FHA mortgage closing costs: What they are and how to avoid them

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The costs of buying a home are by no means limited to the price you pay for it and the interest rate on the loan. In addition, a slew of expenses awaits homebuyers.

When you buy a home using a Federal Housing Administration (FHA) loan, you have the advantage of being able to qualify with a lower credit rating, plus a much-smaller down payment. But using this government program means you’ll pay various costs at closing, some that conventional (non-FHA loans) have, and some that are unique to FHA loans.

What are FHA closing costs?

Known as FHA closing costs, these expenses include fees from the mortgage lender and various other players involved, including title companies, credit-reporting entities and other venders. The litany of fees also includes mortgage insurance and various prepaid items.

On average, FHA closing costs total about 3 percent of a home’s purchase price. Individual fees vary by state, as borrowing costs are higher in states with higher tax rates. You will get an estimate of total your closing costs up front from your mortgage lender.

Federal rules allow sellers to pay some of a buyer’s costs, usually capped at those totaling 6 percent of the sale price. This can be is a point of negotiation: Whether the seller decides to seek this concession from the buyer depends on the local market, how many other buyers want the house and other issues in the negotiations.

Different categories of FHA closing costs

The gamut of FHA closing costs include:

Mortgage insurance premiums

The FHA mortgage insurance premium cost usually totals 1.75 percent of the loan amount and can be wrapped into the loan. Atop this charge are ongoing MIP payments, usually ranging from about .45 percent to 1.05 percent of the loan amount each year of your loan term, all included in the monthly mortgage payment. The premium charged is adjusted annually based snapshot of the outstanding loan balance. (By contrast, neither up-front nor ongoing mortgage insurance premiums are involved in conventional loans for borrowers making down payments of 20 percent or more.)

Lender fees

As the FHA lender wants your business, these fees can often be negotiated, depending on your credit history, the current market and negotiating skills. Among lender fees are those for origination, underwriting, document preparation and interest-rate locks.

Third-party fees

These are charged by non-lender providers for services involving notaries, credit reporting agencies, recording work, appraisers, couriers, attorneys and flood-zone certification.

Pre-paid fees

Lastly, there are expenses that are paid in advance, some of which are shared (on a negotiable basis) between buyer and seller. These include tax and insurance escrow deposits, flood and hazard insurance premiums, property taxes and per-diem interest.

While catching your breath from this flurry of fees, you’re doubtless wondering: How can you stanch the drain from your wallet?

Purchasing points to reduce overall interest paid

One way is to purchase discount points—prepaid interest that lowers your loan’s interest rate and thus, the total amount you pay over time. Discount points are listed as another lender fee. One discount point equals 1 percent of the loan amount. For example, if you’re borrowing $150,000, you would pay $1,500 for one point. This cost is usually lumped in with other closing costs, and so it means you have to write a bigger check at closing.

Other ways to save on FHA loan costs

Try to get the seller to pay as many of the costs as possible—as a concession in negotiations. In a tight market where homes are in demand and prices are rising, this can be difficult. But if the seller doesn’t have other fish on the line and really wants to make a deal, you have some leverage that you might be able to convert to savings.

If you’re eligible, seek a closing-cost grant from a state or local housing assistance program, where applicable.

Paying these costs upon closing, rather than wrapping them all into the loan, minimizes the amount financed and saves on interest over the long term. As usual, you pay now—or pay more later.

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