The home loan search entails more than home tours and deciding on the mortgage option that makes the most sense. Many buyers, mostly when they are early in the home search, fail to consider the reality of basic FHA loan closing costs.
The fact is that after your loan application makes it through the approval process and on to the closing phase, a combination of negotiated and HUD regulated closing fees kick in.
What are FHA Loan Closing Costs?
So what exactly are closing costs? Essentially, FHA closing costs are just expenses and fees that are charged to the buyer by lenders, mortgage brokers and loan originators. Loan closing costs in aggregate are basically just the sum total of the various charges that go into loan processing, approval, and closing. Some of these fees are negotiable whereas others are regulated by HUD. Also, some of the fees may be covered by a seller depending on how negotiations go. Typically, a party to a home purchase may expect FHA loan closing costs to range between 2% to 5% of the total home loan.
What Determines Mortgage Closing Costs Amounts?
As with your loan approval, the interest rate, and loan option will greatly depend on your credit score. The better your score, the more options you will have and likewise, low scores will typically be limiting. A good credit score gives you an ability to shop around and have leverage over a few banks that hope to do business with you. If you have good credit, those lenders will ultimately compete to be your lender which gives you an opportunity to negotiate for lower closing fees in cases where rates are not dictated by HUD.
Using The Good Faith Estimate Loan Estimate Form
To make the FHA loan closing process a little more transparent, HUD provides a form called the Good Faith Estimate (GFE) which provides a high level estimate of final settlement charges and terms that will play if you are approved for a loan that you applied for. The Good Faith Estimate provides a simple breakdown of your loan summary, including the initial loan amount, loan term, and interest rate among other important information. The purpose of this is to help you better understand your mortgage so that you may compare offers, fully understand just how much your loan will cost you over time, and ultimately empower you to make the best decision possible. As a potential home buyer, you should expect to receive a Good Faith Estimate from any potential lender within three days of applying for a mortgage. The GFE is free to use however you should be mindful that a small fee may be charged to pull your credit report for analysis.
A Good Faith Estimate does not obligate you into moving forward with a loan just because you applied for it. It is common for buyers to use their GFE to shop around for the lender that is best suited to their personal needs.
5 Basic FHA Loan Closing Costs To Plan For
At the most simple level, there are five categories of fees that will contribute to your total mortgage closing costs:
- Loan Related Fees
- Title/Recording Fees and Transfer Taxes
- Pre-paid Costs and Escrow Fees
- 3rd Party/Property Specific Fees
- Mortgage Insurance Fees
Loan related fees include costs that cover things such as loan origination, loan applications, mortgage underwriting, credit report analysis, and discount points. Title and transfer fees cover the cost of title insurance, recording fees, and any transfer taxes. As for pre-paid expenses, this will include any taxes or insurance that you pay upfront, initial escrow fees, and the deposit. Property specific fees handle any needs that may require an attorney, pest inspections, and appraisals and mortgage insurance fees are a requirement when it comes to FHA loans.
There is a list of fees that will be paid be either the buyer or seller in the home purchase process and these are negotiable in terms of who is paying for what. The closing costs below are very basic and are always going to be one-time fees under normal circumstances.
Mortgage Closing Cost Averages by State
To help provide an idea of what closing costs may look like for you, the folks are Bankrate.com performed a survey of up to 10 lenders in each of the US states during the Spring of 2017. An analysis of the average closing costs on a $200,000 mortgage with a 20% down payment for single family homes was performed and unsurprisingly, New York and Hawaii were among the most expensive with costs exceeding $2400.
One Time Home Closing Fees
Loan Origination Fee
This fee is a percentage and according to FHA this fee cannot be greater than 1% of the total home loan amount. In most cases, if you are the buyer, you will be covering this fee unless you’re able to convince the seller to take it.
Loan Discount Points
The loan discount fee is often called a “discount points” fee and it is also a one-time fee. The loan discount is what is used by the lender to lock in the home loan’s interest rate for a specific period of time. Unlike the loan origination fee, the loan discount fee will vary depending on what the lender or broker agree to.
An appraisal is a required part of pretty much every home purchase and this fee compensates the FHA appraiser that works with you and the seller to ensure that the home qualifies and is priced appropriately. Depending on the size of the property you may expect to pay anywhere from $250 to $500 for an appraisal. Do keep in mind that this is an approximated range.
Credit Report Fee
This one seems a little high for what it is but this fee, most often in the $40 range, will cover the lender’s expense as it pertains to pulling your credit history. Obviously for loan approvals, your credit report will indicate what your personal spending and earning habits are. There are levels of acceptance as they pertain to home loans and credit scores.
Before you even apply for a loan, it is recommended that you know what the home loan credit score requirements are.
Lender’s Inspection Fee
As if the FHA appraisal wasn’t enough, you also have to cover the cost of a lender’s inspection fee. This helps the lender fully assess their level of risk when determining whether or not to approve your loan application.
Mortgage Insurance Application Fee
By this point, you’re probably thinking it costs money to breath and that nothing is free. Well, you’re pretty much right. A lot goes into applying for a home loan and this fee covers the cost of the application process that dictates what your FHA mortgage insurance will be. Click here to learn when you need to have private mortgage insurance.
Buyer Assumption Fee
When the buyer takes over, or “assumes” the responsibility of paying any existing mortgage that a seller may have on the property, an assumption fee is charged to account for the extra effort and paperwork being handled by the bank.
Mortgage Broker Fee
The mortgage broker fee is how the loan officer makes their many. Don’t feel too bad about this one because a good mortgage broker works to get you the absolute best deal on the market.
Loan Processing Fee
The loan processing service is one that requires a lot of coordination. This is the administrative process that effectively irons out all the paperwork… like everything else, there is a fee that comes with it as it is literally someone’s job to process loans so that people can purchase homes. There are a lot of things that can go wrong or delay a loan application so be appreciative if your loan processing phase is uneventful!
Loan Underwriting Fee
The loan underwriting process is an important one and this closing fee is charged by the seller. The fee accounts for the risk analysis and work that goes into reviewing the loan applicant’s file.
During the closing process, the bank will charge a wire fee to effectively release funds that allow the loan to actually close and move towards recording.
FHA Flood Certification Fee
This one is especially relevant if the property happens to be in a flood zone. If it is, the buyer will be required to purchase and maintain flood insurance in case disaster strikes. If the home is at the top of a hill, this flood certification fee will feel ridiculous however the FHA requires that every property be “certified” one way or the other.
Prepaid Closing Costs for Home Loans
As we move through the list of closing costs, prepaid fees are due at the time of closing and will mostly continue through the life of the mortgage with the exception of certain items (mortgage insurance depending on how much equity you have).
This fee is more of a payment that helps you get to work on that mortgage balance. Borrowers are required to pay the interest that accrues beginning on the date of closing through month 1 of the mortgage.
FHA Mortgage Insurance Premium (MIP)
This is a regulated amount that may be rolled into your financed loan total. The FHA MIP fee will equal 1.5% of the total mortgage.
Hazard Insurance Premium
This is a fee that you have to pay on a recurring basis to maintain insurance that will protect both the buyer and lender from any loses that may come from natural disasters (excluding floods). This insurance product protects against things like tornadoes, strong hail, fire, and other natural hazards. This is a valuable thing to have but do take note that a lender may ask that a full year’s worth of coverage be paid for in advance.
Depending on what the FHA Flood Certification determines, a lender may require that the borrower pay for and maintain flood insurance.
Escrow Related Money Up-front At Closing
An almost mechanical, essential part of every mortgage is the opening of an escrow impound account that will serve as a vehicle for including insurance and taxes in your monthly mortgage payments. The point of this is to have reserves of cash deposited with the lender for specific uses and in accordance with your loan terms.
Hazard Insurance Reserves
It is not unusual for the lender to require that you provide at least two months worth of money up front to cover annual hazard insurance as well as your basic homeowners insurance.
Mortgage Insurance Reserves
Like the hazard insurance requirement, it is common that at least two months of FHA mortgage insurance premiums be paid up front. Your FHA MIP is about half a percent of the final FHA mortgage divided by 12 to ensure that you are paying 1/6 of the annual premium.
Property Taxes Imposed by the City
Not every city will impose property taxes on you however in cases where your local city government imposes this tax, expect to pay some of that at closing. Your closing agent will inform you of this need and depending on your address, Google may provide that answer for you!
Property Taxes Imposed by the County
Like the city property taxes, county property taxes will be prorated at a rate of zero to 11 months at the time of closing. This will vary depending on your county so again, Google may be your friend when it comes to determining whether or not you will have to pay this.
These may be neighborhood or property specific in some cases but an example of another upfront closing cost could be Homeowners Association dues to account for stuff like neighborhood management costs among others.
Special note: After tallying up these closing costs, it is possible that the actual dollar amount may be higher than what is actually permissible. In other words, the sum of these fees may exceed the closing limit. If that happens, an aggregate adjustment will be shown on as a negative amount to help bring your final, aggregate closing cost to an acceptable level.
Title Related Fees at Closing
This is a world of closing fees where things get a little less generalized and more specific to individual transactions. Fees for specific title services may vary and what we are presenting below may not be all inclusive.
A feee paid to the settlement agent. This may also go to the escrow agent and it is up to the seller and buyer to determine who or how this payment will be handled.
Abstract of Title Search, Examination, and Title Insurance Binder Fees
This fee covers the costs of title search and title examination.
Loan Document Preparation Fee
This fee helps title companies cover their costs associated with putting together final mortgage paperwork including the deed of trust and other legal paperwork.
Notary Public Fee
The certify and formalize some of the documents within the loan application, there is a requirement that specific signature pages have the stamp of a notary. The notary fee will sometimes be $40 but may exceed $100 depending on how much heavy lifting that notary is doing for you.
This one can hold a great deal of variance. Not every attorney charges the same hourly rate and some attorneys are very frankly, much better or more experienced than others. Depending on the transaction, the real estate contracts may be best off under the review of a qualified attorney. Typically this may involve examination of the property title binder.
The closing fee associated with title insurance will show on line 1108.
Lender’s Title Insurance
Same as above however this is the cost of the lender’s policy.
Owner’s Title Insurance
This part of closing costs indicates the dollar amount of the owner’s cost of coverage.
Closing Fees That Come With The Loan Recording Phase
The loan recording phase is exciting and that’s when the government puts you on record as the new owner. This particular fee is negotiable between buyer and seller and execution of this will allow the government to execute the final action that puts the transaction on record. It is common for a buyer to handle the fees that go into recording a new mortgage. , a recording fee may be charged by the local government whether it be the municipality, county, and/or state.
The transfer fee is a tax that will vary by location. Depending on the government, this fee may be a significant dollar figure.
3rd Party and Additional Closing Costs
There is so much that may go into a real estate transaction and it is impossible not to recognize that every situation may present similar but unique realities. Because of that, there may be closing costs that are either atypical or specific to the property. Some of these may include costs for: pest inspection, land surveying, and even lead paint inspections. Depending on the condition of the property, it may or may not qualify for a FHA loan so if there are any red flags, it is possible that additional, even specialized inspections may be ordered.
Loan Closing Costs Vary Between Refinances and Home Purchases
Your transaction type, in addition to credit worthiness, will determine your terms and loan choices. If your transaction is a purchase, it is pretty standard to see the aggregate of these fees be added to your downpayment amount.
At closing, your downpayment plus the specific closing cost amount would be required to make things official. On the other hand, for a home refinance it may be possible to add these closing costs to the new mortgage amount and pay those off on a monthly basis.
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