Are you a first-time homebuyer looking into an FHA loan? Using an FHA loan to buy a home will accumulate some costs along the way. The bundle of added fees is known as FHA closing costs. So, what are they? Let's take a look at the details.
An Overview of FHA Loans
An FHA loan is a mortgage issued by certified lenders and protected by the Federal Housing Administration (FHA). It is a great loan option for low-to-medium income borrowers with low credit scores and who may not be able to make a sizeable down payment.
As of 2018, these loans allow approved borrowers to borrow up to 96.5% of the home's value if they have a credit score of at least 580. The down payment is 3.5% compared to 10-20% with a traditional mortgage. What if your credit score is lower than 580? Not to worry! You may qualify for an FHA loan with a lower credit score (as low as 500) but must make a more substantial down payment of 10%.
The Federal Housing Administration does not lend the borrower money to take on the mortgage or to buy the house. Instead, the borrower pays monthly or annual mortgage insurance premium for the FHA to ensure the loan issued by the lending institution. The risk is low for the lender; in the case of default, the FHA would step in to cover the payments. Borrowers do not interact with the FHA when they apply for a loan. They work directly through approved lenders such as banks, mortgage banks, mortgage brokers, and credit unions. These approved lenders make sure applicants meet FHA Mortgage Program requirements.
What are FHA closing costs?
Closing costs are a fee to cover various items charged by the lender, such as credit reports and loan origination fees. Average closing costs on an FHA mortgage are between 2-5%. The borrower can typically roll the closing costs into the loan to avoid paying out of pocket. FHA closing costs can also be paid for by the seller.
Keeping Your FHA Closing Costs Low
To keep FHA closing costs low, borrowers should increase their credit score, even before applying! A better credit score will give the borrower better options. More lenders will be able to help, and the borrower will have more negotiating power. To do this you must first know your credit score. You can pull your score without hurting your credit from web apps like Credit Sesame or Credit Karma. Then pay down the balances on your credit cards. High balances will make your score suffer. Another option is to ask a friend or family member with a credit card account in good standing to add you as an authorized user. That account and all of its history will appear on your credit report and will increase your score.
The debt-to-income ratio also affects these costs because it helps lenders figure out how easy it is for you to make your monthly payments. Low the ratios equal low risk, which will help the borrower score lower closing fees.
Regardless of your credit, all borrowers should shop around! Not all lenders will offer the same deals. You can take the lender quotes back to each lender and ask them to beat the rate.
Closing costs got you down? We've got a fix for that. We'll supply you with a full-service flat fee real estate agent that is not only an expert when it comes to first time home buying but is also a killer negotiator. Want to learn more? Give us a call at 1-833-2-CLEVER or complete our online form to get connected a top-rated local agent. You won't regret it.