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

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What are FHA closing costs?

The closing costs on FHA loans are the fees charged by the mortgage lender and the various other players involved in the loan process, and typically total between 2 percent and 6 percent of the home’s sale price. These fees also include an upfront mortgage insurance premium and prepaid items.

Closing costs vary by state, however, and are higher in states with higher tax rates. When you apply for a mortgage, you’ll get a closing costs estimate from your mortgage lender specific to your loan.

Sellers are allowed to pay some of a buyer’s closing costs, usually capped at 6 percent of the sale price. Whether the seller decides to grant this concession to the buyer depends on the local housing market, how many other buyers are interested in the property and other factors. If a seller has many offers to choose from, for example, there won’t be as much incentive to offer to pay some of the costs.

List of FHA closing costs

Mortgage insurance premium (MIP)

Borrowers who put less than 20 percent down for an FHA loan are required to pay FHA mortgage insurance premiums (MIP), one upfront and another annually for the duration of the loan term (in most cases). The upfront MIP is included in FHA closing costs, and equals 1.75 percent of the loan principal. This MIP can be wrapped into the loan if you don’t have enough cash on hand to cover it as part of your closing costs, but doing so increases the amount you’ll finance and need to pay back.

Atop this charge are annual MIP payments, ranging from 0.45 percent to 1.05 percent of the loan principal, included in your monthly mortgage payment. The premium charged is adjusted annually based on what you still owe.

Although you’re paying the premiums, FHA mortgage insurance protects the lender in the event you stop making payments on your loan; it doesn’t protect you.

Lender fees

Lender fees can include an origination fee, or the cost of creating the loan; an application fee; a processing or underwriting fee; a document preparation fee; a fee to lock your rate; and discount points. Depending on which FHA lender you work with, these fees can sometimes be negotiated down or even waived, and some lenders don’t impose any fees at all.

Third-party fees

Third-party fees are all of the fees charged by other providers involved in the transaction. These cover the cost of services such as a title search, appraisal, notarization, credit check, deed recording and flood-zone certification.

When your lender provides an estimate of your closing costs, you’ll be able to see which costs are fixed and which costs are for services you can shop around for. Some third-party fees might fall under the latter category, so you can potentially save money if you find a lower-cost provider.

Prepaids

Prepaid items are the expenses you pay 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 and per-diem interest.

How to save on FHA closing costs

1. Compare lender fees

Fees vary from mortgage lender to mortgage lender, so shop around and ask for fee transparency upfront to get a sense of what different FHA lenders charge. This’ll help you identify which lenders have the lowest costs.

2. Roll the closing costs into the loan

To avoid paying for closing costs upfront, ask your lender about rolling them into your mortgage. Bear in mind, you won’t really avoid the closing costs on FHA loans this way, since you’re now financing them (with interest), but you won’t have to pay them out of pocket, which can make sense if you’re short on cash for the closing. If you do roll them into your loan, you’ll have a bigger monthly mortgage payment, and pay more for your mortgage overall.

3. Ask the seller to foot the bill

With an FHA loan, you can ask the seller to pay for some of your closing costs to help cut down your expense. This can be a tough demand to make in today’s housing market, however, since sellers are garnering lots of offers these days. Every neighborhood is different, though, so, 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.

4. Look into closing cost assistance

Most states have grants or zero-interest loan options to help lighten the load of closing costs and a down payment, especially for low- and moderate-income borrowers and first-time homebuyers. Bankrate has a list of these types of programs by state to help you explore your options.

5. Get a gift

FHA loans allow for financial support from a few different sources: a family member, close friend, employer, labor union or a charity organization. If one (or more) of these sources is willing to help you pay for part of your closing costs or down payment, you’ll need to provide your lender a gift letter to verify that. This letter should include the giver’s contact information, the gift amount and a disclaimer that you won’t need to repay them.

6. Buy points

Discount or mortgage points are fees you can pay to lower your loan’s interest rate, typically by 0.25 percent per point. One point costs 1 percent of the loan principal. So, if you’re borrowing $150,000, you’d pay $1,500 for one point. While this strategy won’t reduce your closing costs — you’ll need to pay for points upfront — it can help you save significantly in interest.

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor
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