Alabama Real Estate Practice Exam

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What role do closing costs play in FHA-insured loans?

Reducing the amount of the down payment
Determining the property's market value
Finalizing the transaction with credits, debits, and prorations
Setting the interest rate on the loan

The correct answer is: Finalizing the transaction with credits, debits, and prorations

Closing costs are fees associated with a real estate transaction that are typically paid by the buyer. In FHA-insured loans, closing costs can be rolled into the loan and paid over time. They are not used to reduce the down payment, which is a separate upfront cost that the borrower is responsible for. Closing costs also do not determine the property's market value, as that is determined by an appraisal. They also do not directly set the interest rate on the loan, as that is determined by the borrower's credit and the current market conditions. Instead, closing costs are used to finalize the transaction by covering fees such as appraisal, title search, and loan origination charges, as well as prorating expenses between the buyer and seller.