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Getting an FHA loan can be a great way for many buyers to purchase their first home FHA loans require just a 35% down payment and have flexible credit requirements. However, FHA loans do come with costs you’ll need to pay at closing. On average, closing costs for FHA loans fall between 2% to 6% of the purchase price. With the right preparation and knowledge, you can aim to lower your closing costs when getting an FHA mortgage.
What Exactly Are Closing Costs?
When you purchase a home, there are fees and charges associated with finalizing the transaction. These costs are referred to as closing costs. Some examples of common closing costs include:
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Origination fees – Charges from the lender for processing the loan.
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Appraisal fees – For the appraiser to assess the property’s value.
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Title fees – Covers title search, insurance, settlement services.
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Recording fees – To officially record the deed with local authorities.
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Prepaid interest – Interest owed from closing date to first payment.
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Taxes and insurance – Prorated taxes and prepaid insurance premiums.
Closing costs can vary greatly depending on your specific transaction, location, and lender. With an FHA loan, you can expect to pay an upfront mortgage insurance premium, lender fees, third party fees, and prepaid expenses. We’ll look at these in more detail next.
FHA Loan Closing Costs Breakdown
When getting an FHA loan, here are some of the main closing costs you can expect to pay:
Upfront Mortgage Insurance Premium
All FHA loans require you to pay mortgage insurance premiums (MIP). An upfront MIP of 1.75% of the purchase price is due at closing. On a $200,000 home, that would equal $3,500. This upfront premium can be rolled into your loan amount.
Lender Fees
The lender charges fees for originating and processing your FHA loan. Common lender fees include:
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Origination fee – 1% of the loan amount is typical.
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Underwriting fee – $700 on average.
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Document prep fees – Around $300-$500.
Third Party Fees
There are also various third party fees that the buyer must pay, such as:
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Appraisal fee – Often $300-$500.
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Credit report fee – Around $25-$50 per person.
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Title fees – Vary by location, average of $700-$2,000.
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Recording fees – Charged by local government, often $50-$150.
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Survey fee – If required, typically $150-$400.
Prepaid Expenses
Prepaid expenses include prorated property taxes, prepaid homeowners insurance premiums, and prepaid interest. While not closing costs, prepaid expenses are due at closing. Budget 1-2 months of taxes and insurance premiums.
Below is an example breakdown of estimated closing costs for a $200,000 FHA loan:
- Upfront Mortgage Insurance Premium – $3,500
- Origination Fee – $2,000
- Appraisal Fee – $425
- Credit Report Fee – $85
- Title Insurance – $1,014
- Recording Fees – $120
- Initial Escrow Payment – $833
- Prepaid Interest – $933
- Total Estimated Closing Costs – $8,910
As you can see, closing costs can significantly add to your upfront cash needed to buy. But you have options to lower your closing costs on an FHA loan.
7 Ways to Reduce Your FHA Closing Costs
If you want to lower the closing costs on your FHA mortgage, here are some tips:
1. Shop around – Get quotes from multiple lenders. Their fees can vary significantly. Comparing loan estimates makes it easy to find the best deal.
2. Ask for concessions – You can request the seller pays some of your closing costs. With FHA loans, concessions are limited to 6% of the purchase price.
3. Buy down your rate – You can pay more in points to get a lower interest rate and monthly payment. This increases closing costs but lowers long term costs.
4. Negotiate fees – Don’t be afraid to try negotiating lender fees like origination charges. They may be willing to lower the fees, especially for repeat customers.
5. Use gift funds – Get funds gifted from approved sources like family and charitable organizations. This helps cover your costs.
6. Check for grants – There are homebuyer assistance grants available, especially for first-time buyers. These can help with your closing costs.
7. Use a real estate agent – Your agent may have relationships with lenders to get you the best rates and lowest fees.
Strategize to Lower Your Costs
As you can see, you have multiple options to reduce your closing costs with an FHA home loan. Being informed on what fees to expect, shopping lenders, negotiating, and utilizing other resources can potentially save you thousands at closing.
Aim to have all your documents and finances ready when applying for your loan. This makes for a smoother process which keeps lender fees lower. Keep in mind there are also programs available if you need help with closing costs, such as state housing grants.
Buying a home is a big investment. Make sure you have a solid understanding of both your downpayment amount and closing costs. This helps avoid any surprises and keeps your home buying budget on track. With the right preparation, you can enter your closing confident you have the funds needed to finalize your FHA loan and get the keys to your new home.
Upfront mortgage insurance premium (MIP)
One requirement when taking out an FHA mortgage: mortgage insurance premiums (MIP). This includes an upfront premium paid at closing, equal to 1.75 percent of the loan principal.
You’ll also pay annual MIP, which is rolled into your monthly mortgage payments for the life of the loan. The amount you’ll pay depends on your loan amount, loan term and loan-to-value (LTV) ratio.
Not all mortgage lenders charge the same fees, and some lenders don’t charge fees at all. Depending on which FHA lender you work with, you might be able to negotiate some fees. These fees include, but aren’t limited to:
- Origination fee, typically 0.5 percent to 1 percent of the loan amount
- Processing or underwriting fee
- Application fee
- Credit check fee
- Document preparation fee
- Rate lock or rate lock extension fee
- Points to reduce your interest rate, usually 1 percent of the loan principal apiece
You might find your lender offers a lower interest rate but higher fees. Some of these fees might be reflected in the annual percentage rate (APR), so be sure to compare this figure when weighing FHA loan closing costs.
In addition to your lender, there are other providers involved in the home purchase process, and they charge fees as well. Among them, these usually include the appraisal and title search and insurance fees.
The loan estimate shows you which third-party costs are fixed and which ones you can shop around for. For those that fall under the latter category, you can potentially save money if you find a lower-cost provider.
Prepaid items are costs related to your home or mortgage that you’ll pay in advance. Although technically different from FHA mortgage closing costs, you’ll still need to cover these at closing:
- Homeowners insurance, property tax and HOA fee escrow deposits
- Per-diem interest
Finance your upfront mortgage insurance premium
If you’re worried about having enough cash at the closing table, you might consider rolling your upfront mortgage insurance premium into your loan amount. You’ll have to pay slightly higher monthly payments and more interest with this option, but it’ll reduce some of your upfront costs.
FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate
FAQ
What is the payment to the FHA closing?
What is the upfront fee for FHA loans?
What is the downside of an FHA loan?
Are FHA loans difficult to close?
What are the closing costs for an FHA loan?
The closing costs in your FHA loan will be similar to those of a conventional mortgage loan. These costs typically will be around 2% to 6% of the cost of your property. Your costs will be tied to things like your loan amount state the property is located in and lender fees. Some of the costs include:
Can I pay FHA closing costs with my mortgage?
If you don’t have the cash to pay FHA closing costs, you can finance these fees with your mortgage. This saves you from having to bring a check to closing, but also means you’ll pay interest on these charges. What are FHA closing costs?
Can closing costs be included in a purchase loan?
Roll the costs into your loan Yes, closing costs can be included in your loan amount if your lender offers a no-closing cost loan. → How to finance FHA closing costs on a purchase loan: Increase your interest rate and ask the lender to pay the fees, or increase your loan amount to pay them.
Are FHA loan closing costs the same as a down payment?
FHA loan closing costs are not the same as the down payment. The closing costs include charges like the origination fee, any mortgage points and the cost for third-party services like the appraisal. The down payment, on the other hand, is the portion of the home’s purchase price you’re paying upfront, rather than financing with the loan.