FHA (Federal Housing Administration) loans are government insured loans issued to homebuyers, designed to help just about anyone enjoy the benefits of home ownership. They are popular with consumers because of their fair market rates, low down payment requirements and less stringent credit restrictions. However, FHA loans are far from a homebuyer’s idea of a free ride, there are multiple fees associated with buying any home, even under the FHA umbrella.
Earnest money – Earnest money is a deposit made when you put a contract in on a property. This fee shows you have some “skin in the game” and accounts for part of your down payment. Expect most earnest money deposits to be one percent of the sales price of the property.
Example: A property priced at $100,000 would have a $1,000 earnest money deposit due at time of contract.
Talk to your real estate broker about earnest money deposit details.
Down payment – FHA minimum down payments are 3.5 percent of the purchase price. This amount is payable at closing.
Example: A property priced at $100,000 requires a minimum down payment of $3,500. If you deduct the escrow fee (earnest money deposit) from the above example, the buyer pays $2,500 down at closing.
Closing costs – Closing costs are comprised of a variety of fees: homeowner’s association dues, insurance, property taxes, loan origination fees and several other items. Added together, these fees typically account for two to six percent of the sales price -also due at closing.
Using the above example, closing costs on a $100,000 property would range from $2,000 to $6,000. This is in addition to your down payment.
Appraisal – Your lender and FHA require an appraisal. This is an independent opinion of value performed on the property by a licensed professional, designed to insure that the bank isn’t loaning more money than the house is worth. Appraisal fees vary based on location, home age, type and size, but the average cost is $350. This fee is paid directly to the appraiser, before closing, and is the buyer’s responsibility.
Inspection – Home inspections are voluntary, but highly recommended by most real estate professionals. Most home inspections cost $400 and up, and similar to the appraisal fee, this is a fee paid outside of closing, directly to the inspector.
Mortgage Insurance – While upfront mortgage insurance is written into your closing cost assessment, mortgage insurance becomes a monthly fee, added into your payment, and is payable until you reach at least 20 percent equity in your home. This fee varies, but is usually 0.5 percent of your annual mortgage amount.
Talk to your lender about the specifics of mortgage insurance and how it will affect your payment.
Before shopping for a home, it is important to have your financial ducks in a row. Knowing what to expect at the closing table takes the mystery out of a very emotionally charged transaction.