Are FHA Closing Costs More Than Conventional?
When considering home financing, particularly through Federal Housing Administration (FHA) or conventional loans, many first-time homebuyers often wonder about the differences in closing costs. This article provides a comprehensive comparison, breaking down each component and explaining how these costs can vary.
Understanding Closing Costs
Both FHA and conventional loans come with a set of closing costs, which include various fees, insurance, and prepaid items. However, the details and specifics of these costs can differ, especially when it comes to the type of mortgage insurance premiums and down payment requirements.
FHA Loan Costs: Breaking Down the Details
One distinctive feature of FHA loans is the inclusion of an Upfront Mortgage Insurance Premium (UFMIP). This is a one-time cost that can be quite significant and is required for FHA mortgages. The UFMIP is calculated as 1.75% of the loan amount, and it is an essential closing cost for FHA borrowers.
Additionally, FHA loans typically require a minimum down payment of 3.5%, although this can change depending on the specific circumstances. Another factor to consider is that UFMIP can be financed into the loan, making it less of an initial out-of-pocket expense for many borrowers.
For conventional loans, the down payment requirements vary. While you can indeed secure a conventional mortgage with a 3% down payment if you are a first-time homebuyer, this becomes 5% if you are not. This means that the upfront financial commitment can be significantly different between the two loan types.
Variations in Closing Costs
Despite the mentioned differences, the actual closing costs for both FHA and conventional loans can be remarkably similar. Both types of loans attract various fees, such as origination fees, appraisal fees, attorney fees, and recording fees, which are typically the same. These costs pertain to the process of finalizing the loan and ensuring all legal requirements are met.
Financing the UFMIP and Its Impact
A key point to consider is the financing of UFMIP. If UFMIP is part of your closing costs, it can be difficult to cover, especially for first-time homebuyers. However, the FHA allows you to finance this cost into the loan, which means you can spread the cost over a longer period. Approximately 90-95% of FIH borrowers choose this option, opting to pay the UFMIP through mortgage payments rather than as a one-time expense.
Conclusion: Making an Informed Decision
While FHA and conventional loans share many similarities when it comes to closing costs, they do have distinct differences. The inclusion of UFMIP in FHA loans can make the overall cost seem higher, but the ability to finance this cost into the loan can mitigate this concern. Whether you opt for an FHA or conventional loan should depend on your financial situation and long-term goals. Consulting with a mortgage professional, like Martin Straka, NMLS #589189, can provide you with the best advice tailored to your specific needs.