FHA 203k Loan Closing Costs
If you want to purchase a home and renovate it using a 203k loan, paying closing costs might not be the first thing on your mind. However, since 203k closing costs can often reach up to 5% of a home’s sale price, it’s wise to take some time to learn how much they could cost you. Below, we’ll review some of the most common closing costs for FHA loans. Then, we’ll examine closing costs that specifically affect 203k loan borrowers.
Important Closing Costs for FHA Loans
While exact types of closing costs may vary between 203k lenders, some of the most common FHA loan closing costs include:
Appraisal fees: Just like other kinds of FHA loans, 203k loans require borrowers to order a full home appraisal for the property they’re about to purchase. Appraisal costs can vary, but are usually between $300 and $500 for most properties.
Mortgage points: Mortgage points are a way for borrowers to reduce their interest rate by paying money upfront. Most lenders charge 1% of the entire loan amount for 1 mortgage point. Each point typically reduces a loan’s interest rate by 0.125% and 0.25%.
Homeowner’s insurance: Some lenders mandate that borrowers purchase one year of homeowner’s insurance at closing.
Escrow fee: Escrow typically involves a third-party escrow company holding a buyer’s funds in place while the details of a home purchase transaction are completed. Buyers and sellers often split escrow costs, which usually involves a flat fee of about $200, as well as a commission of $2 per every $1,000 of the property sale amount.
Loan origination fee: This usually amounts to about 0.5% of the total loan amount, but can vary between different lenders.
Title search fee: Title searches are required in order to make sure that there are no competing legal claims to a property. Otherwise, a relative or spouse of a former owner may be able to claim ownership rights to your new home. This could lead to a costly legal battle. Even worse, you could actually have to hand over your new house to a stranger. Fortunately, most title searches cost $100 or less.
Title insurance: There are two major types of title insurance, owner’s title insurance, and lender’s title insurance. Owner’s title insurance protects the owner against title claims, while lender’s title insurance protects the lender. Nearly all lenders mandate that borrowers purchase a lender’s policy. Owner’s title insurance is not mandatory, but it’s an excellent idea for most owners.
Property taxes: In many cases, borrowers will have to reimburse a property seller for a pro-rated portion of the property taxes that the seller has already paid. This is because property taxes are typically paid only twice a year, so a seller may have paid taxes for several months in advance.
Transfer taxes: In order to transfer the title of a home from the seller to the buyer, transfer taxes must usually be paid to the local government. Most of the time, these will be paid by the seller, but they may be covered by the buyer in certain scenarios.
Additional Costs and Considerations with a 203(k) Loan
While you’ll likely have to pay most of those closing costs mentioned above if you’re closing on an FHA loan, we’ve also included an additional list of costs below. These costs only apply to 203k borrowers, and do not typically have to be paid by borrowers using other kinds of FHA home financing.
Contingency Reserve: One thing that surprises many would-be homebuyers is the contingency reserve required for their 203(k) loan. This can account for up to 20% of the cost of repairs. It is set aside at the beginning of the loan process and will be used for unexpected occurrences, such as mitigating mold not noticed during the inspection, or damage from a burst pipe when the contractor has already finished work. While this money is initially set aside, it can be used to pay the principal of the loan if it is not tapped into during the renovations. It can also be used to make cosmetic repairs around the house once the rest of the work is done.
Supplemental Origination Fee: Understand going into this that you are doubling or even tripling the amount of paperwork needed to obtain a loan in comparison with a 203(b) loan or a conventional home loan. This means extra effort for the lender, which must be compensated. This is done in the form of a supplemental origination fee, which is generally 1.5% of $350, whichever is larger, and can be paid upfront or can be worked into the loan.
Inspection Fees: You will have additional inspection fees with a 203(k) loan as compared to other FHA loans. You will pay $150 per inspection (and there should be two). These inspections are done to ensure that renovation work is being completed in compliance with HUD/FHA standards.
Title Update Fee: You can expect to pay an additional $150 in a title update fee, which is put in place to protect against builder liens on the property.