FHA Loan Closing Costs: What To Expect
For many homeowners, home loans from the U.S. Federal Housing Administration (FHA) make homeownership more attainable. This type of home loan has less stringent requirements that home buyers must meet, as compared to those for conventional loans. However, FHA mortgages still come with their own set of rules, and part of that includes paying closing costs.
If you’re considering using an FHA loan to purchase a home, there are a few things you should know about closing costs. Let’s take a closer look at FHA loan closing costs and all that they entail.
What Are Closing Costs On An FHA Loan?
Closing costs are fees that a home buyer must pay (or roll into their loan) on the day of closing. These fees are charged by lenders and third parties for services provided throughout the mortgage loan process. FHA loan closing costs are specific to this type of loan and will differ from those for other mortgages.
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How Much Are FHA Closing Costs?
Closing costs for FHA loans vary from borrower to borrower, but they typically are around 3 – 6% of the purchase price. It’s important to note that closing costs don’t count toward the required minimum 3.5% down payment. If you’re looking to buy a house with an FHA loan, you’ll have to have money to cover the down payment and the closing costs.
What Closing Costs Do You Pay On An FHA Loan?
FHA loan closing costs include fees charged for services that your lender and third parties provide during the mortgage application process, as well as mortgage insurance premium and other pre-paid fees. Let’s take a look at how each of these categories impacts your closing costs.
Throughout the mortgage application process, there are a number of fees that your lender will charge you for their services. These fees are part of your closing costs and can include:
- Mortgage origination fee
- Underwriting fee
- Interest rate lock fee
- Document preparation fee
- Discount points, if applicable
- Supplemental loan origination fee (for FHA 203(k) renovation loans)
Throughout the mortgage process, there are several services provided by third-party providers. You’ll pay their fees as part of your closing costs too. There are a wide range of third-party fees depending on the individual circumstances of a particular mortgage, but some of the most common ones include:
- Title insurance fee
- Notary fee
- Recording fees
- Appraisal fees
- Credit report fee
- Courier fee
- Attorney fees
- Flood certification fee
FHA Upfront Mortgage Insurance Premium
A mortgage insurance premium (MIP) is the FHA equivalent of private mortgage insurance. As a requirement of an FHA loan, borrowers must pay or finance a one-time fee of 1.75% of the loan amount. This helps to protect the FHA if you default on your loan. So, for example, if you buy your house for $250,000, you’d pay a MIP of $4,375 at the time of purchase.
In addition to the one-time fee, you’ll also have to pay monthly MIP as part of your loan. You can expect to pay two months of the annual MIP upfront as part of your pre-paid closing costs.
Pre-paid fees are fees paid upfront to cover costs that will come up down the road. Some pre-paid fees that you can expect to see in your closing costs are:
Can Closing Costs Be Rolled Into An FHA Loan?
Home buyers who don’t have the cash to pay the closing costs for their FHA loan upfront may be able to roll the closing costs into their mortgage, sometimes referred to as a no-closing-cost mortgage. Before you do this, carefully consider the pros and cons of this option.
The major benefit of rolling your closing costs into your FHA loan is that it makes homeownership more affordable. Coming up with the cash for a down payment and closing costs is a significant obstacle for many home buyers, so offsetting the upfront costs is often the only way to make their dreams of homeownership attainable.
When you have your closing costs rolled into your mortgage, your monthly payment will be larger than it would be otherwise. Plus, not only will you be paying closing costs over the life of the loan, you’ll also have to pay interest on it, costing you more in the long run.
How Can You Offset FHA Loan Closing Costs?
While paying closing costs is traditionally the buyer’s responsibility, there are several other options to help make your closing costs more affordable.
Use Gift Funds
The FHA allows certain eligible donors to contribute money toward your closing costs and down payment. Eligible donors can include:
- Family members
- Your employer
- A close friend
- Charitable organizations
- A labor union
Ask The Seller
In a buyer’s market, you may be able to ask the seller to contribute to your closing costs. FHA rules allow sellers to pay up to 6% of the purchase price toward a buyer’s closing costs.
Explore Assistance Programs
There are assistance programs that focus on helping low- and moderate-income home buyers cover their closing costs and other home buying expenses. The database maintained by the Department of Housing and Urban Development (HUD) is a great resource for buyers looking for assistance programs.
Talk To Your Lender
In some instances, you may be able to negotiate with your lender to reduce your closing costs. While some fees are unavoidable, they may have the ability to waive certain fees if you ask what they can do.
The Bottom Line
FHA loans offer home buyers flexible requirements, lower interest rates and low down payments, but they also come with closing costs that buyers must pay. Your lender will provide you with a loan estimate that’ll specify what your closing costs are estimated to be. While closing costs for an FHA loan won’t be included as part of your minimum required down payment, there are several creative options to help make your closing costs more affordable, including having it gifted by a family member or paid by the seller.
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