FHA loans are a great loan for borrowers with less than perfect credit. Formerly known as the ‘first-time homebuyer’s loan,’ the FHA loan is now a great loan for anyone that doesn’t qualify for conventional financing.
Aside from its flexible guidelines, the FHA loan typically has low closing costs and only requires a small down payment. Keep reading to learn more about the FHA loan and how it can help you.
FHA Loan Closing Costs
FHA loans have closing costs just like any other loans. The most common costs are as follows:
FHA loans charge upfront mortgage insurance on every loan. Right now, borrowers pay 1.75% of the loan amount at the closing. On a $200,000 loan, you’d pay $3,500. You can either pay this amount at the closing or wrap it into your loan amount. This amount gets paid directly to the FHA.
FHA loans aren’t written by the FHA. Instead, FHA-approved lenders write and fund the loans. Each lender charges its own fees, but in general, you’ll pay:
- Origination fees
- Discount points
- Underwriting fee
- Processing fee
- Rate lock fee
- Credit report fee
You pay these fees directly to the lender at the closing. The closing agent disburses the funds from the loan as well as the funds you bring to the table. You don’t directly write the lender a check, but you pay the lender for the closing fees.
Title companies must do work to get your loan closed. The lender will order a title search and require you to buy title insurance that protects the lender. Most FHA borrowers pay the following title fees:
- Title search
- Title insurance
- Notary fees
Various other third parties are involved in the processing of your loan. The fees involved include:
- Attorney fees
- Recording fees
- Courier fees
- Flood certification fees
In addition to the standard closing costs, you may have prepaid fees that you’ll need to cover. They include:
- Prepaid mortgage interest
- Real estate taxes
- Homeowner’s insurance
If you set up an escrow account (most FHA lenders require it), you may need extra money to set up the escrow account to have enough funds to pay your taxes and insurance on time.
Getting Help With the Closing Costs
Closing costs can be as much as 5% of the loan amount. If you can’t afford that amount, there are ways to get help:
- Seller concessions – The FHA allows sellers to contribute up to 6% of the sales prices toward your closing costs. Even though sellers have their own closing costs to cover, many sellers are willing to help buyers with the costs if they negotiate it into the contract.
- Gift money – The FHA allows you to receive gift funds from relatives, employers, or a charitable organization. As long as you can prove the funds’ origination and that the money is a gift and not a loan, the FHA allows it.
- Wrap the costs into your loan – If the home appraises for more than the amount you bid, you can wrap some or all of the closing costs into the loan.
Down Payment Requirements
In addition, the closing costs, you’ll need to make a down payment on the home. The FHA requires at least a 3.5% down payment on the home if you have at least a 580 credit score. On a $200,000 home, you need at least $7,000 down on the home.
If you have a credit score between 500 and 579, you will need to make a down payment of 10%. On the same $200,000 loan, you’ll need a $20,000 loan.
If you have a credit score above 580, the FHA allows you to accept gift funds for the down payment. You can accept 100% of the down payment as gift funds. In order to accept gift funds you must provide:
- A gift letter that proves the money is a gift and not a loan
- Bank statements from the donor proving ownership of the funds
If you have a credit score between 500 and 579, you must put down 3.5% of the down payment from your own money. The remaining 6.5% of the down payment, however, can be from gift funds.
The FHA has some of the most flexible guidelines regarding underwriting and down payment requirements. If you need a loan that doesn’t require perfect credit or large down payments, the FHA loan may be the perfect fit for you.