The Fees And Expenses Associated With An FHA Loan

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For prospective homebuyers with a less-than-stellar credit history or limited funds, an FHA mortgage is a fantastic option. FHA loans require a credit score of at least 580 and have a higher maximum debt-to-income ratio than traditional mortgages. Though FHA mortgages are considered an affordable loan, it is still vital for prospective applicants to understand the associated fees and expenses so they can budget accordingly.

The Down Payment

When using an FHA mortgage, you need to have a down payment amount equal to 3.5 percent of the home's purchase price. For a home that sells for $200,000, 3.5 percent of this amount is $7,000. Considering that conventional mortgages usually demand a down payment of 5 to 20 percent of the loan amount, this makes an FHA loan extremely affordable.

Borrowers generally must use their own money to pay the down payment, but grants from approved programs and gifts from relatives may also be used.

Upfront Mortgage Insurance Premium

The upfront mortgage insurance premium must be paid when the borrower closes on the mortgage. It applies when borrowers have a down payment that is less than 20 percent of the home's purchase price. Upfront mortgage insurance is 1.75 percent of the amount of the mortgage. A mortgage amount of $200,000 has an upfront mortgage insurance premium of $3,500.

Borrowers are able to roll the full amount of the upfront mortgage insurance premium into their loan, or they can pay it using their own cash. The ability to finance this insurance premium is a terrific feature for individuals with limited cash assets.

Annual Mortgage Insurance Premium

In addition to the upfront mortgage insurance premium, FHA loans have an annual insurance premium for homes bought with a down payment under 20 percent. The annual mortgage insurance premium is variable; factors that influence the premium are the mortgage length, the mortgage's loan-to-value ratio, and the size of the mortgage. Borrowers pay a portion of this insurance each month when they make their mortgage payment.

Closing Costs

Every home transaction includes closing costs. These expenses are associated with both the mortgage and with transferring ownership of the property. Closing costs when buying a home vary from 2 to 5 percent of the home's selling price. A home that sells for $200,000 would have closing costs that vary from $4,000 to $10,000.

FHA mortgage guidelines permit the seller of a home to pay the buyer's closing costs as a part of the terms for selling the home.

FHA mortgages help make home ownership possible for individuals who otherwise would not be approved for a loan or would not be able to afford the expenses of a traditional mortgage. Researching the costs associated with an FHA loan is an excellent way for prospective homeowners to understand the financial resources needed to purchase a home. You can get more information about FHA loans by contacting a company like Western Ohio Mortgage.