FHA closing costs: What they are and how much you’ll pay

What are FHA closing costs?

The closing costs on FHA loans encompass several fees charged by the mortgage lender and others involved in the lending process. On your closing day, you need to be ready to pay both your FHA loan down payment and closing costs.

When you apply for an FHA loan, your lender will give you a loan estimate, which includes a preliminary tally of closing costs. Three days before your closing date, you’ll get a closing disclosure with a final accounting of closing costs, along with a detailed breakdown of those FHA loan fees.

What’s included in FHA loan closing costs?

The costs you’ll pay at closing fall under four main categories:

• Upfront mortgage insurance premium
• Lender fees
• Third-party fees
• Prepaid expenses

While the upfront premium comes at a standard rate (more on that below), the other FHA closing costs often vary. For instance, one lender might charge a 1 percent origination fee, while another lender won’t charge one at all.

Upfront mortgage insurance premium (MIP)

One requirement when taking out an FHA mortgage: mortgage insurance premiums (MIP). This includes an upfront premium paid at closing, equal to 1.75 percent of the loan principal. Can closing costs be included in the loan with FHA financing? You bet. Just be advised that when you make it part of the loan, you’re paying interest on it, raising your all-in costs.

Although you’re responsible for paying the premiums, they protect the lender — not you — if you were to default on the mortgage.

Lender fees

Not all mortgage lenders charge the same fees, and some lenders don’t charge fees at all. Depending on which FHA lender you work with, you might be able to negotiate some fees. Typical FHA loan fees include:

• Origination fee
• Underwriting fee
• Application fee
• Credit check fee
• Document preparation fee
• Rate lock fee
• Points to reduce your interest rate

You might find your lender offers a lower interest rate but makes up for it with higher fees. The fees are reflected in the annual percentage rate (APR), so be sure to compare this figure when weighing FHA loan closing costs.

Third-party fees

In addition to your lender, there are other providers involved in the home purchase process, and they charge fees as well. Among them, these usually include the appraisal and title search and insurance fees. Take a look at the initial estimate of closing costs. This will show you which third-party costs are fixed and which ones you can shop around for. For those that fall under the latter category, you can potentially save money if you find a lower-cost provider.

Prepaid expenses

Prepaid items are the costs you pay in advance. Although technically different from your FHA mortgage closing costs, you still need to cover them at closing. (That said, depending on how eager the seller is to close a deal, you might be able to negotiate to have them pay for part of these costs.) These prepaid costs can include:

• Tax and homeowners insurance escrow deposits
• Flood and hazard insurance premiums
• Per-diem interest (if your closing date falls prior to the start of your regular monthly payments)

How much are FHA closing costs?

Closing costs vary, largely depending on the type of FHA loan fees your chosen lender charges. Typically, a borrower can expect to pay between 3 percent and 6 percent of the home’s purchase price in closing costs.

On a $400,000 home, for example, you’d budget $12,000 to $24,000 to cover your closing costs. And remember, your FHA loan down payment and closing costs are all due at the closing table. You’ll need to make sure you have sufficient funds to cover everything laid out in your lender-provided closing disclosure, plus your down payment.

How to reduce FHA closing costs

Whether you’re looking to reduce the sting of immediate expenses or hoping to lower the lifetime cost of your loan, consider these tips to lower your FHA closing costs:

Finance your upfront mortgage insurance premium

If you’re worried about having enough cash at the closing table, you might consider rolling your upfront mortgage insurance premium into your loan amount. You’ll have to pay higher monthly payments with this option, but it’ll reduce some of your upfront costs.

Compare mortgage lender fees

FHA lenders don’t all charge the same fees. When you shop around, ask for a list of lender fees to get a sense of what different lenders charge. This can also help you spot fees that seem out of the range of normal.

Explore FHA closing cost assistance programs

Most states run housing finance agencies that connect borrowers — especially low- and moderate-income borrowers and first-time homebuyers — with down payment and closing cost assistance. Bankrate has compiled a list of these types of first-time homebuyer programs by state to help you explore potential options.

Ask the seller to pay some closing costs

With an FHA loan, the seller is allowed to pay some of the buyer’s closing costs, up to 6 percent of the home’s sale price. Not every seller agrees to this, especially if there are other offers on the table. If you’re working with a Realtor, they can help you figure out the best approach to this strategy.

Get a gift

FHA loans allow buyers to accept financial gifts from a family member, close friend, employer, labor union or charity. If you receive this financial support, you’ll need to provide your lender with a gift letter. This letter needs to include the giver’s contact information, the gift amount and a disclaimer that you won’t need to repay them.

Buy mortgage points

Mortgage points, also referred to as discount points, are fees you can pay to lower your loan’s interest rate, typically by 0.25 percent per point. Each point costs 1 percent of the loan principal. So, if you’re borrowing $400,000, you’d pay $4,000 for one point.

While this strategy means you’ll pay more at closing, it can be a huge savings advantage in the long run, since you’re paying upfront rather than amortizing the borrowing costs of that money over the 15- or 30-year term of your mortgage. Conversely, if you don’t plan on staying in the home that long, points might not be worth it.

FAQ about closing costs on FHA loans

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  Can FHA closing costs be rolled into the loan?

  Yes. As with other types of mortgages, you can roll FHA closing costs into your mortgage. This means you’ll pay less at the closing, but higher monthly payments, as well as more interest. This move is really about determining what’s more important to you: avoiding a payment now, or paying more for it in the future.
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  Are FHA closing costs different from the down payment?

  FHA loan closing costs are not the same as the down payment. The closing costs include charges like the origination fee, any mortgage points and the cost for third-party services like the appraisal. The down payment, on the other hand, is the portion of the home’s purchase price you’re paying upfront, rather than financing with the loan. For an FHA loan, this amounts to a minimum 3.5 percent.
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  What are the benefits of an FHA loan?

  The key benefit of an FHA loan: flexibility. You can get this type of mortgage with a credit score as low as 580 if you have a 3.5 percent down payment, or 500 if you have at least 10 percent to put down.
  
  Learn more: FHA loans: What are they and how do they work?
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  When will I find out my exact closing costs?

  You’ll receive a closing disclosure that outlines your exact closing costs at least three business days before the closing.