How Much Are the Closing Costs on an FHA Loan?

Closing costs are the fees charged to finalize a mortgage loan. When getting an FHA loan, buyers can expect to pay between 2-5% of the purchase price in closing costs. While closing costs vary by lender and location, understanding what goes into these charges can help FHA borrowers budget for them.

What Are Closing Costs on an FHA Loan?

Closing costs on an FHA loan include

• Upfront Mortgage Insurance Premium (MIP) – This is a 1.75% fee charged on the total loan amount. It’s required for all FHA loans.

• Lender Fees – Origination fee, application fee, processing fee, etc. Lender fees range depending on the lender

• Third Party Fees – Appraisal fee, credit check fee, title fees, etc. These are charged by vendors involved in the transaction.

• Prepaid Costs – Homeowner’s insurance, property taxes, and interest are paid for in advance.

While the upfront MIP is standard at 1.75%, lender and third party fees can vary. Shopping around and comparing total closing costs between lenders is important. Sellers can also cover up to 6% of the buyer’s closing costs for FHA loans.

How Much Are FHA Closing Costs?

For a $200,000 FHA loan, closing costs often range between $4,000-$10,000:

• Upfront MIP – $3,500 (1.75% of loan amount)

• Lender Fees – $1,500 (0.5% to 1% is common)

• Third Party Fees – $1,500

• Prepaid Costs – $1,500

Total Estimated Closing Costs: $8,000 (4% of loan amount)

On a $400,000 home purchase with a 3.5% down payment FHA loan for $386,000, closing costs could be:

• Upfront MIP – $6,750

• Lender Fees – $2,500

• Third Party Fees – $3,000

• Prepaid Costs – $3,000

Total Estimated Closing Costs: $15,250 (3.75% of loan amount)

As you can see, closing costs scale along with the loan amount. While your lender will provide estimates upfront, the final total due will come a few days before closing.

4 Ways to Reduce Closing Costs on an FHA Loan

Here are some tactics FHA borrowers can use to lower their closing costs:

• Finance the Upfront MIP – This spreads the 1.75% fee over your loan term rather than paying it all upfront. This avoids a big payment but means you pay interest.

• Shop Around – Compare multiple lender fee estimates. Negotiate with lenders to reduce or remove certain fees.

• Seek Down Payment Assistance – Check if your state or local government offers grants or low interest second loans to help cover closing costs.

• Ask the Seller to Cover Costs – Sellers can pay up to 6% of the purchase price towards the buyer’s closing costs on an FHA loan.

Reducing your closing costs by even 1% of the loan amount can result in thousands in savings. Implementing 2-3 of the above tactics can get you there.

What Goes Into Calculating FHA Closing Costs?

When estimating your closing costs, here are key factors that determine how much you’ll pay in total FHA fees:

Purchase Price & Down Payment – The higher the purchase price, the higher your closing costs. With a lower down payment, loan amount and fees increase.

Credit Score – Borrowers with lower credit scores often pay higher lender fees. A credit score of at least 580 is required for FHA approval.

Location – Closing costs vary by state and region. Title and escrow fees fluctuate based on local prices.

Lender – Each lender sets their own origination, application, and other fees for FHA loans. Shop around for the best deal.

Prepaid Costs – Home insurance, property taxes, and prepaid interest are tied to the purchase specifics like price, location, and loan amount.

Seller Credits – If the seller agrees to pay closing costs, this effectively reduces your out-of-pocket amount.

Considering these factors, you can better estimate potential FHA closing costs during budgeting.

Are FHA Closing Costs Negotiable?

Certain lender fees and third party fees can potentially be negotiated when getting an FHA mortgage, including:

• Origination or underwriting fees
• Rate lock or application fees
• Title insurance and appraisal fees if you find them for less elsewhere

However, the upfront MIP and any government recording fees cannot be negotiated. Still, asking lenders about excluding or lowering their fees could save you several hundred dollars or more.

Can You Add Closing Costs to an FHA Loan?

Yes, FHA borrowers can finance closing costs by adding them to the mortgage loan amount, similar to other loan programs. This avoids large out-of-pocket payments but increases your monthly mortgage and overall interest paid.

For example, on a $200,000 FHA loan:

• 3.5% Down Payment – $7,000
• Total Closing Costs – $8,000

Rather than paying $15,000 at closing ($7,000 + $8,000), you could finance the $8,000 into the loan. This would take your loan amount to $208,000 and monthly mortgage up slightly but let you bring less cash to closing.

Common FHA Closing Costs FAQs

How are closing costs different than the down payment on an FHA loan?

The down payment is the upfront amount you pay to fund part of the home purchase. Closing costs are the additional fees charged by the lender, government, and third parties to process the mortgage transaction.

When will I know my final closing costs on my FHA loan?

Your lender is required to issue a final Closing Disclosure outlining your actual total closing costs at least 3 business days before you close. This will include the finalized figures.

Can I get closing cost assistance on an FHA loan?

Yes, there are state and local down payment assistance programs that include help covering closing costs. Veterans also have access to VA loans that allow the seller to pay all closing costs.

Should I shop for the lowest FHA closing costs?

Comparing total closing cost estimates across multiple lender quotes can help you find the best deal. Look at the entire offer, not just bottom line fees.

The Bottom Line

Closing costs are a significant expense when getting an FHA mortgage but buyers can take steps to reduce them. Understanding what comprises FHA closing costs allows you to better budget and shop lenders. While fees vary, expect to pay 2-5% of the purchase price and finance them if needed. With preparation and a little legwork, FHA buyers can minimize closing costs.