Whether you’re buying or selling a home, sorting out how much it’s going to cost you is no small feat. In addition to the price of the home itself, loan and lender fees, agent commissions, and other costs are tacked on at closing. Keep reading to find out what fees you can expect to encounter with an FHA loan and learn who pays for what.
Benefits of an FHA Loan:
Before we jump into fees, let’s talk about why FHA loans are a popular option among buyers. An FHA loan is a mortgage that’s insured by the Federal Housing Administration. Borrowers who take out an FHA loan pay for mortgage insurance, which is in place to protect their lender from a loss if the borrower defaults on a loan.
Since the loan is insured, FHA approved lenders offer attractive interest rates and more flexible borrower requirements. These loans are available to borrowers with less than stellar credit and have lower down payment requirements. Much like government-funded student loans, FHA loans have built-in protections for buyers facing financial hardship. This includes forbearance, loan modifications, and payment deferrals.
FHA Loan Fees:
There are a number of FHA loan fees buyers need to consider to before committing to this type of loan:
1. Loan Origination Fee
This is the fee a mortgage lender charges to cover their administrative costs (application processing and closing document preparation). An employee or independent broker manages the details, and the fee covers the cost of labor. It’s paid the the borrower and is not exclusive to an FHA loan.
With certain FHA loans, like reverse mortgages and rehab loans, regulations require that the origination fee be 1% or less than the principal amount borrowed. That means if you were to borrow $200,000 – your loan origination fee would be $2,000 or less. However, with the most common type of FHA loan, lenders are required to follow the Real Estate Settlement Procedures Act, aka RESPA. This act states that origination fees must be reasonable based on what other lenders in the same area are charging.
2. Upfront & Annual Mortgage Insurance Premiums
Two mortgage insurance premiums are required on all FHA loans. The first is called an upfront premium, and it is equal to 1.75% of the total loan amount. That equates to $1,750 on a $100,000 loan. This is paid when the borrower gets the loan but can be processed as part of the loan.
The second portion is called the annual mortgage insurance premium. The name is a little confusing because although it’s called an “annual” premium, it’s processed monthly – similar to many car or homeowner’s insurance plans. The amount varies based on the length of the loan and on the loan-to-value ratio and is disclosed to buyers by their lender.
4. Optional 203(k) Loan
If you need money to pay for home renovations, you can take out an option 203(k) loan. This loan allows you to finance up to $35,000 to make home repairs, such as painting or replacing cabinets. It does not allow you to make structural changes to your home. One of the biggest benefits of a 203(k) loan is the loan amount is based on the projected value of the property after repairs, not the current market value of the home.
Rules and Regulations:
In an FHA loan, the seller may offer to pay closing costs – including appraisal, credit report or title expenses – for the buyer in any amount. However, the dollar amount is not to exceed 6% of the sale price. If it does, it is considered an “inducement to purchase,” and the FHA will lower the amount of the mortgage respectively, dollar by dollar, for the amount contributed over 6%. An additional stipulation is the 6% or less contributed must cover actual closing costs, discount points, or interest rate buy-downs. For example, if closing and other costs total $5,000, the seller can’t offer to pay $8,000 in closing costs.
Additional Seller Closing Costs:
In addition to contributing to buyer closing costs, which is optional, sellers also have fees of their own to pay. These fees include real estate agent commissions (just the buyer’s agent if you list with HomeBay!) and a variety of other fees, which are explained here.
It’s important to understand what costs and fees are associated with different types of mortgage loans before you buy or sell a property. Now that you know what to expect from an FHA loan, you can head into your real estate transaction with confidence!