Although there are costs involved in co-signing with the government, it does allow people with less than perfect credit to get an FHA home loan in a situation where the banks would have rejected them otherwise. Currently the requirement even for FHA loans is a credit score of at least 640. FHA allows you more than that. It means you can get up to 97% of the appraised value of a home with traditional FHA loans rather than the 80-90% limit most banks impose on conventional loans, and a rate that you couldn’t get otherwise without perfect credit. FHA loans are often the best or only solution for people with not much equity or less than stellar credit. But the fee structures on FHA loans are similar to conventional loans.
The big question is what costs will you need to pay?
Bank fees can range anywhere from about $1100 to $5000 depending on the size of the loan and the terms worked out. There are fixed fees that usually amount to about $1100 and then it is common for there to be a loan origination fee of at least 1% of the loan amount.
Title and escrow fees are fees charged by the title company and vary from state to state. It is common for these fees to tally $1000-2000. The larger the loan, the larger the title and escrow fees.
Another cost are pre-paid items which are pre-payments on property taxes and homeowners insurance. FHA insists that taxes and insurance be included in the escrow account and paid monthly. While these aren’t fees (since you are simply paying ahead on taxes and insurance) they do need to be added to the loan amount or otherwise paid in advance.
Finally, there is a 1.75% mortgage insurance premium that Uncle Sam requires in exchange for essentially co-signing on your FHA loan. This mortgage insurance premium (along with the mandatory monthly mortgage insurance fees) helps keep the FHA solvent and able to pay the banks back when FHA borrowers default on their loans. This fee does not apply to conforming loans refinanced under the Homeowner Affordability and Stability Plan.
So as an example you should expect fees on an FHA loan of about $150,000 to look something like this: ~$2500 in bank fees, ~$1200 in title fees, ~$1300 in prepaid items, and ~$2625 for the upfront FHA mortgage insurance premium.
That adds up to more than $7500 added to the overall loan amount after the refinance. Be prepared for balance increases as you look to refinance.
Of course the positives of refinancing into a fixed-rate FHA loan often far outweigh the negatives of a slightly higher mortgage balance. If you are in an adjustable rate mortgage (ARM) that is about to shoot up or just in a bad loan in general you can often lower your monthly payments by hundreds of dollars. Not only does a lower monthly payment ease your month to month burden but you will usually save a lot of money in the long run in spite of the refinance fees discussed here. As a general rule, the longer you plan to stay in your home the more sense getting a refinance makes.
Now what? Contact someone who can help you get started in the process and can get FHA loans done in as little as Ten Days!
