No doubt, buying a house is a major purchase. On top of the new monthly mortgage payment and your down payment, you’ll also need to cover closing costs before you sign on the dotted line.
For some prospective home buyers – especially those who have less-than-perfect credit scores or don’t have a lot of funds for a down payment – Federal Housing Administration (FHA) loans are an attractive option for a mortgage. Even so, FHA loans – which are backed by the U.S. Department of Housing and Urban Development (HUD) – come with their own additional expenses at closing, in the form of an up-front mortgage insurance premium.
Before you start the home buying process, learn how much you may spend on FHA closing costs, as well as what is included and how you might reduce some of those fees before you buy.
- FHA closing costs cover lender fees, third party fees, an up-front mortgage insurance premium and prepaid expenses.
- Only a limited portion of closing costs could be rolled into your mortgage, such as the mortgage insurance fees – but as a result you may have higher mortgage payments and pay more interest over time.
- You may be able to negotiate with the seller or lender to cover some closing costs.
- Gift funds from approved sources are also allowed for FHA loan closing costs.
What Are FHA Closing Costs?
An FHA loan is a type of federally insured mortgage that helps you finance the purchase of a home. Like all mortgages, FHA loans have closing costs you’ll need to pay before you finalize your paperwork and get the keys to your new home.
Closing costs include things like lender fees, third party fees and the FHA up-front mortgage insurance premium. You also usually need to prepay some of your home-related expenses, such as property taxes and homeowners insurance.
Can closing costs be included in an FHA loan? The answer depends on the loan type and your lender. On most FHA loans, the upfront mortgage insurance premium (MIP) can be rolled into the loan amount rather than paid at closing. But this option is not available on an FHA Streamline Refinance. Beyond MIP, whether closing costs can be rolled in depends on your lender and any seller concessions negotiated as part of your purchase. If you do roll costs into your loan, just remember that you’ll need to qualify for the larger loan amount and will pay more in interest over time.
Compare Mortgage Offers From Verified Lenders:
How Much Are FHA Closing Costs?
FHA closing costs vary based on a number of factors, especially the price of your home and the location. But in general, expect to pay anywhere between 3% and 6% of your home’s purchase price.
For example, if you buy a $300,000 home, your FHA closing costs would probably be between $9,000 and $18,000. If you’re putting down 3.5%, that adds another $10,500 you’ll need to pay up front, for a total of $19,500 to $28,500.
Once you officially apply for an FHA loan, they’re required to send you a loan estimate within 3 days. Look at the “estimated cash-to-close” section to find out how much your closing costs will be. Then, as you finalize the underwriting process and head toward closing, you’ll receive a closing disclosure at least 3 business days before closing. This shows you the final total of your closing costs.
See What You Qualify For
Buy A Home
Discover mortgage options that fit your unique financial needs.
Refinance
Refinance your mortgage to have more money for what matters.
Tap Into Equity
Use your home’s equity and unlock cash to achieve your goals.
What Do FHA Closing Costs Cover?
There are four categories of fees included within FHA closing costs.
FHA Up-Front Mortgage Insurance Premium
All FHA loans come with an up-front mortgage insurance premium (MIP), which varies depending on your loan amount. For FHA purchases, the up-front MIP costs 1.75% of the loan amount. If you look at the example of buying a home with a $300,000 loan, that means MIP will cost $5,250 at closing. It can, however, be rolled into your mortgage as long as you qualify for that amount.
Remember that a higher mortgage balance means two things: a larger monthly payment and more interest paid over time. Let’s look at an example of a $300,000 house, with a 3.5% down payment. That takes the loan amount to $289,500. Assuming a 7% annual percentage rate (APR) with a 30-year term, the monthly payment (principal and interest only) would be $1,926 and the total interest paid would be $403,878.
But by rolling in $5,066 in MIP, your new loan amount would be $294,566. The monthly payment would increase to $1,960 and your interest paid would jump to $410,946. That’s without considering insurance, taxes and the FHA’s annual mortgage insurance premium.
Lender Fees
Lenders generally charge several fees to cover the application process. Standard lender fees include:
- Mortgage origination fee: This fee covers the administrative costs associated with reviewing your application. It usually totals between 0.5% and 1.2% of your loan.
- Underwriting fee: The underwriting fee is meant to cover the lender’s analysis of your financial situation. It may be included in the origination fee or as a separate charge.
- Documentation preparation fee: You can typically expect to pay no more than $100, which reimburses the lender for preparing all of your closing documents.
There are also some optional lender fees that may or may not apply to your loan, including:
- Interest rate lock fee: A rate lock lets you protect the rate you qualify for when you apply, in case it increases before closing. You may be charged a fee if you need to extend your rate lock beyond the typical period of 15 to 60 days.
- Discount points: If you want to buy a lower interest rate, you can pay a discount point at closing. It’s usually charged as a percentage of your loan amount – one point being equal to 1% of your total loan amount.
- Supplemental loan origination fee: Used for FHA 203(k) renovation loans, this extra origination fee applies to the portion of your mortgage assigned for home repairs.
Third-Party Fees
Third-party fees pay service providers beyond your lender. They can vary based on the state you live in and the specifics of your FHA loan, but could include:
- Title insurance
- Notary fee
- Local government recording fees
- Appraisal fee
- Credit report fee
- Courier fee
- Attorney fee (if required in your state)
- Flood certification fee
Prepaid Fees
Prepaid fees are an important part of the closing process. Instead of covering expenses already incurred, they pay upcoming expenses in advance. Funds are typically held in an escrow account, then dispersed by your mortgage servicer before the due date. Here are common fees you may need to pay in advance at closing.
- Property taxes: The cost of your annual property tax is usually spread out between your monthly mortgage payments each year. But your lender will want you to prepay the taxes owed from the time you close to the date of your first mortgage payment.
- Homeowners insurance: While homeowners insurance is similarly included in your monthly payment, you must pay anywhere between 6 months to 1 year’s worth of your premium to start your coverage.
- Mortgage interest: You also must pay mortgage interest to cover the daily rate between the closing date and your first mortgage due date.
- Escrow deposit: Some lenders may require that you put some money in your escrow account as a buffer against future shortages. Check on your closing disclosure to see if this prepaid fee is required.
Ready To Become A Homeowner?
Get matched with a lender that can help you find the right mortgage.
How To Minimize FHA Loan Closing Costs
Closing costs can quickly add up when you’re already making one of the biggest purchases of your life. Even though these expenses are the buyer’s responsibility, there are ways to potentially offset the final cost to close.
Seller Concessions
Seller concessions refer to negotiating with the seller to cover some or all of your closing costs. While this might be difficult to do in a seller’s market, you may have better luck if you’re purchasing a home in a buyer’s market. However, the government limits the amount sellers can put toward FHA closing costs to 6% of the sales price.
Lender Negotiations
It’s possible, although not guaranteed, to negotiate with your lender on some of their closing costs. Look at some of the line items and see if there are any costs they can reduce or remove, such as courier or wire transfer fees. It also may be worth asking multiple lenders as part of your loan comparison process, then see which overall mortgage package looks the best.
Gift Funds
The FHA allows you to receive cash gifts from certain sources in order to help cover your closing costs. Acceptable gift sources include:
- A relative
- An employer or labor union
- A close friend
- A charitable organization
- A government agency or public entity providing home ownership assistance (limited to low and moderate income families or first-time home buyers)
Prepare to submit documentation to your lender about the source of your closing costs if they’re coming from one of these third parties.
Down Payment Assistance Programs
Another option to help reduce your up-front FHA loan costs is to apply for down payment assistance. These local programs are usually reserved for first-time home buyers who meet certain income thresholds. There are a few different ways a down payment assistance program may be structured:
- Grants (that don’t need to be repaid)
- Forgivable, deferred payment or low-interest loans
- Matched savings programs
Search for assistance with local or state government agencies or nonprofits serving your area.
Take The First Step To Buying A Home
Find a lender that will work with your unique financial situation.
FAQ
The Bottom Line: Budget For FHA Closing Costs Before You Buy
Closing costs are a part of the home buying process for any type of mortgage, but there are some differences when you opt for an FHA loan. Plan ahead so that you know exactly how much cash you’ll need before signing your final paperwork.
Need help calculating all the costs associated with a new home loan? Check out our mortgage calculator.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
