payment option. People with previous bankruptcy cases or foreclosures can also access the FHA loan.
The Federal Housing Administration insures the FHA loans, making qualifying for one easier. One should consider applying for an FHA loan at District Lending Company because:
- They offer a low down payment option
- They provide FHA loans to people with low credit scores
District Lending Company is one of the best FHA-approved lenders and can help determine if an FHA loan is right for you. One must meet certain requirements to qualify for an FHA loan like conventional loans. The general requirements include the following:
- A minimum credit score of 580 and pay 3.5% down payment
- A minimum credit score of 500 and pay 10% down payment
- A minimum down payment of 3.5%
- A debt-to-income ratio of 43%
- The property bought should be your primary residence
- Provide proof of steady income
- Apply for mortgage insurance premiums
When applying for an FHA loan, it is important to discuss any other FHA loan costs with the lender.
What are Closing Costs in Mortgage loans?
Closing costs are fees that borrowers should settle before finalizing the loan application. The mortgage loan pays a certain percentage of the property price, while the closing costs cover bills that accumulate in the home-buying process.
When applying for a loan, the District Lending Company provides you with a loan estimate during application and a closing disclosure before the arranged closing day. The documents illustrate the details of the loan and the inclusions on the closing cost.
FHA Loans and Closing Costs
The closing costs on an FHA loan are similar to those of any conventional mortgage loan. They entail fees charged for you to get an FHA loan. Borrowers may need to pay similar fees on conventional loans, such as credit report fees, underwriting costs, and home appraisal fees.
Since FHA loans cater to borrowers with a lower credit score, the insurance costs might be higher. FHA loans are considered high-priced due to the high mortgage insurance costs.
The FHA closing costs for most lenders range between 2% to 6% of the loan total. It is important to discuss with your lender the closing costs upfront. However, the lender will need to review your financial status before providing you with an accurate estimate.
What are the Closing Costs of an FHA Loan?
Mortgage Insurance Premium
Once you apply and qualify for an FHA loan for a home purchase, you will need to pay the mortgage insurance premium. The insurance premium comes in two forms, which include:
The upfront premium forms part of the FHA closing costs. District Lending Company offers an FHA upfront premium of 1.75% of the total loan amount. Therefore, if you borrow $400,000, you will need to pay an upfront mortgage insurance cost of $7000.
Borrowers may not need to pay the upfront premium in cash. Lenders can also roll it into loans for people who fall short of cash. However, this will increase the total amount of money you need to pay at the end of the loan period.
In addition to the upfront costs, borrowers will also pay annual mortgage insurance premiums. Lenders offer different annual premiums ranging from 0.5% to 1.05% of the loan amount, which is included in the monthly mortgage installment. The lenders adjust the rate depending on the amount you owe.
It is important to note that insurance premiums offered on FHA loans only protect the lenders when the borrower stops the payment and does not protect the borrower.
Different lenders provide varying lending fees. Therefore, it is important to discuss with your FHA lender about the lending fees. These fees are negotiable, and one can request a waiver. Some lenders also do not ask for the fees at all. Some of the common lending fees include:
- Underwriting fee
- Application fee
- Rate lock fee
- Document preparation fee
- Rate lock fee
Your loan lender is not the only party to process the mortgage application. You may pay for other services as part of the closing costs. These services include:
- Deed recording
- Flood zone certification
- Credit check
- Title Search
- Real Estate attorney fee
In most cases, the prepaid expenses are not considered closing costs. However, homebuyers will need to pay them at the same time. They include fees paid to cover costs that may arise in the future. Some of the common fees include:
- Tax and insurance deposit
- Real estate taxes
- Per diem interest
- Flood and hazard insurance premium
When the lender offers an estimate of the closing costs, you will see and identify the fixed costs and service costs you can look around for. Shopping around can help you find cheaper alternatives for the service costs, thus saving you money.
Who pays the Closing Costs on FHA Loans?
As mentioned above, all FHA loans come with closing costs. These costs are negotiable and can be reduced. In most cases, the homebuyers are responsible for covering all the closing costs. However, you may not have to pay for everything. One of the main benefits of FHA loans is that they have little upfront costs. Therefore, it is important to find better ways to reduce the closing costs that could derail your purchase.
Saving on FHA Closing Costs
Compare the Lending fees.
Lending fees vary depending on the lender you choose. Ask around and compare lending fees offered by different lenders. It will help you get a sense of what different lenders are offering. When reviewing each lender, it is important to compare the closing costs to the interest rate. Most lenders provide lender fees depending on the quotation rate.
For most lenders, the lending costs will be similar. However, the difference arises with the origination fees and discount points. District Lending Company offers low-cost lending fees for first-time buyers.
Roll Closing Costs into Mortgage FHA
One can include the closing costs in the total loan to avoid paying them upfront. However, this option does not exclude you from paying closing costs since you will finance them as part of the loan with interest. The advantage is that it saves you from paying them out of pocket if you have less money.
If you roll them into the loan, your monthly installment payment will be high. This move does not necessarily save you, but it helps determine which is of more importance.
Negotiate with the Seller to Cover Some Closing Costs
Sellers sometimes cover some closing costs for buyers. In most cases, they pay 6% of the total sale price. However, this decision depends on the local market, the number of buyers interested, and other factors. Negotiating with the seller can be difficult due to the differences in the housing market. However, the FHA guidelines require sellers to pay 6% of the total cost as the closing cost.
Therefore, it is important to discuss with the seller any assistance in covering some costs.
Ask for Assistance from Financial Institutions
Several banks and housing finance institutions provide FHA closing cost assistance programs. Some states also offer zero-interest loans or grants that you may qualify for. These options are always available for low and moderate-income borrowers and first-time homebuyers.
District Lending provides a list of program types to help you settle closing costs.
Ask for a Gift
FHA loans permit borrowers to ask for financial support from other sources. One can get assistance from family members, employers, or a labor union. One can also use funds from government agencies that assist first-time buyers.
However, if you get assistance from any sources, you must produce a gift letter for verification. The letter should contain the giver’s contacts, amount, and disclaimer that you do not need to pay.
How to Estimate FHA Closing Costs
FHA loans provide you with an opportunity to purchase a new home if you cannot qualify for a mortgage loan. The process is also less complicated compared to other loan types. However, your home must meet all the FHA requirements, which makes the appraisal more costly.
Several factors make each home purchase process unique. These factors determine the closing costs of the FHA loan. However, you do not need to wait for the closing day to get an estimate of your closing costs. You should expect the following with your FHA loan closing cost.
- Loan Estimate. District Lending Company will provide you with a loan estimate that provides all details explaining the terms of the loan.
- The closing cost calculator will help you calculate your potential closing cost.
Apply For an FHA Loan Today
District Lending Company offers a variety of mortgages for buying a new home. It also offers refinancing options on an existing loan. The FHA loan is the best option for first-time homebuyers since it provides more flexible options. District Lending offers FHA loans with a low down payment of 3.5%. Visit the official website today and access affordable FHA loans.
Frequently Asked Questions
Do sellers cover FHA Closing Costs?
Yes. According to the FHA guidelines, sellers should contribute up to 6% of the purchase price as part of the closing cost. The guidelines provide a better option for negotiating the closing cost credit with the seller.
Can you roll closing costs into an FHA loan?
Yes. The FHA guidelines provide an option to roll closing costs into mortgage FHA. However, the closing costs do not form part of the down payment.
What is the Difference Between the FHA Loan Closing Costs and Down Payments
Closing costs differ from down payments and cannot be combined. Closing costs involve extra costs paid by the borrower that are not part of the purchase price. The down payment is the initial payment made by the borrower as part of the purchase price. However, after evaluating your eligibility, lenders will combine the FHA loan down payment and closing costs to provide you with the total money needed to close the loan.
Can FHA Lenders finance Closing Costs?
First-time buyers who do not have enough money can ask to be financed by their lenders. Most lenders will accept to finance closing costs but add them to the total loan amount.