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 and expenses you pay when you purchase a home with an FHA mortgage loan. These costs are in addition to your down payment and include charges from your lender, third-party services, taxes, and prepaid costs.
Closing costs typically range from 2% to 5% of your FHA loan amount. On a $300,000 mortgage, you can expect to pay $6,000 to $15,000 in closing costs. The exact amount depends on your lender, location, and other specifics of your home purchase.
Understanding closing costs is key to budgeting for your home purchase. This guide explains everything you need to know about FHA closing costs, including:
- Common Fees in FHA Closing Costs
- Estimating Your Total Closing Costs
- Ways to Reduce Closing Costs on an FHA Loan
- Financing Closing Costs into Your Loan
What’s Included in FHA Closing Costs
FHA closing costs consist of four main categories
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Upfront Mortgage Insurance Premium (MIP) – This funds the mortgage insurance you’re required to carry with an FHA loan. It equals 1.75% of your loan amount.
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Lender Fees – Your lender charges fees for originating and processing your loan. These may include application fees, underwriting fees and rate lock fees.
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Third-Party Fees – You’ll pay independent companies for services like the appraisal and title search.
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Prepaid Costs – These include prorated taxes, homeowner’s insurance, and any escrow deposits your lender requires
The upfront MIP is set by the FHA and is the same with any lender. But lender and third-party fees can vary. Shopping around is key to getting the lowest costs on an FHA loan.
How Much Are FHA Closing Costs?
Closing costs on FHA loans typically range from 2% to 5% of your mortgage amount. For example:
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On a $200,000 FHA loan, expect $4,000 to $10,000 in closing costs.
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On a $300,000 FHA loan, expect $6,000 to $15,000 in closing costs.
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On a $400,000 FHA loan, expect $8,000 to $20,000 in closing costs.
So on a $300,000 home purchase with a 3.5% FHA down payment, you’d need:
- $10,500 for your down payment
- $6,000 to $15,000 for estimated closing costs
- $16,500 to $25,500 total cash needed at closing
Closing costs can vary quite a bit between lenders. Be sure to ask prospective lenders for a Loan Estimate to compare fees. Third-party fees also depend on your location and property type.
Strategies for Lowering FHA Closing Costs
If your closing costs are stretching your budget, here are some tips for lowering them:
Shop Around for the Best Lender
Since lender fees can vary widely, this is the best way to reduce your closing costs on an FHA loan. Ask prospective lenders for a Loan Estimate so you can compare origination fees, points, and other charges.
Negotiate Seller Credits
Ask the seller to cover some of your closing costs. With an FHA loan, they can pay up to 6% of the purchase price. Just keep in mind they may refuse or reduce their offer if it’s a competitive sale.
Apply for Down Payment Assistance
Many state and local programs help first-time buyers cover down payments and closing costs. These programs provide grants, forgivable loans, or deferred loans. Your lender can tell you if you qualify.
Request a Gift
The FHA allows homebuyers to use gifts from family, friends, or nonprofits to cover down payment and closing costs. Make sure the gift giver provides a gift letter vouching they don’t expect repayment.
Finance Closing Costs
You can roll closing costs into your FHA loan amount instead of paying out of pocket. But this increases your loan balance, monthly mortgage, and interest paid over the life of the loan.
Should You Finance FHA Closing Costs?
Financing your closing costs avoids upfront payment, but increases your mortgage balance. Here are the pros and cons:
Pros
- Avoid upfront cash needed at closing
- May allow you to buy sooner than saving up for costs
- Makes the upfront cost lower and more affordable
Cons
- Increases your loan amount and monthly mortgage payment
- Causes you to pay more interest over the loan term
- Reduces how much equity you build by making a down payment
In general, paying closing costs in cash is better if you can afford it. But financing makes sense if you have limited savings and are eager to buy.
Just remember to account for the higher payment when budgeting after you buy the home. And try to recoup the costs by paying extra each month to pay off the loan early.
The Bottom Line
FHA closing costs typically add 2% to 5% to your mortgage loan amount. On a $300,000 home loan, you’ll pay about $6,000 to $15,000. The exact amount depends on your lender and location.
To keep costs low, shop around for lenders and negotiating seller credits if possible. And consider down payment help programs if you’re short on cash for closing.
Understanding FHA closing costs is key for first-time buyers using this popular low down payment mortgage option. Being prepared will help you close on time and start enjoying your new home sooner.
What are FHA closing costs?
FHA closing costs are fees that are charged when you take out an FHA loan. You’ll pay many of the same types of fees charged on other home loan types, including credit report fees, underwriting costs and home appraisal fees.
However, because FHA lending requirements cater to borrowers with much lower credit scores than other programs, the mortgage insurance costs are higher. In fact, FHA loans are more likely to be considered “higher-priced mortgage loans” (HPMLs) because of the high cost of FHA mortgage insurance.
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.
FHA Closing Costs Explained – FHA Loan 2022 – First Time Home Buyer | Team Tackney – GMT Real Estate
FAQ
Why are FHA closing costs so high?
What is the payment to the FHA closing?
Can closing costs be rolled into an FHA loan?
Why do sellers not like FHA loans?
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:
How much does it cost to close a home?
Closing costs can vary significantly based on the type of loan you choose. Here’s a quick summary of what you can expect to pay, based on loan type. With an FHA loan, you can expect to pay between 2% and 6% of the home sale price in closing costs. This includes an up-front mortgage insurance premium (MIP) fee paid at closing.
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?
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.