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How FHA Closing Costs Work in California: an Overview
Home buyers in California tend to have a lot of questions about the FHA loan program, and also about closing costs. Today, we’re going to combine these two subjects, with an explanation of how closing costs work on an FHA-insured mortgage loan.
Here’s the short version. If you use an FHA loan to buy a house in California, you will probably have to pay closing costs as well. Generally speaking, these fees and charges can range from 3% to 5% of the loan amount. Those numbers are not set in stone, but they do give you a frame of reference for budgeting purposes.
What Is an FHA loan?
Let’s start with a quick overview of what this program is and how it works. An FHA loan is simply a mortgage loan that gets insured by the federal government, under the direction of the Federal Housing Administration (FHA).
The government insurance backing is what sets this program apart from regular or conventional loans, which do not receive government insurance. The insurance protects lenders from instances of borrower default. Because of this, lenders can offer more flexible qualification criteria for borrowers seeking an FHA loan.
What Are Closing Costs?
When you take out a mortgage loan to buy a house in California, you will receive a variety of services from many different individuals and organizations. For instance, you will likely have a home appraisal, credit check, mortgage loan processing, document recording, escrow services, etc.
All of these service providers and entities charge fees for their services. Collectively, these charges are referred to as closing costs. These are the costs you have to pay in order to close on home and take ownership of it.
Common Costs Associated With FHA Loans
Though there are some key differences between FHA and conventional loans, many of the closing costs are the same between these two different types of mortgages. If you use an FHA loan to buy a home in California, you will likely encounter some or all of the following costs:
- Appraisal Fee: An appraisal is required to determine the value of the property being purchased. The cost of an appraisal can range from $300 to $500, depending on the location and the complexity of the property.
- Credit Report Fee: Lenders require a credit report to determine the borrower’s creditworthiness. The cost of a credit report can range from $30 to $50.
- Origination Fee: This fee is charged by the lender for processing the mortgage application. The origination fee can range from 0.5% to 1% of the loan amount.
- Title Insurance: Title insurance protects the lender and the borrower from any title defects or claims that may arise. The cost of title insurance can range from $500 to $1,000.
- Recording Fee: This fee is charged by the government to record the mortgage documents. The cost of recording fees can vary by location and typically range from $25 to $250.
- Home Inspection Fee: A home inspection is not required for an FHA loan, but it is highly recommended. The cost of a home inspection can range from $300 to $500. Home buyers usually pay for these inspections at the time they are performed, as opposed to rolling them into the closing costs. We’ve included it in this list since it’s another one of the fees and charges you will encounter.
- Mortgage Insurance Premium (MIP): FHA loans require mortgage insurance to protect the lender in case the borrower defaults on the loan. The MIP can be paid upfront at closing or added to the monthly mortgage payment. The cost of MIP varies depending on the loan amount and the length of the mortgage.
These are just some of the typical closing costs associated with an FHA loan in California. You might encounter additional fees based on the specifics of your home loan and real estate transaction.
How Much Does It All Add Up to?
As mentioned earlier, FHA closing costs for home buyers in California typically range from 3% to 5% of the loan amount. But your costs might fall outside of this range for number of reasons. The good news is you will receive notice in advance, so you can prepare accordingly.
When you apply for an FHA loan (or any other type of mortgage program), you will receive an estimate of the closing costs that will be due on the day you close. Later on, as that day gets close, you will receive a finalized list of costs as well as the total amount due. This is the amount you will need to bring to your closing, in the form of a cashier’s check or wire transfer.
Have Questions About This Program?
The FHA loan process can be a bit confusing for first-time home buyers. That’s because there are multiple parties involved, including the government. That’s why we work hard to educate consumers about the different types of home loans that are available in California. We publish many articles right here on our blog, to help you make a more informed decision.
If you have specific questions about using an FHA loan, closing costs, or the mortgage process in general, please contact our staff. We are located in San Francisco Bay Area but serve the entire state of California. And we look forward to working with you!