You can refinance or buy a home using the Federal Housing Administration's insurance program if you have low to moderate income or credit challenges. An FHA borrower pays fees to escrow, title and the lender. He must establish an impound account, which the lender requires for tax and insurance payments. The fees, known as closing costs, also include prepaid items such as mortgage interest.
An FHA-insured loan requires a down payment of 3.5 percent on a purchase transaction. On a refinance transaction, FHA allows you to borrow as much as 97.75 percent of your home's value. Purchases and refinances involve closing costs. The amount you pay for prepaid closing costs depends on the time of month and year the transaction closes. The lender and escrow agent estimate the costs based on projected closing dates.
You begin to pay for the FHA loan on the closing date. The lender requires you to prepay the loan interest through the end of the month in which you close. If you have an estimated closing date of Jan. 15, for example, you owe 16 days worth of loan interest. The lender must inform you of all estimated loan costs within three days of your loan application using a so-called good faith estimate. The actual amount you prepay at closing is shown in Section 900 of the final settlement statement, or the HUD-1 form. Federal law requires the accurate disclosure of all closing costs on a HUD-1 before closing.
FHA loans require mortgage insurance, with the exception of loans that have been paid down to 78 percent of the loan balance. FHA pools the mortgage insurance it collects from borrowers and uses the money to pay lender claims after default. The lender requires you to prepay the first month of mortgage insurance. FHA also requires you to get homeowners insurance, which covers damage to the property caused by fire, vandalism and certain inclement weather. You must prepay the first year of the homeowners insurance policy at closing.
You become responsible for property taxes on the closing date. Before purchasing the home, the seller may have prepaid several months' worth of property taxes. At closing, the escrow agent calculates how much of that prepaid amount you must reimburse the seller because he owes only for the time period in which he owned the home. The prepaid amount is based on the previous tax year's assessed value and may be less than what you pay in the future, because of reassessments and changes in property values.
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