Your (3.5%) down payment is calculated on the selling price ($205,000).
The 3% Closing Costs could be calculated on selling price or mortgage amount. Ask you Realtor about it.
Assuming the you have an FHA mortgage, you mortgage amount will be,

$205,000
3.5% = 7,175
and if you are rolling over the Up Front Mortgage insurance, that I believe is 1.75%, please correct me anyone if I am wrong, then $1,508
So, your ESTIMATE mortgage amount will be: $199,333.

But, PLEASE, contact your Home mortgage Consultant for a detail explanation of your mortgage expenses based on the specific property and exact closing date.

For FHA loans, as long as the home appraises at your purchase price, you will finance 96.5% of the purchase price, in this case $197,825, and you will also add the Up front Mortgage Insurance Premium, which in most cases I believe is 2.25% of your loan amount or $4,451, giving you a total amount financed of approximately $202,276.

If the home does not appraise at $205,000, and instead appraises at $190,000, you will need to bring in $15,000 to start, then add 3.5% of $190,000, or $6,650, making your down payment $21650, which gives you a loan amount of $183,350, plus your Up Front Mortgage Insurance Premium of $4,125, giving you a total amount financed of approximately $187,475.