If you plan to buy a home by taking out an FHA loan, it’s important to include closing costs in your budget. While your down payment might be just 3.5 percent of the purchase price, you should also be prepared to pay FHA closing costs, too.

What are FHA closing costs?

Closing costs on FHA loans encompass several different expenses and fees charged by the mortgage lender and other companies involved in the lending process. Typically, a borrower can expect to pay between 2 percent and 6 percent of the home’s sale price.

When you apply for your loan, your lender will give you a loan estimate, which includes a preliminary tally of closing costs (sometimes written as “cash to close”). Three days prior to the closing date, you’ll get a closing disclosure with a final accounting of your closing costs, along with a detailed breakdown of those fees.

What’s included in FHA loan closing costs?

Since you won’t know exactly how much you’ll pay in closing costs until shortly before you finalize the deal, it’s smart to budget between 2 percent and 6 percent of the loan amount to make sure you have enough cash at the closing to cover these fees. On a $300,000 loan, for instance, you should budget between $6,000 and $18,000 to cover your closing cost estimate.

While FHA closing costs can vary considerably, a key variable is the size of your mortgage. As with non-FHA mortgages, larger loans carry higher closing costs.

The mortgage origination fee is one big contributor to your closing costs. 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.

Another key factor that determines your FHA loan closing costs is where your new home is located: Closing costs vary by state and can be much higher in states with higher tax rates.

FHA closing costs also include an upfront mortgage insurance premium and prepaid items.You’ll have to pay other companies, as well, for an appraisal, title services, flood zone certification services and more.

Mortgage insurance premium (MIP)

One condition of taking out an FHA loan to buy a home is the requirement to pay FHA mortgage insurance premiums (MIP), which include:

  • Upfront premium: This premium equals 1.75 percent of the loan principal. So if you’re borrowing $300,000, for instance, your upfront mortgage insurance premium will be $5,250. Although this fee can be wrapped into your mortgage if you don’t have enough cash to pay for it at the closing, doing so augments the size of your loan, increasing the amount you’ll need to pay back, both in principal and accompanying interest. In the example above, rolling the upfront MIP into the mortgage would raise the loan balance to $305,250.
  • Annual premiums: Included in your monthly mortgage payment, these premiums range from 0.45 percent to 1.05 percent of the loan principal. Whatever the rate, the exact charge will change annually because it is based on the amount of your outstanding mortgage balance.

Although the borrower is responsible for paying the premiums, FHA mortgage insurance protects the lender — not the homeowner — if the loan becomes delinquent.

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 choose, these fees can sometimes be negotiated down or even waived. The typical ones include:

Examining these costs should be part of your comparison-shopping process. Often a lender offers a lower interest rate but makes up for it with higher or more numerous fees.

Third-party fees

In addition to your lender, there are other providers involved in the mortgage application/home purchase process. This means you might expect additional fees in your closing costs for services such as:

  • Title search
  • Appraisal
  • Notarization
  • Credit check
  • Deed recording
  • Flood-zone certification

Take a look at the initial estimate of closing costs your lender provides. 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.

Prepaids

Prepaid items are the costs you pay in advance. Although technically different from your FHA mortgage closing costs, you still need to cover them. (Although, 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 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 five tips to lower your FHA mortgage closing costs.

1. Compare mortgage lender fees

FHA lenders aren’t all created equal, so when you shop around, ask for a transparent accounting of closing costs and other fees to get a sense of what different firms charge and identify which lenders have the lowest costs.

2. Explore FHA closing cost assistance programs

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

3. Ask the seller to pay some 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 and how hungry the seller is. 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.

While buyers were unlikely to successfully negotiate such concessions during the white-hot housing market of the past couple of years, the rapid increase in mortgage rates in 2022 has cooled demand considerably, especially in some of the markets that saw the most rapid run-ups. While some highly desirable areas and neighborhoods might still face a shortage of inventory and bidding wars, sellers have much less clout than they did when mortgage rates were at 3 percent. Buyers should take time to learn about local market conditions and evaluate the potential of negotiating with a seller.

4. Get a gift

FHA loans allow buyers to accept financial support from a family member, close friend, employer, labor union or a charity. If you plan to receive assistance paying for your down payment or closing costs from one (or more) of these sources, you’ll need to provide your lender with a gift letter that includes the giver’s contact information, the gift amount and a disclaimer that you won’t need to repay them.

5. 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 $300,000, you’d pay $3,000 for one point. While this strategy means that you’ll pay more at your closing, it can be a huge savings advantage in the long run, since you’re paying up front rather than amortizing the borrowing costs of that money over the 15- or 30-year term of your mortgage.

FAQs about FHA loan fees

  • Yes, as with other loans, you can roll FHA closing costs into your mortgage. This means you’ll have to come up with less cash at your mortgage closing. The drawback is that it means higher monthly payments, as well as more interest paid over the length of your loan term. So, this move is really about determining what’s more important to you: avoiding a payment now, or paying for it more in the future.
  • FHA closing costs are not the same thing as a mortgage down payment. Closing costs include charges like the origination fee, insurance, any pre-paid mortgage points and the cost of third-party services like appraisals.

    Your down payment counts towards the equity you are building in your new home, while closing costs do not. It’s important to budget for both a down payment as well as closing costs — which generally run between 2 percent and 6 percent of the loan amount.
  • Guaranteed by the Federal Housing Administration, FHA loans are designed to promote homeownership among moderate-income buyers, as well as those who would otherwise have trouble securing a conventional loan (one issued by a private lender). FHA loans only require a down payment of 3.5 percent of the purchase price, while many conventional mortgage lenders require down payments of 20 percent. FHA loans also allow borrowers to have lower credit scores (500 to 580, vs 620 for their conventional cousins) and carry more debt.

    In short, FHA loans are less stringent in their requirements. However, they come with caveats too: They require the borrower to pay mortgage insurance, often for the lifetime of the loan, and in most markets, they have lower limits on how much you can borrow.