When getting ready to buy a new home, you may not realize the impact that FHA closing costs can have. However, when comparing different loans you may find out that you will be paying more. Closing costs on a mortgage loan is simply the difference between what you will pay for closing and the amount that is left to cover your closing costs. Closing costs are calculated as the amount of money that you will pay to close your mortgage loan. The closing cost typically includes appraisal, insurance, and title, and bank fees.
On virtually every mortgage transaction there are closing costs involved. Whether they are refinance mortgage deals or home purchase, there is always additional closing fees associated with such transactions. Many first time home purchasers don’t have an understanding of all the various fees and costs that are charged by their potential lenders. Lenders do these costs according to their policies and guidelines. However, when working with a potential lender, it is wise to have an understanding of these fees and policy before signing any type of agreement.
In general, closing costs vary among mortgage lenders. Most lending institutions charge these fees along with title, appraisal, and insurance. In most cases, the lender charges a one time set up fee, and then the remainder of the fees will be paid by the purchaser at closing. Many borrowers don’t realize that some closing costs will actually be reimbursed by their mortgage lender. If you inquire with your mortgage lender about any other fees or charges that are incurred at closing, this will help you avoid any surprises at the time of closing.
There are three basic types of closing costs. One is the upfront fee paid by the borrower to their mortgage insurance company, called “closed in” closing costs. Another is what is commonly referred to as “additional closing expenses,” which is described as a fee paid by the buyer for items that the lender will reimburse them for. And finally, there is the third type of closing cost, known as ” incidental closing expenses,” which is defined as any other fees due to the third-party fees mentioned above.
As you understand the fees due from the mortgage origination process, you can budget to avoid them. In many cases, borrowers overestimate the total amount of their closing costs. Consequently, they pay more than they need to for their FHA loan. Borrowers can avoid under paying for their FHA loan origination fees by asking their mortgage broker if they can include one or more of the following closing expenses in the mortgage loan: title fees, appraisal fees, and survey fees. If the lender’s rate sheets only show one or two of the three items, it may be possible to inflate the costs by as much as 50%. With careful budgeting and communication, however, borrowers can learn how to trim these fees without reducing the value of their FHA loan.
The second method used by borrowers to reduce FHA closing costs is to overestimate the value of the home that they plan to buy. This strategy works because most lenders will penalize borrowers for an underestimate of the value of the property. If a borrower estimates the home worth too high, the lender will require more funds upfront to cover the additional costs. When this happens, borrowers find out that they have spent more on their origination fees than on the actual mortgage itself.
The third method to reduce FHA loan closing costs is to inflate the appraised value of the home to make up for the under estimated mortgage loan. To do this, borrowers must use a formula based on similar homes in the area that have recently sold. Unfortunately, there is no easy way to determine the appraisal value of your new home accurately; this method makes it nearly impossible to accurately determine if the appraisal is too high or too low.
Borrowers who are stuck with an under-estimated loan estimate or an appraisal that is too high may not be able to refinance their FHA loan because lenders require full disclosure of all costs incurred during the underwriting process. This means that borrowers may not know what their closing disclosure will cost them until they get their final quote. In many cases, borrowers will have to pay additional origination fees to get their quote back.