FHA What Are Closing Costs
If you’re like most borrowers, you may not fully understand what closing costs are, why they’re so expensive, or why you have to pay them. Closing costs are costs incurred when buying or refinancing a home, in addition to the purchase price of the home, and can be anywhere from 2 to 5 percent of your loan amount. These costs can include appraisal fees, title searches, surveys, taxes, title insurance, loan origination fees, fees for discount points, and any deed-recording or credit report charges.
These fees can add up quickly so it’s worth examining them to understand why they’re a required and unavoidable part of getting a mortgage home loan. On top of that, learning about closing costs may help you decrease their amount or pass them onto the seller or lender? Additionally, it’s worth investigating your different loan options as certain loan types, like FHA and VA loans, have built-in limitations to closing costs.
How Much Should I Pay?
The typical amount for closing costs is between 3 and 5% of your total loan amount. Keep in mind the amount can vary based on the type of loan you are applying for, any special circumstances regarding your property, and can also change based on your location.
Closing Costs and Refinancing
While refinancing does eliminate some of the closing costs since you already own the property, all of the major costs tend to still be there for most major loan programs. Costs such as appraisals, wire transfers, courier fees, and lender fees will be included in your closing costs, but you won’t have to deal with title fees and often can forgo other inspections, which may be necessary for certain loan programs.
The Biggest Cost
Of course, the biggest cost of losing a purchase isn’t technically a closing cost at all. Down payments are the most expensive part of buying a new home. Depending on your loan program, that amount can be anywhere from 3.5% for an FHA loan to 20% under certain conventional loan programs. Though, if you qualify, there are programs, such as VA loans, which can eliminate the need for a down payment, leaving you only with the traditional closing costs at the time of close.
Why Should I Pay?
In most circumstances, closing costs are simply a necessary evil. They are fees which need to be paid to a variety of entities involved in the loan process for their work and to ensure everything is properly filed and legal. It is worth noting, though, that you can negotiate with the seller for them to cover the closing costs. This won’t always work, but motivated sellers will cover these costs to sweeten the deal on a home they need to get rid of.
Your Loan Officer
A loan officer is the primary person you’ll deal with as you get your loan. They manage the front end paperwork, provide you with the list of fees and what they are for, and act as the go-between for you and everyone else working to get your loan approved.
Common Closing Costs
- Attorney fees
- Origination fees
- Deposit verifications
- Property inspections
- Title insurance
- Property surveys
- Credit report fees
- Recording costs
- Transfer fees
- Certification and test fees
Each of these costs represents a service provided or a legally required filing verification.
Protecting You and the Lender
A lot of the closing costs are fees put in place to protect the lender. They are the ones taking the risk by putting all the money toward for the loan. Most of the costs are all part of their attempts to mitigate the risk of their investment. By getting a credit report, doing inspections, and requiring insurance, they are doing their due diligence to make sure the loan is good for both them and you.
While it may seem like these things are mostly for the good of the lender, they actually benefit the buyer. You’d be surprised how many people get halfway through the lending process only to find out that the seller doesn’t actually own the home or have the right to sell it. That is a type of circumstance uncovered during the approval process, which ends up as a closing cost. The home appraisal and inspections can also help you discover if the square footage advertised is actually true, or if you’re buying a smaller home than you believed. These inspections can also make you aware of wiring, plumbing, and structural issues you might not have been aware of.
FHA vs Conventional Mortgage Fees
The above list of fees are ones you will find on an FHA loan and most conventional mortgages. But in addition to the fees listed above, lenders for other loan types can, and often will, charge you a variety of other fees such as:
- An application fee
- Underwriting fees
- Interest rate lock fees
- Processing costs
- Courier costs
- Administrative costs
- Document preparation costs
- Commitment costs
- Origination or broker fees
- Closing fees
No Closing Cost Loans?
The truth is there’s no such thing as a loan with no closing cost. Certain processes and inspections have to be done for your loan and someone has to pay them. Lenders can package loans so it looks like you’re not paying closing costs when in actuality the cost is covered by a higher interest rate or loan amount.
While there’s really no such thing as no closing costs many areas have programs to help you cover the costs associated with buying or refinancing a home and it's worth looking into those options.
Ways to Cover Closing Costs
The most common way to avoid a large upfront payment for closing costs is to include them in your total loan amount. This is available on most loans provided there is enough room between the loan amount and the value of the home. When that is not an option due to a required down payment, it is worth asking the lender, seller, or real estate agent to cover some of the costs. Everyone involved in this process wants to see the loan approved because it is how they make their money. Often, someone along the line will help out to ensure they still make something instead of losing the loan entirely.
FHA Can Help You
The Federal Housing Administration (FHA) was created to help homebuyers, especially first-time homebuyers. Because of this, their rules and regulations are put in place specifically to benefit you. All loan costs must be deemed reasonable by location and lenders cannot markup third party services.
The FHA monitors its lenders and examines every loan before approving and guaranteeing it, making the whole process safer and more fair for the borrower.
To understand more about closing costs and FHA loans in general, contact a Mortgage Advisor today.