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Buying your first home is an exciting milestone! As a first-time homebuyer you’ve likely heard about “closing costs” but might not totally understand what they are. Closing costs can definitely add up so it’s important to budget for them properly when applying for an FHA loan.
In this comprehensive guide, I’ll explain everything you need to know as a first-time homebuyer about closing costs on FHA loans You’ll learn
- What exactly closing costs on FHA loans include
- Typical closing costs on a $200,000 FHA loan
- Strategies to reduce your closing costs
- Whether closing costs can be rolled into an FHA loan
- How closing costs on FHA loans differ from conventional loans
Let’s start with the basics.
What Are Closing Costs on FHA Loans?
Closing costs refer to the fees charged to process, underwrite, and close your FHA mortgage loan. Closing costs on FHA loans typically range from 2-5% of the home’s purchase price.
For example, on a $200,000 home with 3% closing costs, you would pay around $6,000 at closing. Closing costs are paid upfront and due at closing, in addition to your FHA down payment of at least 3.5% of the purchase price.
Closing costs on FHA loans include:
- Origination fees – Charged by the lender to originate and process the mortgage, usually 1% of the loan amount
- Appraisal fee – For the appraisal report assessing the property’s value
- Credit report fee – For the lender to access your credit report
- Title fees – Paid to a title company to search public records and ensure a clear title
- Prepaid interest – Interest owed from closing date to first payment date
- Property taxes – Prorated amount owed at closing
- Homeowner’s insurance – First year premium due at closing
- Mortgage insurance – Upfront FHA mortgage insurance premium of 1.75% of loan amount
The upfront FHA mortgage insurance premium is the biggest chunk of closing costs on FHA loans. On a $200,000 loan, this premium alone would total $3,500.
How Much Are Closing Costs on a $200,000 FHA Loan?
As mentioned above, closing costs on FHA loans generally range between 2-5% of the purchase price. On a $200,000 home purchase with 3% closing costs, you would pay around $6,000 at closing.
Here’s a detailed breakdown of typical closing costs for a $200,000 FHA loan:
- Origination Fee: $2,000
- Appraisal Fee: $500
- Credit Report Fee: $50
- Title Fees: $1,000
- Prepaid Interest: $500
- Property Taxes: $1,000
- Homeowner’s Insurance: $1,000
- Upfront Mortgage Insurance: $3,500
- Total Closing Costs: $9,550 (4.8% of purchase price)
As you can see, closing costs can significantly add to your upfront costs. It’s important to budget accordingly and account for closing costs when saving for your down payment.
4 Tips to Reduce Closing Costs on FHA Loans
Here are some smart strategies first-time buyers can use to lower their closing costs on an FHA loan:
1. Shop around for the best rate and fees – Compare quotes from multiple lenders. Look for lenders offering discounts for first-time buyers or who allow you to buy down the interest rate by paying points upfront.
2. See if the seller can cover some costs – Ask your real estate agent if the seller is willing to cover a portion of closing costs by providing a closing cost credit.
3. Apply for down payment assistance – Check if your state or local government provides down payment and closing cost assistance grants for first-time buyers.
4. Get a gift from family – Receiving a financial gift from relatives to help with closing costs is allowed with an FHA loan. Make sure to provide a gift letter.
Shopping around, negotiating with sellers, and utilizing assistance programs can potentially lower your closing costs by thousands.
Can You Roll Closing Costs into an FHA Loan?
Yes, you can finance closing costs by rolling them into the FHA loan amount instead of paying out of pocket.
However, this increases your principal balance and monthly mortgage payment. You also pay more interest over the long run.
Before rolling in costs, weigh the pros and cons:
Pros
- Preserves cash needed for down payment
- Avoids bringing money to closing
Cons
- Higher loan amount and monthly payment
- More interest paid over loan term
Run the numbers to see if rolling in costs makes sense for your budget. Many first-time buyers choose to pay closing costs upfront if possible.
How Do Closing Costs on FHA Loans Compare to Conventional Loans?
The main differences in closing costs between FHA and conventional loans are:
- Mortgage insurance – FHA loans require upfront and annual mortgage insurance premiums, while conventional loans typically just have monthly PMI
- Interest rates – Conventional loans often come with lower interest rates than FHA, saving on interest over time
- Fees – FHA limits origination fees to 1% of the loan amount, while conventional lenders may charge higher origination fees
Aside from mortgage insurance, closing fees between FHA and conventional loans are generally comparable. Conventional loans with PMI removed once you reach 20% equity do have long-term cost advantages over FHA mortgages.
But FHA loans offer more flexible credit standards, making it easier to qualify if you have limited funds for a down payment and closing costs.
The Bottom Line
Saving up for closing costs is key when buying your first home with an FHA loan. Now that you know what to expect, you can budget properly and shop lenders to reduce your closing costs. This will put you in a better position to cover the fees at closing.
While closing costs might seem complicated as a first-time buyer, being informed about the typical fees and your options will give you confidence throughout the homebuying process. Stick to your budget, bring the required funds to closing, and enjoy the excitement of owning your first home!
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How much are FHA closing costs?
FHA closing costs vary widely by lender and location. Typically, a borrower can expect to pay between 3 percent and 6 percent of the home’s purchase price in closing costs. On a $400,000 home, for example, you’d need to budget $12,000 to $24,000 to cover your closing costs.
FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate
How much does an FHA loan cost?
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn’t diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting. Ready to apply for your FHA or conventional loan?
Do FHA loans pay closing costs?
Federal Housing Administration (FHA) loans are mortgages that offer flexible eligibility guidelines to help borrowers. FHA loan borrowers may qualify with lower credit scores and smaller down payments than other mortgage programs. But like with most mortgages, borrowers still pay closing costs on FHA loans. What Are Closing Costs?
What is a No Closing Cost Mortgage?
With a no closing cost mortgage, the lender pays your closing costs and charges you a higher interest rate to recoup the expense. FHA loans allow lenders—and other interested parties—to contribute up to 6% of the sales price toward your origination fees, prepaid items, discount points and other closing costs.
How much does it cost to close a house with an FHA loan?
You’ll typically pay between 2% and 6% of your loan amount toward closing costs on any mortgage loan, depending on your loan amount. The average home price for FHA borrowers was $330,200 at the end of 2022, making the average cost to close on a house with an FHA loan around $6,604 to $19,812.