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.
Getting a mortgage to purchase your dream home can be an exciting yet stressful process. As a buyer, you need to navigate a lot of details, from finding the right property and getting a loan pre-approval to inspecting the home and negotiating an offer. Another key piece? Understanding the closing costs on an FHA loan.
As a first-time homebuyer last year, I spent a lot of time researching these charges to know what to expect. Now, I want to share what I learned to help other buyers in the same boat. In this article, we’ll break down common FHA closing costs, how much borrowers can expect to pay, and some ways to reduce these fees.
What are Closing Costs on an FHA Loan?
Closing costs refer to the various fees charged to finalize and fund your mortgage The lender charges some of these, while others come from third parties like the appraiser and title company Closing costs are in addition to your down payment amount.
On an FHA loan, closing costs often range from 2% to 6% of the purchase price. So on a $200,000 home, you may pay $4,000 to $12,000 in closing costs The final amount depends on factors like your lender, location, and loan details.
Your lender provides a loan estimate when you apply, listing estimated closing costs. A few days before closing, you get a closing disclosure with the final figures. This helps you know the total cash needed to close.
Key Closing Costs on an FHA Mortgage
While specific charges vary, FHA closing costs fall into a few main buckets:
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Upfront Mortgage Insurance Premium (MIP) – This prepays your mortgage insurance for the first year, at a rate of 1.75% of the loan amount. You also pay annual MIP through your monthly payments.
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Lender Fees – The lender may charge an origination fee, underwriting fee, or rate lock fee. Discount points to lower your interest rate also fall here.
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Third-Party Fees – This covers the appraisal, credit report, and title fees. You can shop around for some third-party services.
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Prepaid Costs – This includes escrow deposits for taxes and insurance, and any prepaid interest.
The upfront MIP is a standard cost. But lender and third-party fees can vary. Comparing loan estimates from different lenders can help you find the best deal.
What’s the Average for FHA Closing Costs?
As mentioned above, FHA closing costs often range from 2% to 6% of the purchase price. On a $300,000 home purchase, you may pay $6,000 to $18,000 in total closing costs. However, your specific amount depends on factors like:
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Loan amount – Higher loan amounts mean higher closing costs.
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Location – Closing costs vary by state and region. Certain areas have higher appraisal and title fees.
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Lender – Each charges different fees for origination, underwriting, etc. Shop around!
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Credit – Borrowers with lower credit scores may pay more.
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Down payment – The higher your down payment, the lower the loan amount and closing costs.
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Seller contributions – Some sellers agree to cover certain buyer closing costs.
Work with your lender to estimate your unique closing costs based on these specifics. Their fees can really impact your bottom line.
Ways to Reduce FHA Closing Costs
Closing costs can take a big chunk of your savings. As a first-time buyer, I looked for ways to lower these FHA fees without hurting my loan. Here are some options I would recommend exploring:
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Shop mortgage lenders – Compare loan estimates to find the lender offering the lowest overall fees. Even a 0.25% difference in the origination fee can save you $750 on a $300k loan.
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Compare third-party fees – Your loan estimate shows which third-party fees you can shop for. Getting quotes from multiple providers on appraisal, title, etc could score you some savings.
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Negotiate seller contributions – Sellers can cover up to 6% of closing costs on an FHA loan. A 3% contribution could knock $6,000 off costs on a $200k home.
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Receive closing cost gifts – FHA allows family gifts to help with your closing costs. This saved me over $2,000! Just provide a gift letter.
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Apply for down payment assistance – State and local programs provide grants to cover closing costs and down payment. Income limits apply but worth checking out!
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Financing closing costs – You can roll closing costs into your mortgage amount instead of paying upfront. Just know you’ll pay interest on the fees over the loan.
With some savvy shopping and negotiating, you may be able to lower your FHA closing costs by $2,000 or more. For me, every dollar counted as a first-time buyer on a budget.
The Bottom Line
Can I roll closing costs into my FHA loan?
Yes, you can roll some or all your closing costs into an FHA mortgage. Itâs sometimes referred to as a no-closing-cost mortgage. Rolling your closing costs into your FHA mortgage will lower your upfront payment but raise your monthly mortgage payment. Youâll also pay interest on the higher monthly amount, making the loan more expensive in the long run.
FHA Upfront Mortgage Insurance Premium
The upfront mortgage insurance premium (UFMIP) is the largest closing cost unique to FHA loans. FHA borrowers must pay or finance the one-time fee, which is 1.75% of the total loan amount. For example, if you buy a house for $250,000, you will either pay $4,375 for UFMIP at closing or fold the amount into your loan.
UFMIP protects FHA lenders in case of mortgage default and helps the FHA continue to provide affordable home loans to would-be homeowners. In addition to the upfront mortgage insurance premium, youâll also pay a monthly mortgage insurance premium (MIP) as part of your monthly mortgage payment.
Throughout the mortgage application process, there are several closing cost fees a lender will charge for their services, including:
- Mortgage origination fee
- Underwriting fee
- Interest rate lock fee (if applicable)
- Document preparation fee
- Discount points (if applicable)
- Supplemental loan origination fee (for FHA 203(k) renovation loans)
Third-party providers also charge for services provided throughout the mortgage process. The fees get added toyour closing costs. The third-party fees will vary depending on the loanâs specific requirements, but standard third-party fees include:
- Title insurance fee
- Notary fee
- Recording fees
- Appraisal fees
- Credit report fee
- Courier fee
- Attorney fees
- Flood certification fee (if applicable)
You pay prepaid fees upfront to cover costs that will come up later. Some prepaid fees you can expect to see in your closing costs include:
- Flood insurance premium (if applicable)
- Hazard insurance premium
- Property taxes
- Escrow deposit
- Per diem interest (daily interest charged on a mortgage from closing to the first mortgage payment)
FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate
FAQ
Can closing costs be included in an FHA loan?
What is the downside of an FHA loan?
Why do sellers not like FHA loans?
How expensive of a house can you buy with a FHA loan?
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?
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:
Do you have to pay FHA closing costs?
You will be charged FHA closing costs, which often include mortgage insurance, lender and third-party fees, and prepaid items. These are paid in addition to your FHA down payment.
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.