What are FHA Closing Costs?
If you qualify for an FHA loan, you may have lower mortgage rates and down payments, but you can still expect to pay 3-6% of your home cost in closing fees.
Written by Bee Davis
Reviewed by Melanie Reiff
Table of Contents
- What is an FHA loan?
- What are FHA closing costs?
- How to calculate your FHA closing costs
- How to reduce your closing costs
- Finding affordable home insurance
Load full table of contents
Loans from the Federal Housing Administration typically come with 3 to 6 percent of your home sale price in closing costs. These costs can include lender fees, Mortgage Insurance Premiums, third-party fees, and prepaid costs. You’ll receive an estimate of your closing costs from your lender when you apply for a mortgage, but you can also calculate them online.
If you’re looking to purchase your dream home but have trouble qualifying for a regular loan, a loan from the Federal Housing Administration may be the solution. Individuals who are low-income or first-time homebuyers can use an FHA loan to lower their down payment or secure a manageable mortgage with a suitable timeline.
But an FHA loan won’t help you avoid closing costs. In fact, getting a loan from the FHA can increase your costs at closing while you save on your down payment and mortgage.
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What is an FHA loan?
The Federal Housing Administration, or FHA, provides loans and mortgage insurance to low-income or first-time homebuyers. FHA loans require a lower down payment than most conventional loans and can provide opportunities to buyers with low credit scores.
The FHA doesn’t actually lend money to people, but rather it insures loans from lenders. The FHA guarantees the loan, making it easier to get approved for a loan through a bank or financial institution.
What are FHA closing costs?
If you’re looking to buy a house, you’ve probably heard of closing costs. Closing costs are the fees you pay to your lender in exchange for loan services. They cover things like home appraisal and processing fees, typically amounting to 3 to 6 percent of the home’s sale price.
While an FHA loan can help lower your down payment, you’ll still have to pay closing costs at the end of your house hunting process. Closing costs can vary by state and tend to be higher in states with higher tax rates.
Here are some closing costs that you can expect when applying for a loan through the FHA:
Mortgage Insurance Premium
If you put less than 20 percent down for an FHA loan, you’re required to pay an FHA Mortgage Insurance Premium, or MIP, one upfront and another due annually.
The first MIP is included in your closing costs, equalling 1.75 percent of the loan principal. If you don’t have enough cash to pay your first MIP upfront, you can bundle it into your loan—but it increases the amount you’ll have to pay back, especially when you factor in interest rates.
The annual MIP that you’ll pay is included in your monthly mortgage payment, ranging from 0.45 to 1.05 percent. This premium is meant to insure your lender in case you stop paying back your loan.
Lender Fees
Lender fees are any expenses that pay the lender’s services. These can include the cost of creating a loan, the application fee, the document preparation fee, or the processing and underwriting fee. Some lenders don’t charge these fees at all, and with others, you can work with them to negotiate or waive certain fees.
Third Party Fees
Third-party fees are fees charged by other providers involved in your home buying process. These include the cost of appraising your house, notarizing documents, checking your credit, or recording your deed.
While some of these costs are fixed, others you can shop around for at your own discretion. When you receive your loan estimate, check to see if there are any third-party fees for services you can find yourself.
Prepaids
These are fees you pay in advance to cover future expenses. They can be listed as mortgage insurance, flood and hazard premiums, real estate taxes, or escrow deposits.
Key takeaway Lenders charge closing costs to pay for loan services, typically costing 3 to 6 percent of your home sale price.
How to calculate your FHA closing costs
To qualify for an FHA loan, your lender must appraise the house you’re looking at to make sure it meets FHA requirements. A more extensive appraisal process means a higher appraisal fee and higher closing costs.
Since many factors affect your closing costs, it can be hard to know how much you’ll be paying. Luckily, there are a couple of ways to estimate your closing costs online and through your lender.
- Loan estimate: You’ll receive a closing cost estimate from your lender within 3 days of applying for a mortgage. In your estimate, you can see the details of the terms of your loan and what you can expect in closing costs.
- Closing cost calculator: You can also use a closing costs calculator to estimate your closing costs online.
How to reduce your closing costs
Here are a few things you can do to reduce your costs at closing:
Compare lenders
Different lenders charge different fees, so it’s a good idea to shop around to see what different lenders cost. From there, you can pick a less expensive lender for lower closing costs.
Roll closing costs into your mortgage
While this will increase the amount you pay back, bundling your closing costs into your mortgage can help you avoid paying them upfront if you’re short on cash.
Use a gift
The FHA allows friends, family members, employers, or labor unions to help pay for your down payment and closing costs. You’ll need to provide a gift letter with the giver’s contact info, the amount they’re giving you, and a statement that you don’t need to repay them.
Ask the seller to pay closing costs
It may sound like a long shot, but if closing costs are the only thing keeping you from buying a house, the seller might be willing to pay them for you. If your seller seems eager to make a deal, ask if they’d be willing to cover part or all of your closing costs.
Finding affordable home insurance
Another cost you’ll need to prepare for is the cost of home insurance—which you’ll be required to get if you have an FHA loan.
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Can closing costs be included in an FHA loan?
Yes! You can bundle your closing costs into your loan payments if you’re short on cash up front, but be warned that you’ll pay these with interest, meaning you’ll increase the amount you’ll pay overall.
How much does it cost to close an FHA loan?
Typically, your closing cost will be 3 to 6 percent of your home sale price. You can view your closing costs in the estimate your lender will send you, or you can calculate them online through a reputable calculator.
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