FHA Home Loan Closing Cost Options
What is a borrower to do when there is a need to reduce up front costs while still getting an FHA mortgage?
Decisions to Be Made
When planning for your mortgage, it’s important to do the math on how much your loan will cost over the longest term of the loan--the full term, the halfway mark, etc.
The reason it’s important to calculate the cost at the halfway mark and at other milestone moments? You’ll want to know what happens if you sell or refinance your loan at those points instead of carrying the original loan to its full term.
Short-Term Financial Goals Versus Long-Term Planning
If you need to save more money at the beginning of your homeowner journey, you may wish to consider rolling allowable closing costs into the mortgage (such as the Up-Front Mortgage Insurance Premium) and making the lowest down payment possible.
This will increase the amount of the monthly mortgage payment which is another reason why you will need to run the numbers--with and without the amount of the closing costs included into the loan.
Seller-Paid Closing Costs
With FHA mortgages, you have the option of negotiating with the seller to have them pay up to six percent of the closing costs on your mortgage. Any amount over the six percent limit (based on the value of the home) is considered an “inducement to purchase” and results in a dollar-for-dollar reduction in the loan amount for any money above the six percent limit.
Some are leery of asking the seller to do this as it makes the house purchase offer less “clean”, but some borrowers may feel the need to explore this option. Be sure to understand just how much the seller is allowed to contribute based on the sale price of the home.
Some borrowers will want to spend more money up front to reduce the interest rate via a purchase of discount points on the mortgage. This is an option borrowers should not explore if they are planning to sell the house at some point and not remain in the home over the entire term of the loan--discount points save money over the duration of the mortgage thanks to lower interest rates but those who sell fairly early in the loan won’t reap the benefit of those discount points the way a long-term homeowner would.
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