Homebuyers need to keep in mind besides the down payment, they will have closing costs on FHA loans on their new home purchase. Unlike the down payment, which is a flat 3.5% of the home purchase price, closing costs on FHA loans vary depending on several factors. Closing costs on FHA loans are anywhere between 2.5% to 6%. The actual closing costs on FHA loans will not be determined until the closing disclosure. However, the homebuyer will have a tentative estimate on what the closing costs will be on the Loan Estimate (LE). We will be discussing and covering closing costs on FHA loans on home purchase and refinance transactions in great detail.
Best Mortgage Options For Homebuyers
FHA and conventional loans are the two most popular mortgage loan programs in the nation. FHA loans are hands down the most popular and best home loan program for first-time homebuyers, borrowers with high debt to income ratio, and homebuyers with bad credit. It is easier to get qualified and approved for an FHA loan with a low credit score and less than perfect credit than any other loan program. HUD, the parent of FHA, promote hard-working Americans to own their own homes for their families with easy streamlined mortgage guidelines with low down payment and little to no credit and/or bad credit.
What Is The Role and Function of HUD and How Do FHA Loans Work?
The U.S. Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). HUD does not originate, process, underwrite, fund, or service home loans. The role of HUD is to promote homeownership to homebuyers with low down payments and less than perfect credit scores by insuring private lenders. HUD promotes private lenders to offer low down payment home loans at low mortgage rates. In return, FHA will partially insure lenders against loss in the event that homeowners default on their FHA loans. Due to this government guarantee, lenders can offer first-time homebuyers, buyers with less than perfect credit and higher debt to income ratios low down payment, low-interest rates home loans.
How Much Money Do I Need To Buy A House?
There are two types of costs involved in home purchases:
- Down Payment
- Closing Costs
The down payment cannot be covered with seller concessions. The down payment can be gifted. Closing costs can be covered with seller concessions and/or a lender credit. In this article, we will discuss and cover FHA Closing Costs And Down Payment Guidelines And Requirements.
How Are FHA Closing Costs Determined
Most consumers are aware that closing a mortgage entails some form of closing costs. Government-insured FHA loans are no different. Oftentimes carry higher costs than their counterparts. A residential home buyer can expect closing costs to range between 3-6% of the total loan amount. FHA loans are usually found at the higher side of the spectrum. With that said, FHA loans play an important role for first-time home buyers, credit-challenged borrowers, and those looking to keep theirs out-of-pocket exposure to a minimum. Although costs for an FHA loan may seem high at first, lower than anticipated interest rates are often achieved when incorporating common and customary seller/lender credits.
Upfront FHA Mortgage Insurance Premium
The FHA required Upfront Mortgage Insurance Premium (UFMIP) and monthly Mortgage Insurance Premium (MIP), which both mitigate lender risk, potentially translating to lower interest rates than one might expect. It’s important to keep in mind that although FHA loans cost several percentage points.
Like other mortgages, a significant portion of these costs are attributed to third party fees, i.e.
- initial escrow collection
- upfront homeowners insurance premiums
- per diem interest, county & state transfer taxes, title fees, etc.
The Federal Housing Administration
Here’s what you can expect when it comes to FHA closing costs. FHA Mortgages: A Quick Primer. FHA home mortgage loans are insured by the Federal Housing Administration (FHA).
The FHA was established in 1934. FHA was created to advance homeownership opportunities for all Americans. The role and mission of FHA are to assist home buyers by providing mortgage insurance to lenders to cover most losses that may occur should a borrower default on the loan. HUD’s role is also to encourage lenders to make loans to borrowers who might not qualify for a conventional mortgage. FHA mortgage rates are typically lower than conventional mortgage loans. This is due to the security of the government guarantee. FHA home loans offer many distinct advantages including low down payment requirements, flexible credit guidelines as well as the ability to lend in declining markets.
FHA loans are issued by private financial institutions approved by the U.S. Department of Housing and Urban Development (HUD) and underwritten by private lenders. FHA loans are easier to qualify for. If you don’t have much cash for a down payment, enough equity in-home, or potentially less than perfect credit, it’s likely you may still take advantage of this option.
FHA Lenders For Bad Credit
Lenders are more likely to approve buyers with credit challenges and moderate to low FICO scores because of the FHA insurance guarantee. Because FHA loans are easier to qualify for, they are ideal for buyers with less-than-perfect credit. They were traditionally designed for homebuyers without the 20% conventional down payment available. In fact, buyers can buy a home with as little as 3.5% down.
Features Of FHA Mortgages
FHA Mortgage Features Include:
- Minimum 3.5% required for the down payment
- Flexibility in credit, income, and equity/down payment guidelines
- 100% gift allowed for the down payment and closing costs
- Fixed-Rate and Adjustable Rates are available
- 15- and 30-year fixed-rate terms available
Seller and lender credits to help cover additional closing costs.
Breakdown Of FHA Closing Costs
Because FHA loans are insured and backed by HUD, a government agency, borrowers are required to pay an Upfront Mortgage Insurance Premium (UFMIP) in the amount of 1.75 percent of the base loan amount. The upfront MIP goes to the FHA Insurance Fund and is used to pay out for claims by lenders. An ongoing annual mortgage insurance premium of 0.85% of the loan balance on all 30-year fixed-rate FHA loans is required for the term of the loan. The annual FHA MIP is divided into 12 equal monthly payments and is escrowed by the mortgage servicer and is part of the monthly mortgage payment. The annual FHA mortgage insurance premium varies based on factors such as loan amount, Loan-To-Value (LTV) ratio, and the mortgage term. We will categorize the FHA Mortgage Insurance Premium rates for 2022 are as follows:
2022 FHA Mortgage Insurance Premium Rates:
FHA Loans Over 15 Years (> 15 Years)
Base Loan Amount LTV Annual MIP:
- ≤ $625,500 ≤ 95% 80 bps (0.80%)
- ≤ $625,500 > 95% 85 bps (0.85%)
- >$625,500 ≤ 95% 100 bps (1.00%)
- > $625,500 > 95% 105 bps (1.05%)
FHA Loans Up to 15 Years (≤ 15 Years) Base Loan Amount LTV Annual MIP:
- ≤ $625,500 ≤ 90% 45 bps (0.45%)
- ≤ $625,500 > 90% 70 bps (0.70%)
- > $625,500 ≤ 78% 45 bps (0.45%)
- > $625,500 78.01% to 90% 70 bps (0.70%)
- > $625,500 > 90% 95 bps (0.95%)
The current Up-Front Mortgage Insurance Premium UFMIP is still 1.75% of the base loan amount. This is the same regardless of the amortization term or LTV ratio.
- The UFMIP is currently 0.01 percent of the base loan amount for forwarding FHA streamline refinance transactions refinancing FHA loans endorsed on or before May 31, 2009,
- Forward streamline refinance transactions that are refinancing FHA loans endorsed on or before May 31, 2009, the Annual MIP will be 55 bps (0.55%), regardless of the base loan amount, this took effect on or after June 11th, 2012
No matter the scenario, home buyers using an FHA loan must make a down payment of at least 3.5%, the Minimum Required Investment (MRI) for this program outlined by HUD as of 2022
Understanding Closing Costs On Home Purchase And Cash To Close
Understanding Closing Costs: Closing costs and down payments are two types of costs a home buyer needs to come up with on a home purchase loan. Homeowners who refinance their mortgages also need to come up with closing costs. Closing costs are costs associated with the purchase or refinance mortgage of a home loan. Someone needs to pay the closing costs. Closing costs can be paid by the home buyer, the homeowner doing the refinance, the mortgage lender, the seller on a home purchase via seller concession, or a combination of all. Understanding closing costs is important for both home buyers and mortgage refinance borrowers
In the following paragraphs, we will discuss and cover Understanding Closing Costs On Home Purchase And Cash To Close.
Lender Credit To Cover Homebuyer’s Closing Costs
Refinance mortgage loans in which the closing costs are paid by the lender are commonly referred to as zero closing cost loans due to lender credit. In fact, the term no closing costs is deceiving. This is because there is no such thing as free in this world. No closing costs refinance mortgage loans is when the borrower does not have to come up with paying for closing costs. The mortgage lender will cover the closing costs in lieu of a higher mortgage rate charged to borrowers. Lenders will normally charge a 0.25% or more mortgage rate premium in lieu of covering the borrower’s closing costs.
Types Of Closing Costs
There are two categories of closing costs.
- The first type of closing costs are the mortgage lender closing costs also called origination fees
- The second type of closing costs are the third party closing costs
Both of these closings costs are part of a home purchase mortgage loan and refinance mortgage loan.
Closing Costs Includes Lender Fees And Charges
Mortgage lenders will charge costs and fees which is part of the borrower’s closing costs. Closing costs include lender charges, costs, and fees such as mortgage loan origination fees and discount points for lower rates. There are also mortgage lender fees such as the following:
- credit report fees
- processing fees
- origination fees
- documentation fees
- underwriting fees
- processing fees
- document prep costs
Lender costs and fees are disclosed on the Loan Estimate and Closing Disclosure.
What Are Third-Party Charges On Home Purchase Transactions On FHA Loans
The second category of closing costs is third-party charges. Third-party closing costs are fees and costs that the mortgage lender has nothing to do with such as the following:
- title charges
- attorneys fees
- transfer taxes
- intangible county taxes
- recording fees
- other third party charges associated with the home purchase or refinance mortgage
Closing costs vary on the county the property is located and the type of property.
Sellers Concession Towards Buyers Closing Costs
It is always recommended that a home buyer try to get a seller’s concession towards a buyer’s closing costs.
- With a sellers concession, a home buyer can cover most or all of their closing costs
- However, buyers can not have excess sellers concession
- If buyers have extra sellers concession, then the excess will need to go back to the seller
- A home seller cannot give the extra sellers concession to the home buyer in the form of cash or credit
- A home buyer needs to use all of the sellers’ concessions he or she receives
- Sellers concessions can be used for discount points
- Discount points are fees mortgage lenders charge to borrowers buying down their mortgage rates
In the event there are excess sellers concessions, most lenders will advise borrowers to buy down mortgage interest rates.
Cash To Close
Figures on Loan Estimates are often overly disclosed and are not the exact figures required by borrowers. After the mortgage underwriter issues a clear to close, the mortgage company closing department will prep docs and disclosures. The exact figure on how much borrowers will need to bring to closing is called cash to close. This will be disclosed on the final CD and this is the number of money borrowers needs to bring to the closing table.
Closing Costs On Home Purchase And Refinance Transactions
Home Closing Costs On Property Purchase And Refinance Mortgage Loans: Once home buyers have decided they want to become a homeowner, there are a lot of things and factors to consider.
- Most folks do not buy homes often
- Most buyers just buy a home and live in the home they purchase most of their lives
- They raise their children and family
- Buying a home is not like buying any other high ticket merchandise
- A home is many people’s single largest investment for most folks
- The home buying process is not easy, especially when it comes to obtaining a home loan
- Buyers need to understand that the down payment on a home purchase is the not only cost they will incur for a home purchase
- All home purchase and refinance transactions have home closing costs
- Closing costs are costs and fees borrowers will incur with buying and/or refinancing a home
In this article, we will discuss and cover Closing Costs On Home Purchase And Refinance Transactions.
Examples Of Closing Costs On Home Purchase And Refinance Transactions
Examples of some home closing costs are the following:
- origination fees
- credit-reporting fees
- title charges
- attorneys fees
- appraisal fees
- home inspection fees
- pre-paid (escrows required and mandated by lenders)
Homebuyers and homeowners who are planning on refinancing their current home mortgage need to also prepare for home closing costs which can add up.
- Closing costs are not like a down payment on a home purchase which is a fixed percentage amount
- Closing costs vary upon where buyers are buying
Each county and state have different costs when it comes to transfer stamps, recording fees, and other third-party fees and costs.
What Are Closing Costs?
Closing costs are costs and fees a home buyer and/or homeowner who is refinancing their home mortgage needs to pay when closing on their home loan.
- Closing costs are fees and costs that are charged by lenders and third-party vendors such as title companies, attorneys, home appraisers, home inspectors
- The home closing is when the title to the property is transferred to the home buyer from the seller
- Either the home buyer and/or the home seller or both are responsible for paying the closing costs
- On every closing, there are closing costs that the home buyers are responsible for and costs sellers are responsible
The home buyer needs to come up with the down payment as well as the closing costs at the closing table.
Fees And Costs That Is Included In Closing Costs
It is very simple to calculate the down payment on a home purchase:
- This is because the mortgage loan program requires a minimum down payment requirements on a home purchase
- For example, the minimum down payment requirement on FHA loans is a 3.5% down payment
- On a $100,000 home purchase, it is easy to calculate the 3.5% down payment on the home purchase, which is $3,500
- However, it is harder to determine closing costs on a home purchase
- This is because closing costs are based on where the property is located and the type of property
Every county and state has different charges on closing costs such as transfer stamps, recording fees, and other fees and costs.
Common Closing Costs
Examples of closing costs include but are not limited to the following:
- origination charges
- credit-reporting fees
- processing fees
- underwriting fees
- home inspection fees
- home appraisal costs
- survey fees
- title insurance fees
- title search charges
- homeowners insurance (homeowners insurance needs to be paid upfront for the one year)
- attorneys and legal fees
- well inspection costs
- pest inspection fees
- escrow deposit hold back
- other fees and costs that may apply
How Much Are Closing Costs on FHA Loans?
As mentioned in the previous paragraph, it is hard to determine what the exact closing costs will be until further down the mortgage approval process. Most loan originators can estimate the approximate closing costs. But cannot get the exact amount until the mortgage processor gets all of the numbers from the title company. In general, buyers can estimate their closing costs to be anywhere between 3% to 5% of the home purchase amount. On a $100,000 home purchase, closing costs can range between $2,000 to $5,000. The lender will issue a Loan Estimate Form. The Loan Estimate is the mortgage disclosure that replaced the Good Faith Estimate on October 3rd, 2015. By law, all lenders need to disclose the list of fees and costs borrowers may incur during the mortgage loan application and approval process. The closing costs listed on the Loan Estimate Form are often overly disclosed. The figures for the closing costs will not be accurate. Lenders are allowed to overly disclose but not under disclose on The Loan Estimate Form.
What If I Do Not Have Funds To Cover Closing Costs on FHA Loans?
There are many qualified buyers who are making a decent income, have the down payment for their home purchase, can afford the monthly proposed housing expenses but do not have the closing costs. Situations like these are very common where a home buyer is currently paying $1,500 per month in rent and their new proposed housing payment including property taxes and homeowners insurance will be $1,500. They have the down payment but do not have the extra funds to come up with the closing costs on their new home purchase. The solution to this problem is closing costs can be covered by the home seller with a seller’s concession toward home buyers closing costs.
Can The Seller Contribute Towards Homebuyers Closing Costs on FHA Loans
Sellers concessions are where the home sellers will cover most or all of the closing costs for the home buyer:
- How this concept works is let’s say a home seller wants a bottom-line price of $100,000 for their home
- The home seller can inflate the purchase price to $106,000
- Both the home buyer and home seller can agree with the $106,000 purchase price
- The seller can give the home buyer a $6,000 sellers concession towards the home buyer closing costs
- Homebuyers can cover all of their closing costs with a sellers concession
- But cannot use the sellers concessions towards their down payment
- Another way of covering closing costs is through Lenders Credit Towards Buyers Closing Costs
How this works is where lenders will cover part or most of the borrowers closing costs in lieu of a higher mortgage rate.
Closing Costs on FHA Loans On Refinance
Mortgage Refinance Closing Costs And How It Is Paid:
- Refinancing is almost at a historical high
- More and more homeowners are refinancing their mortgages due to record low mortgage rates
- Last year in 2018, mortgage rates were at an all-time high since the 2008 Great Recession
- However, rates started plummeting starting the beginning of 2019
- The Feds have cut rates for the first time in 11 years
- The Federal Reserve Board cut rates twice in 2019 and may continue to do so
- Mortgage Rates are at a three-year low
- Mortgage rates today are over 1.0% lower than it was one year ago
- Some homeowners have refinanced multiple times in the past few years
- However, there are Closing Costs every time a borrower refinances
In this article, we will cover and discuss Mortgage Refinance Closing Costs.
What Does It Mean To Refinance
Refinancing is when a homeowner with a mortgage pays off the outstanding balance with a new mortgage due to one reason and/or another. The existing mortgage is paid off with a new mortgage. The homeowner is responsible for the new principal and interest with the new mortgage. Refinance Closing Costs depend on many factors. It will cost borrowers money every time they refinance. We will cover the various reasons why homeowners refinance and the net tangible benefits. The majority of homeowners refinance to save long-term interest costs and to lower their monthly payments. By refinancing a high-mortgage rate loan to a lower rate mortgage, it can save tens of thousands of dollars in interest expense.
Closing Costs on FHA Loans: Is There Such A Thing As No-Cost Mortgage Refinance
Is there such a thing as a no-cost refinance mortgage?
- The blunt answer is no
- There is nothing for free in the mortgage world
- Many lenders advertise no-cost refinance mortgages
- What this means is the borrower does not have to pay any upfront mortgage to refinance closing costs
Borrowers can pay discount points and upfront closing costs and get lower rates on refinance transactions.
Reasons Why Homeowners Refinance
There are many reasons why homeowners refinance. The most common reason to refinance is to save money by paying off the existing high-interest rate mortgage with a new lower-rate loan when rates are low. Other reasons are when you need to take out a co-borrower. Non-occupant co-borrowers can be taken off the existing loan by paying it off with a new loan via refinancing. Cases, when joint borrowers go through a divorce, are another common reason why homeowners refinance. Many homeowners with FHA Loans refinance to Conventional Mortgages to eliminate the FHA MIP. Homeowners with non-QM Loans or other mortgages with high rates often refinance to conventional loans when they meet Conforming Guidelines. Homeowners with equity in their homes can refinance and get a cash-out refinance mortgage.
Pre-Payment Penalty On Existing Mortgages
Pre-payment penalties used to be very common prior to the 2008 Housing Collapse. However, it is illegal to have pre-payment penalties on owner-occupant mortgages. It is legal to have pre-payment penalties on investment property loans. Most investment real estate loans have pre-payment penalties for the first three years. Common penalties are borrowers will get charged 3% the first year they pay off their investment home loans. 2% if they pay it off in the second year. 1% if they pay off the loan in the third year. After the fourth year, the pre-payment penalties are usually waived.
Common Refinance Closing Costs on FHA Loans
Every lender has different mortgage refinance closing costs. The following are typical refinance mortgage closing costs:
- Application and/or origination fees
- Credit report fee
- Discount points
- Pre-paid which are escrows held by the lender of homeowners insurance and property taxes
- Appraisal fee
- One year homeowners insurance
- Inspection fees
- Processing fee
- Underwriting fee
- Title charges
- Recording fees
- Transfer stamps
- Inspection fees
- Other third-party fees and/or costs
Closing costs vary from city to city, county to county, and state to state. Closing costs are more expensive in some areas than others. Lenders can exempt certain costs and can eat it for rate shoppers. Refinance closing costs can either be paid upfront and/or through a lender credit. To get a lender credit, the mortgage rates will be higher. Homebuyers needing to get pre-approved with a direct national lender no mortgage lender overlays, please contact us at Gustan Cho Associates at 1-800-900-8569 or text us for a faster response. Borrowers can also email us at firstname.lastname@example.org. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.
January 2, 2022 - 14 min read