February 29, 2024
If you want to buy a home using an FHA mortgage, the required minimum cash to close is one of the things you must plan and save for in the beginning stages of the loan. Some view the rates and costs as being separate…at first.
Some borrowers quickly learn that FHA loan closing costs and the interest rate your lender offers may be more related than they realize. Much depends on which options the borrower decides to pursue.
FHA Home Loan Closing Costs
Your FHA loan cash-to-close requirements include the lender’s fee, your down payment, and other expenses such as the upfront mortgage insurance premium.
Some costs you can finance. One is the FHA upfront mortgage insurance premium. Other expenses cannot be added to the loan amount.
That said, a lender may offer you the option of choosing a “no closing cost” mortgage.
No Closing Cost Mortgages Explained
What’s a no-closing-cost mortgage? A home loan is where the borrower’s closing costs are paid by the lender. The borrower agrees to a higher interest rate, which is what makes up for the lender’s payment. The borrower, in turn, pays no closing costs.
Such an arrangement may make for a more expensive mortgage. But that is more expensive over the long haul rather than pricey up front.
Closing Costs Are Separate From Your FHA Loan Down Payment
Some borrowers read the phrase “cash to close” and wonder if that includes the down payment. Some wonder if the closing costs not applied toward the down payment might count towards it.
FHA loan rules require the borrower to make a low 3.5% minimum down payment. Your other cash paid to close does not count toward this amount.
Cash to close and down payment money are both paid at the same time, but money down is not part of the other cash needed to close and vice versa.
Down payment funds can be supplemented with down payment assistance from approved sources. Your lender cannot help you with the down payment.
Higher Home Loan Rates
When the lender agrees to raise your interest rate (so there are no costs paid at closing), you will pay more over the lifetime of the mortgage due to that higher interest.
Do you want to keep your home for a long time? If so, it may help to consider lowering the higher rate by talking to your lender about paying discount points. Buying points can reduce your loan rate and help you save money on interest payments over the full term of the mortgage.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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