Understanding Closing Costs for an FHA Loan

When buying a home with an FHA loan closing costs are an important factor to consider. These costs which are fees charged to process and finalize your mortgage, typically range from 2% to 6% of the total home price. Knowing what goes into these closing costs can help you budget properly and avoid any surprises at closing. In this comprehensive guide, we’ll break down exactly what closing costs entail with an FHA mortgage.

What are Closing Costs?

Closing costs are charges paid to various parties to finalize and secure your mortgage loan They are fees assessed by lenders, third party providers, and government agencies. Closing costs are typically between 2% to 6% of your home’s price, whether you get an FHA loan or conventional mortgage

With an FHA loan, here are some of the main closing costs homebuyers can expect:

• Origination fee – This covers lender costs to process your loan application, including underwriting and document preparation. It’s usually 1% of the total loan amount.

• Appraisal fee – Paid to the appraiser who evaluates the property value. Typically $400-$600.

• Credit check fee – Covers the lender credit check, usually $25-$50.

• Title fees – Includes title search, title examination, title insurance premiums. Often $700-$2,000.

• Recording fees – Charged by the local government to record your home purchase publicly. Varies by state, commonly $50-$150.

• Prepaid interest – Interest on your mortgage from closing date to the first payment.

• Property taxes – Prorated share of property tax based on closing date

• Homeowners insurance – Prepaid hazard insurance premium.

• Mortgage insurance – Upfront and annual mortgage insurance premiums.

Closing costs ultimately depend on your specific transaction, location, and lender. Your final estimated fees will appear on your Closing Disclosure form at least 3 days before closing.

FHA Loan Closing Costs Breakdown

Now let’s take a closer look at some of the main closing costs involved specifically with an FHA mortgage loan.

Upfront Mortgage Insurance Premium

One of the biggest differences in closing costs between an FHA loan and conventional loan is the upfront mortgage insurance premium (MIP). This is a 1.75% fee charged by the Federal Housing Administration based on the total loan amount. On a $300,000 home purchase, your upfront MIP would be $5,250. This upfront premium can be financed into your loan amount.

In addition, your monthly mortgage payments will include an annual MIP to cover the life of the loan. This ongoing premium will vary based on your loan-to-value ratio and term length.

Origination & Underwriting Fees

As with any mortgage, you’ll pay lender fees for origination (loan processing) and underwriting (approving you as a borrower). Origination fees are capped at 1% of the total loan amount for FHA loans. Underwriting fees vary by lender but often range from $300-$1,500.

Title Fees

Title fees cover title insurance, title examination, document preparation and notary services. Title insurance protects your ownership claim against any defects. Title fees often add up to $700-$2,000, depending on your area and specific closing costs.

Government Recording & Transfer Charges

Recording fees are charged by local governments to formally record your deed and property transfer in public records. Transfer taxes are based on a percentage of the purchase price and also charged upon closing. These fees together often total $100-$300 but depend on your state and county.

Prepaid Property Costs

At closing, you’ll need to prepay a portion of your property taxes and homeowners insurance premiums. The prepayment covers the period between your closing date and your loan’s first full payment. For example, if you close mid-year, you’d prepay taxes for the remaining year.

Other Third-Party Fees

Some additional fees charged by third-party providers may include:

• Home inspection fees
• Appraisal fee
• Flood determination fee
• Survey fee
• Pest inspection fee

Strategies to Lower FHA Closing Costs

Closing costs can feel daunting on top of your down payment amount. Here are some tips to lower your closing costs with an FHA loan:

• Shop around – Compare quotes from multiple lenders. Origination and title fees can vary widely.

• Negotiate seller concessions – Ask the seller to pay some closing costs for you. With FHA loans, concessions are limited to 6% of the purchase price.

• Apply for grants & aid – Take advantage of down payment assistance programs if you qualify as a first-time or lower-income buyer.

• Increase your down payment – Putting down more upfront lowers your loan amount, which reduces fees tied to a percentage of the total loan.

• Ask about discounts – See if your lender provides any discounts, such as waiving appraisal or origination fees.

• Lower title insurance – Ask for a reissue rate if within a few years of buying the home.

What to Expect at Your FHA Loan Closing

Congratulations, you’ve made it to closing day! Here’s an overview of what to expect:

• Arrive prepared with a cashier’s check, certified funds or wire transfer to cover your closing costs and down payment amount.

• You’ll sign the final loan documents, including the mortgage note and deed of trust. Read everything carefully before signing.

• Once documents are signed, funds will be disbursed to the seller and other parties. You’ll receive the property keys!

• Your lender will explain the escrow account setup and when your first mortgage payment is due.

• Finally, make sure to retain copies of your signed closing paperwork for your records.

With an FHA loan, closing costs typically fall on the higher side due to the upfront mortgage insurance premium. But locking in a low interest rate and putting down just 3.5% can offset these expenses long-term. Now that you know what to expect, you can budget properly and time your home purchase in alignment with your financial readiness.