The Federal Housing Administration (FHA) makes it easier to get a mortgage than other popular types of financing. The catch: Lenient borrowing requirements mean extra FHA closing costs.
Closing costs are the fees charged by lenders and third parties to process and finalize your mortgage loan. When getting an FHA loan, these costs typically run between 2% to 6% of the home’s purchase price. Knowing what closing costs entail and how to estimate them can help you budget for your home purchase.
What Are Closing Costs on an FHA Loan?
Closing costs on an FHA loan cover all the charges associated with finalizing your mortgage beyond just the down payment. These fees pay for the lender’s origination services third-party services like the appraisal, and prepaid costs like homeowners insurance and property taxes.
Here’s a breakdown of the main FHA closing costs:
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Upfront Mortgage Insurance Premium (UFMIP) – This FHA loan fee is 1.75% of your loan amount. It goes towards your mortgage insurance.
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Lender Fees – Origination fee, application fee, underwriting fee, etc. Lender fees range, so shop around.
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Third-Party Fees – Appraisal fee, credit check fee, title fees, etc Some you can shop for
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Prepaid Expenses – Homeowners insurance, property taxes, interest. Costs you pay for in advance at closing.
While the UFMIP is set at 1.75%, other closing costs on an FHA loan vary by lender, location, and loan details. Your lender provides a Loan Estimate of expected costs upfront and a finalClosing Disclosure before closing.
How Much Are Closing Costs on an FHA Loan?
Typical FHA closing costs range from 2% to 6% of the purchase price. For example, on a $300,000 home, you may pay $6,000 to $18,000 in total closing costs.
Here’s a breakdown of average costs for an FHA loan:
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Upfront Mortgage Insurance Premium: $5,250 (1.75% of $300,000)
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Lender Fees: $2,000
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Third-Party Fees: $3,000
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Prepaid Expenses: $1,500
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Total Closing Costs: $11,750 (3.9% of purchase price)
Closing costs ultimately depend on your specific loan, lender, and location. A loan in a high cost-of-living area or jumbo loan generally has higher fees. Ask your lender for a detailed estimate.
How to Estimate Your FHA Closing Costs
Follow these steps to estimate your closing costs on an FHA loan:
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Determine your purchase price – Your closing costs are based on this amount.
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Calculate 1.75% of the price for UFMIP – This is your upfront mortgage insurance cost.
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Research lender fees – Ask prospective lenders for their common fees to estimate this portion.
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Estimate third-party fees at 1% to 2% – Appraisal, title, etc. Varies by location.
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Add prepaid costs like insurance and taxes – Check rates in your area to approximate.
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Add all categories together – This provides an estimate of your total expected closing costs.
Having an idea of costs ahead of time allows you to budget and prepare for your home purchase.
Ways to Reduce Your FHA Closing Costs
If your estimated closing costs are stretching your budget, here are some tips to reduce them:
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Shop lenders – Compare lender fees, as they can vary significantly.
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Ask the seller to cover costs – Seller can pay up to 6% of home price.
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Get a gift – Get family gift funds, with proper documentation.
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Use down payment assistance – Check state and local programs.
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Finance the UFMIP – Roll this 1.75% fee into your loan amount.
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Compare third-party fees – Shop appraisal, title, etc. if possible.
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Buy down your rate – Pay points to reduce interest rate.
Evaluating these options can potentially lower your closing costs by several thousand dollars.
Key Steps When Reviewing Your Final Closing Disclosure
Your lender will provide a Closing Disclosure three days before your closing date. Take these steps when reviewing it:
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Confirm your loan details – Interest rate, term, loan amount.
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Check fee amounts didn’t increase – Lender/third-party fees must match the Loan Estimate or be lower.
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Look for any new fees – Ask your lender to explain any you’re unsure of.
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Verify the seller’s credits – If applicable.
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Confirm down payment and closing cost amounts
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Check prepaid amounts look accurate – Insurance, taxes, etc.
Notify your lender immediately if you have any questions on your final disclosure. Being diligent can help avoid surprises at closing.
Know Your Total Cash Needed at Closing
Your closing costs are due at your home closing, on top of your down payment amount. If you have an FHA loan with the minimum 3.5% down payment, here is how to calculate the total cash you’ll need:
Loan amount: $300,000
Down payment (3.5%): $10,500
Estimated closing costs (3.9%): $11,750
Total cash needed: $22,250
Having this full amount available will make for a smooth closing process.
Closing Costs Are an Investment in Your New Home
While closing costs increase your upfront costs, they are a necessary part of the mortgage process. These fees pay for services that allow you to lock in your loan, officially purchase the home, and protect your investment. Focus on estimated costs during budgeting, then scrutinize the final figures on your Closing Disclosure. This helps ensure there are no unwanted surprises before you seal the deal.
Standard loan closing costs
Typically 0.9% of home price
Typically 0.7% of home price
Typically 0.12% of home price
- Origination fee. When a lender issues a loan, it’s called an “origination.” The fee may include processing, underwriting and funding your mortgage.
- Credit report. A fee to get a copy of your credit scores and reports.
- Flood determination or certification fee. A fee to verify if the home is in a federal flood zone and to determine if flood insurance is required.
- Flood monitoring fee. An additional fee for monitoring the flood status of a property, depending on the flood determination.
- Tax monitoring. A fee that sets up a monitoring service to track whether you’re making tax payments on time.
- Lender’s title insurance. The lender requires you to pay for a title insurance policy to protect them against any title problems, including judgments or tax liens. You may also want to buy an owner’s policy for additional protection.
- Discount points. Also known as mortgage points, this upfront fee is charged as a percentage of your loan amount to get a lower interest rate.
- Escrow account fee. If your property taxes and insurance are included in your monthly mortgage payment, the lender collects a portion of your homeowners insurance, monthly mortgage insurance premium and property taxes to set up an account to pay those items.
- Prepaid fees. Prepaid fees are costs you pay before they’re due. For example, this can include prepaying the first year of homeowners insurance premiums.
- Transfer taxes. All but 13 U.S. states charge transfer taxes if ownership is transferred from one homeowner to another. State laws may set rules on who can pay them, and in some cases you may be exempt from them. However, they can make up a big chunk of your total closing costs on a mortgage.
List of current FHA closing costs
There are three closing costs unique to FHA loans:
1.75% of the loan amount
0.15% to 0.75% of the loan amount
$400 to $700
FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate
FAQ
Are closing costs higher on an FHA loan?
What is the payment to the FHA closing?
What is the upfront fee for FHA loans?
What is the downside of an FHA 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:
What fees are not allowed in an FHA refinance loan?
According to the **Federal Housing Administration (FHA)**, while some closing costs are allowed as charges to the borrower, all other costs are generally not allowed and are usually paid by the seller
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?
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.