Does an FHA Loan Cover Closing Costs? How to Reduce Fees When Buying a Home

For many homeowners, home loans from the Federal Housing Administration (FHA) make homeownership attainable and affordable. This type of home loan has less stringent requirements than conventional loans. But while the requirements are more flexible, FHA mortgages still have requirements home buyers must meet, including paying closing costs.

If youâre considering an FHA loan to purchase a home, you should acquaint yourself with the rules around closing costs. Letâs take a closer look at FHA loan closing costs and everything they include.

Purchasing a home is one of the most exciting times in a person’s life. After months or even years of saving and preparing, the big day is finally here – you get to buy your dream house! However, the road to homeownership also comes with many costs, including closing costs on your mortgage loan.

If you’re considering an FHA loan, you may be wondering – does an FHA loan cover closing costs? The short answer is, not directly. However, there are ways to reduce your out-of-pocket expenses when getting an FHA mortgage. In this comprehensive guide, we’ll explain everything you need to know about closing costs with an FHA home loan.

What Are Closing Costs on an FHA Mortgage?

Closing costs refer to the fees charged by lenders and third parties to process, underwrite, and close your mortgage loan. Every mortgage comes with closing fees, whether FHA or conventional.

FHA closing costs typically range from 3% to 6% of your total loan amount. They do not count toward your required FHA down payment of at least 3.5%. You’ll need to save for closing costs separately from your down payment funds.

The Main Components of FHA Closing Costs

FHA closing costs consist of three primary categories – upfront mortgage insurance lender fees and third-party fees

Upfront Mortgage Insurance Premium (UFMIP)

This is a one-time 1.75% fee charged on your total FHA loan amount. On a $200000 loan, your UFMIP would be $3500. This premium protects the lender in case you default.

Lender Fees

Your lender charges fees for originating, processing, and underwriting your FHA loan. Common lender fees include:

Origination fee
Underwriting fee
Document prep fee
Interest rate lock fee

Third-Party Fees

Outside companies that provide services for your loan also charge fees, such as:

Appraisal fee
Credit report fee
Title insurance fee
Recording fees
Survey fees

Prepaid Costs

Additional prepaid costs may include homeowner’s insurance, property taxes, and prepaid interest.

While lender fees can vary, the UFMIP and third-party costs are largely fixed for any FHA borrower.

Does an FHA Loan Cover Any Closing Costs?

The short answer is no – FHA loans do not directly cover your closing costs. As the borrower, you are responsible for paying all closing fees at the time of closing. However, that doesn’t mean you have to pay everything out of pocket.

Here are some options for reducing your closing costs with an FHA mortgage:

Finance Closing Costs

You can roll all or a portion of your closing costs into the FHA loan amount. While this avoids upfront costs, you’ll end up paying interest on those fees over the long run.

Negotiate with the Seller

In a buyer’s market, you may be able to ask the seller to cover some of your closing fees. FHA guidelines limit seller contributions to 6% of the purchase price.

Apply for Down Payment Assistance

Many state and local programs help first-time buyers with down payments and closing costs. Income limits apply, but grants can cover several thousand dollars in costs.

Request Lender Credits

It never hurts to ask! Your lender may be willing to credit you for certain fees at closing. You can also shop lenders and compare costs and lender credits.

Use Gift Funds

The FHA allows you to use funds gifted from relatives or nonprofit organizations to pay for closing costs and your down payment. Make sure to document any gift over half your monthly income.

How Much Cash Do You Need at Closing with an FHA Loan?

Your cash required at closing includes:

Down payment (at least 3.5% of purchase price)
Upfront mortgage insurance premium
Any closing costs NOT financed into loan
Prepaid costs like home insurance and property taxes

For example, on a $200,000 home with 3.5% down, you’d need:

Down Payment: $7,000

UFMIP (1.75%): $3,500

Closing Costs: $4,000 (2% of loan amount)

Prepaid Costs: $2,500

Total Cash Needed: $17,000

Having an estimate of your closing figures can help you determine if you need gift funds or seller credits to cover costs upfront.

Tips for Lowering Your Out-of-Pocket Costs

While an FHA loan doesn’t directly cover closing costs, you can take steps to reduce fees and required cash:

Boost your credit score. Better scores qualify you for lower interest rates and points, reducing lender fees.

Compare multiple lenders. Shop around for the best combination of rates and lender credits.

Avoid high origination fees. Don’t pay over 1% of the loan amount in origination fees if possible.

Lower your interest rate. Pay for points to buy down your rate, reducing interest charges.

Ask about discounts. See if your employer, bank account, or association qualifies you for reduced lender fees.

Apply for down payment help. Grants can cover thousands in closing expenses for eligible buyers.

Talk to your loan officer. See if they can waive any minor fees or offset costs.

Choose a lower UFMIP option. You may qualify for a reduced 0.01% UFMIP on some loans.

Are FHA Closing Costs More Expensive Than Conventional Loans?

It depends. The UFMIP does add a significant fee that conventional loans don’t have. However, FHA interest rates are also typically lower, saving you money over the long run.

FHA loans allow lower down payments as well – meaning less cash needed upfront. When shopping for a mortgage, look at the entire long-term cost, not just upfront fees.

Many buyers find FHA loans to be more affordable overall, especially when taking advantage of down payment assistance programs.

When Do You Find Out Your Final Closing Costs?

Your lender will provide a Loan Estimate when you first apply, listing estimated closing fees. This helps you budget and plan.

At least 3 business days before your closing date, you’ll receive a final Closing Disclosure listing your actual total costs. Compare this to your Loan Estimate to ensure there are no surprises or changes. Ask your lender to explain any variations.

Does an FHA Streamline Refinance Cover Closing Costs?

If you already have an FHA loan, an FHA Streamline Refinance allows you to refinance into a new FHA mortgage with lower payments or rate, minimal documents, and limited appraisal.

Streamlines may also allow you to fold your closing costs into the new loan amount. However, as with any no-closing-cost option, you’ll end up paying interest on those fees over time.

Work with a Trusted FHA Lender

As you navigate FHA loans and closing costs, the right lender can make all the difference. I recommend working with a reputable lender like [COMPANY NAME]. Their loan officers will explain every fee, find ways to reduce your costs, and help you qualify for the optimal FHA mortgage.

Owning a home is a major milestone. While an FHA loan won’t directly cover your closing fees, make sure you understand all your costs upfront. With the right lender at your side, you can get approved for an affordable FHA mortgage and start building wealth through homeownership.

How Can You Offset FHA Loan Closing Costs?

Closing costs are traditionally the buyerâs responsibility. Fortunately, buyers can take advantage of several optionsto help make closing costs more affordable.

The FHA allows borrowers to receive money for closing costs and their down payment from eligible donors. Eligible donors can include:

A family member
An employer
A close friend
A charitable organization
A labor union
A government agency or public entity

In a buyerâs market, a seller may be willing to contribute to your closing costs to seal the deal. The FHA allowssellers to pay up to 6% of the home purchase price toward a buyerâs closing costs.

You can find assistance programs that focus on helping low- and moderate-income home buyers cover their closing costs and related home buying expenses.

See What You Qualify For

FHA closing costs vary from borrower to borrower. Theyâre typically around 3% â 6% of the home purchase price. You should know that the closing costs donât count toward the FHAâs minimum 3.5% down payment. If you want to buy a house with an FHA loan, you must have enough money to cover the down payment and closing costs separately.

FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate

FAQ

Can closing costs be rolled into an FHA loan?

Can FHA closing costs be rolled into the loan? Yes. As with other types of mortgages, you can roll FHA closing costs into your mortgage. This means you’ll pay less at the closing, but higher monthly payments, as well as more interest.

Why are FHA closing costs so high?

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.

How much are closing costs for FHA vs conventional?

Borrowers pay an average of $7,402 in closing costs when taking out FHA loans. If you get a conventional mortgage, you’ll only pay, on average, about $3,745 in closing costs. FHA loans also have higher down payment requirements.

What is the minimum down payment for an FHA loan?

Key takeaways. FHA loans require a minimum 3.5 percent down payment for borrowers with a credit score of 580 or more. Borrowers with a credit score of 500 to 579 need to put 10 percent down to get an FHA loan. Conventional conforming mortgages only require 3 percent down, and VA and USDA loans require no down payment.