The Federal Housing Administration (FHA) notes that these costs can vary greatly and are typically 2 to 5 percent of the loan amount. For those looking to save money on their closing costs, FHA loans can offer some unique advantages.
Generally speaking, closing costs are fees charged by lenders at the time of purchase to cover the costs associated with obtaining a mortgage loan. These fees can include lender and third-party fees, such as appraisal and credit report costs, as well as title insurance and other related fees. In addition, closing costs also include other fees involved in the transfer of a property, such as transfer taxes and recording fees. For FHA loans, borrowers must pay an upfront mortgage insurance premium, or MIP, which is a one-time fee equivalent to 1.75 percent of the mortgage loan amount.
One of the primary benefits of FHA loans is that they allow borrowers to finance their closing costs. This means that buyers can roll the closing costs into their loan amount and not have to pay them out-of-pocket. This is especially useful for first-time homebuyers with limited funds available. Additionally, borrowers can also use gift funds, including family member contributions, for the mortgage down payment or closing costs.
Another advantage of FHA loans is that the closing costs are typically lower than those associated with conventional loans. This is because FHA lenders often pass on the savings they receive through reduced origination or processing fees. Closing costs can vary significantly, so it’s important to consult with multiple lenders to determine which one offers the best terms.
Finally, FHA loans also come with a few additional benefits, such as the fact that they are readily available to those with less-than-stellar credit scores. Borrowers with a credit score of 580 or higher will only need to put down a 3.5 percent down payment. Additionally, some lenders may be willing to work with borrowers who have a slightly lower credit score if they are able to provide a larger down payment.
In summary, FHA loans can provide significant advantages to prospective homebuyers, as they can help lower closing costs and are available to those with less-than-ideal credit. Borrowers are likely to benefit from shopping around to find the lender that offers the most competitive rates and fees. Additionally, it is important to bear in mind that when calculating closing costs, borrowers must consider the upfront MIP payment as well as any related third-party fees. With careful planning and research, borrowers can take advantage of the benefits that FHA loans provide.
This article was contributed on Nov 30, 2023
