When applying for an FHA loan to buy a home, you’ll need more than just 3.5 percent of the purchase price as a down payment. As you budget, it’s important to make sure you factor in FHA closing costs, too.
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 can be much 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. Then, three days before you’re set to become the official owner, you’ll get a closing disclosure with a final breakdown of those fees.
How much are FHA closing costs?
There is no set amount for how much you’ll pay in FHA closing costs. One of the key factors that impacts your total closing cost tab is the size of your mortgage.
For example, if your loan is for $300,000, and your lender charges an origination fee of 1 percent, that portion of your closing costs will be $3,000. If you can find a lender that charges just 0.5 percent, you can shrink that item to $1,500.
You’ll have to pay other companies, as well, for an appraisal, title services, flood zone certification services and more.
Overall, you’ll want to budget between 2 percent and 6 percent of the loan amount to make sure you’re leaving enough room to cover these fees. On a $300,000 loan, that falls between $6,000 and $18,000.
List of FHA closing costs
Mortgage insurance premium (MIP)
When you take out an FHA loan to buy a home, you are required to pay FHA mortgage insurance premiums (MIP), which include:
- Upfront premium: The upfront MIP is part of your FHA closing costs and equals 1.75 percent of the loan principal. If you’re borrowing $300,000, your upfront mortgage insurance cost would be $5,250. However, you don’t have to pay this in cash — it can be wrapped into the loan if you don’t have enough money to cover it as part of your closing costs. Keep in mind, though, that doing so increases the amount you’ll finance and need to pay back. In this case, your loan is now for $305,250, with accompanying interest.
- Annual premiums: Atop the upfront 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.
Not all mortgage lenders charge the same fees. 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. Ask about these costs as you compare loan options:
- Origination fee
- Underwriting fee
- Application fee
- Document preparation fee
- Rate lock fee
- Points to reduce your overall interest rate
Your lender isn’t the only company involved in dealing with your mortgage application. There are other services you might need to pay for in your closing costs, including:
- Title search
- Credit check
- Deed recording
- 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.
Prepaid items are the costs you pay in advance, and they’re actually different from closing costs. Regardless, you need the money to cover them, and sometimes, the seller might be willing to pay for a portion. The prepaids 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 to save on FHA closing costs
Whether you’re looking to reduce the sting of closing costs now or hoping to lower the lifetime cost of your loan, consider these six tips to manage the money involved in your FHA mortgage.
1. Compare lender fees
Mortgage lenders aren’t all created equal. Shop around and ask for fee transparency upfront to get a sense of what different FHA lenders charge and 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. You won’t 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 closing.
If you do roll them into your loan, you’ll have a bigger monthly mortgage payment, and pay more for your mortgage overall. This move is really about determining what’s more important to you: avoiding a payment now, or paying for it more in the future.
3. Ask the seller to pay some of the closing costs
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.
It’s important to note that this is a tough ask to make in today’s housing market, 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 might have some leverage that you can 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 $300,000, you’d pay $3,000 for one point. This strategy won’t reduce your upfront closing costs — in fact, you’ll need more cash since you’re paying for points upfront. However, it can make a huge difference in the long period (15 to 30 years) that follows closing day by saving you a large chunk in interest.