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Buying a home is an exciting time, but it also involves a lot of fees called closing costs. These extra charges come on top of your down payment when you close on a mortgage. If you’re getting an FHA loan, you’ll have specific closing fees to budget for. Let’s break down what exactly FHA closing costs include and some smart strategies to lower yours.
What Are Closing Costs on an FHA Loan?
Closing costs are expenses charged by your lender and third parties for processing, underwriting and finalizing your FHA mortgage. These fees are typically 2% to 6% of the home’s purchase price.
On a $300,000 home, for example, your FHA closing costs could range from $6,000 to $18,000.
Closing costs are separate from your required FHA down payment which is at least 3.5% of the purchase price.
Three days before closing, you’ll get an official closing disclosure listing your finalized closing costs. But your lender also provides a loan estimate when you first apply to give you an idea of what to budget for FHA closing fees.
Major Categories of FHA Closing Costs
FHA closing costs generally fall into four main buckets:
- Upfront mortgage insurance premium (MIP)
- Lender fees
- Third-party fees
- Prepaid expenses
Let’s look at what each category includes.
Upfront Mortgage Insurance Premium
An upfront MIP of 1.75% of the loan amount is mandatory on all FHA loans. On a $200,000 loan, that equals a $3,500 upfront MIP.
This premium is paid at closing to the Federal Housing Administration. It provides insurance that protects the lender in case you default on the mortgage.
You’ll also pay an annual MIP that’s rolled into your monthly payments for the life of the FHA loan.
Lender Fees
Common lender fees include:
- Origination fee – Typically 0.5% to 1% of the loan amount
- Processing fee
- Underwriting fee
- Application fee
- Rate lock fee
- Points to buy down your interest rate
Be sure to comparison shop multiple lenders to see how their fees stack up. Online lenders tend to have lower fees than banks.
Third-Party Fees
Besides lender charges, other parties are involved in processing your FHA loan. They also tack on fees such as:
- Appraisal fee – For the appraiser’s valuation of the home. This averages $600 to $800.
- Credit report fee – For running your credit report. Usually $20 to $50 per person.
- Title search fee – To research the home’s title history. Often $150 to $400.
- Title insurance fee – For insurance against claims against the property. Typically 0.5% to 1% of the home’s price.
For the “shoppable” fees above, compare rates from a few providers to potentially save.
Prepaid Expenses
Prepaid costs include items you pay for upfront at closing but will use gradually over time:
- Homeowners insurance premium
- Property taxes
- Interest on the loan from closing to the first payment
- HOA dues
- Mortgage insurance
Sinking money into prepaid expenses increases your total cash needed at closing. But these inevitable housing costs simply get paid sooner, rather than padding your long-term costs.
Estimating Your FHA Closing Costs
Closing costs range widely, but you can ballpark your total FHA fees around 4-5% of the purchase price. The upfront MIP already accounts for 1.75%. Lender and third-party fees often add another 1.5% to 2.5%.
On a $250,000 home, you may pay:
- Upfront MIP: $250,000 x 1.75% = $4,375
- Lender fees: $250,000 x 1.5% = $3,750
- Third-party fees: $250,000 x 1% = $2,500
Total: $4,375 + $3,750 + $2,500 = $10,625 (or 4.25% of $250,000)
This gives you an idea of potential FHA closing costs, but get a formal loan estimate from your lender too.
Strategies to Lower FHA Closing Costs
No one likes extra fees. Here are some ways to reduce your FHA closing expenses:
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Shop lenders – Compare mortgage companies to find the lowest rates and fees. Online lenders and credit unions tend to have competitive pricing.
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Compare third-party fees – Get quotes from multiple providers for the “shoppable” closing services to save.
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Negotiate with the seller – Ask for the seller to cover some of your fees, up to 6% of the home price.
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Request a lender credit – Lenders can provide a credit toward closing costs, typically by raising your interest rate slightly.
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Get down payment gift – Family can gift you cash for closing costs, if properly documented in a gift letter.
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Apply for down payment assistance – Check state and local programs that provide grants to cover costs.
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Finance closing costs – Roll costs into the FHA loan amount to lower upfront cash needed. You’ll pay interest on the fees over the long run though.
FAQs on FHA Loan Closing Costs
Here are some commonly asked questions about closing expenses on FHA mortgages:
How are FHA closing costs different from conventional loans?
FHA loans require the upfront MIP fee, which isn’t charged on conventional loans. But the other closing costs are quite similar between FHA and conventional mortgages.
Can I finance FHA closing costs into my loan amount?
Yes, you can roll closing costs into your FHA loan balance just like a conventional loan. This avoids out-of-pocket costs upfront but increases your loan amount and monthly payment.
What are typical FHA lender fees?
Origination fees of 0.5% to 1.5%, application fees of $75 to $100, and rate lock fees of 0.25% to 0.5% are common on FHA loans. But lender fees vary, so shop around.
How can I get help with my FHA down payment and closing costs?
Down payment assistance programs through state housing agencies and nonprofits are a great resource for first-time buyers. Family gifts and seller contributions can also cover your FHA costs.
When will I know my final FHA closing figures?
Your lender sends your closing disclosure at least three business days before closing with finalized fees and cash required. This gives you time to ask any questions and get prepared.
The Bottom Line
When budgeting for an FHA home purchase, be ready for closing costs equal to about 2% to 6% of the purchase price. These FHA fees cover lender charges, third-party services, and prepaid costs.
Shop lenders, compare quotes, negotiate with the seller, and explore down payment help to reduce your closing expenses. That leaves more money for your move-in ready home!
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What are FHA closing costs?
The closing costs on FHA loans encompass several fees charged by the mortgage lender and others involved in the lending process. On your closing day, you need to be ready to pay both your FHA loan down payment and these closing costs. The costs typically run 2 percent to 6 percent of the home’s purchase price.
When you apply for an FHA loan, your lender will give you a loan estimate, which includes a preliminary tally of closing costs. Three days before your closing date, you’ll get a closing disclosure with a final accounting of closing costs, along with a detailed breakdown of those FHA loan fees.