FHA loan closing costs
Quick insights
- An FHA loan is a government-insured mortgage designed to help more people achieve homeownership, especially first-time buyers and borrowers with limited savings or lower credit scores.
- Closing costs for an FHA loan are typically 2% to 6% of the home’s sale price. Typical closing costs include lender fees (such as origination fee), third-party fees, pre-paid fees and FHA upfront mortgage insurance premium (UFMIP).
- You can reduce FHA loan closing costs by using gift funds, rolling costs into the loan, asking the seller to cover some fees, applying for assistance and/or negotiating with your lender.
When you’re trying to buy a home, finding a mortgage loan that meets your needs can be difficult. A loan from the Federal Housing Administration, known as an FHA loan, may provide opportunities not offered by other mortgages. Still, closing costs are part of the deal. If you’re considering an FHA loan to pay for your dream home, it’s important to know the details of FHA mortgage closing costs and how to pay them.
What’s an FHA loan?
An FHA loan is a mortgage issued by the Federal Housing Administration for first-time buyers, especially those with low credit scores and little saved up. Because these loans are insured by the government, lenders can offer flexible qualifications and manageable down payment requirements, making it easier for many borrowers to qualify and start the path to homeownership, even those who previously declared bankruptcy or filed for foreclosure. FHA loans can only be used to purchase your primary residence. In other words, you can’t use them for a second home, vacation home or investment property.
How do you get an FHA loan?
To get an FHA loan, you’ll work with an FHA-approved lender. They can help you determine if an FHA home loan meets your needs. Like any loan, you’ll need to meet certain criteria to qualify. Current requirements for an FHA loan include:
- A credit score of at least 580 to qualify for a 3.5% down payment.
- A credit score of at least 500 to qualify with a 10% down payment.
- Proof of steady income.
- The home must be your primary residence.
- Mortgage insurance premiums: An upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) paid monthly.
Be sure to discuss this with your lender, as some lenders may have tighter restrictions.
What are closing costs in a mortgage?
Closing costs, including prepaids, are fees that must be paid to finalize your mortgage loan. Your loan covers a percentage of the sales price of the property you’re purchasing while closing costs cover the costs that accumulate during the homebuying and mortgage loan process. You’ll receive a loan estimate at time of application and a closing disclosure three days before your scheduled closing day from your lender. These documents include details of your loan and an itemized list of closing costs.
What are FHA loan closing costs?
The closing costs on 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, the state the property is located in and lender fees. Some of the costs include:
- Lender fees: Your lender accumulates certain costs while taking care of your mortgage. You’ll pay for these at closing. FHA loan fees may include an origination fee, underwriting fee, document preparation fee and interest rate lock fee.
- Third-party fees: Some services included in the mortgage process are taken care of by third-party providers. These may include fees for the title insurance, notary, credit report, recording, appraisal, courier, attorney and flood certification.
- Pre-paid fees: These are paid in advance to cover the costs that will be incurred in the future. They may be listed as mortgage insurance, escrow deposit, flood and hazard insurance premiums, real estate taxes and per diem interest.
- FHA upfront mortgage insurance premium (UFMIP): Since your FHA loan is insured by the Federal Housing Administration, you’ll be required to finance or pay 1.75% of your loan amount as a one-time upfront fee to protect the lender if you default. Additionally, ongoing monthly MIP costs are also associated with your FHA loan.
How to calculate your FHA loan closing costs
Sometimes, an FHA loan can give you the opportunity to buy a home when you otherwise wouldn’t get approved for a mortgage loan. Because your home must meet FHA property standards, the appraisal process may include more requirements than a conventional home loan. The appraisal is required to be performed by an FHA-approved appraiser and may have additional inspections, which could result in a higher appraisal cost. Besides these expenses, your FHA mortgage closing costs will include the typical fees listed above.
When buying a home with an FHA loan, closing costs can vary based on many factors, but understanding them early can help you prepare financially. Your lender will provide a loan estimate within three days of your application, outlining your loan terms and estimated closing costs. Additionally, tools like closing cost calculators can give you a helpful estimate of potential expenses so you can plan your budget effectively.
How to reduce FHA closing costs
Every FHA loan includes closing costs, but you can take steps to lower them. While closing costs are generally considered to be the responsibility of the homebuyer, you may not have to pay for everything yourself. One of the biggest advantages of an FHA loan is the ability to avoid large upfront costs. To avoid or offset high closing costs that could derail your home purchase, consider some of these options.
1. Interested party contributions
FHA allows Interested Party Contributions up to 6% of the sales price toward the borrowers origination fees, other closing costs, prepaids items and discount points. Interested Parties refer to seller, real estate agents, builders, developers, mortgagees, third-party originators or other parties with an interest in the transaction.
2. Use a gift
The FHA allows money given by family members or other eligible donors to cover both your down payment and closing costs. The FHA also allows gifts from your employer, a labor union or from charitable organizations. You can also use funds from government agencies or public entities that provide assistance to low-to-moderate-income or first-time buyers.
3. Include the costs in your loan payments
If you can afford and qualify with a higher interest rate, it’s possible to have most or all of your closing costs rolled into your interest rate through premium or par pricing. It’s important to remember that when closing costs are rolled into your interest rate, your monthly mortgage payments will be higher.
4. Ask the seller to pay closing costs
If closing costs are the only thing preventing you from completing your purchase, the seller may agree to pay for some or all of them. FHA rules allow the seller or another third party to pay up to 6% of the property sales price toward closing costs or other prepaid expenses. Consider asking for any seller assistance during the contract negotiation.
5. Apply for assistance
Some banks and housing finance agencies offer FHA closing cost assistance programs. Additionally, you may be eligible for state grants or programs designed to help homeowners with the up-front costs associated with a mortgage loan. Typically, to qualify for closing cost assistance, the residence must be a single-family home and your primary residence. Some types of assistance are only for first-time homeowners.
6. Negotiate with the lender
In some cases, there’s some wiggle room when it comes to lender fees. If your lender wants to compete for your business, they’re often willing to help you with lower closing costs. Comparing quotes from other lenders can help you navigate the negotiation.
FHA loan closing costs FAQ
Who pays FHA loan closing costs?
The borrower typically pays the FHA loan closing costs, but the seller can contribute up to 6% of the home’s sale price to help cover the buyer’s closing costs, prepaid expenses and other financing concessions. Also, some borrowers choose to roll certain closing costs, like the upfront mortgage insurance premium, into the loan amount itself, which can reduce out-of-pocket expenses at closing.
What is the downside of an FHA loan?
Overall, FHA loans provide a straightforward and reliable path to owning a home, with protections that benefit both buyers and lenders. However, there are factors to consider before choosing an FHA loan, as they can impact your financial commitment and the types of homes you’re eligible to buy. The main drawbacks of an FHA loan are the ongoing costs of mortgage insurance premiums, which can last for the life of the loan (up to 30 years); rigorous property standards that might exclude some homes; and loan limits that restrict how much you can borrow based on your location.,
In summary
Understanding FHA loan closing costs is essential to keeping your homebuying budget on track from day one. While these costs add to your upfront cash needed, FHA loans offer financial flexibility. Knowing what to expect and how closing costs are broken down can help you plan better and make your path to homeownership smoother. To learn more about FHA loans and options for covering closing costs, consider speaking with a Home Lending Advisor.
