FHA loan closing costs range from 3% to 4% of the purchase price. For a median home price of $427,496, this means an additional $12,825 to $17,100 in closing expenses.
FHA loans are a popular choice among homebuyers due to their low down payment requirements. However, these down payments come with closing costs that can significantly increase overall expenses.
To understand your total costs and plan accordingly, get pre-approved today. This will give you a clear picture of your loan terms and make you a seller’s favorite in a competitive market.
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What Are FHA Loan Closing Costs?
FHA closing costs are additional fees that lenders and stakeholders charge borrowers. When you apply for an FHA loan, your lender provides a loan estimate and final cost disclosure three days before closing.
You can roll closing costs into the loan to ease upfront costs. In this case, you have to pay interest on the closing fees, which will increase your total loan cost.
What’s Included in FHA Loan Closing Costs?
FHA home loan closing costs include various fees, such as:
1. Mortgage Insurance Premium
Mortgage insurance premium(MIP) is a fee that protects the lender if a borrower defaults on an FHA loan. MIP is required on all FHA loans, regardless of the size of the down payment.
2. Lender Fees
This fee covers your lender’s services during the mortgage process, and may include:
- Origination Fee: Mortgage origination fee typically ranges from 0.5% to 1% of the loan amount, charged for processing the loan.
- Underwriting Fee: Covers the cost to evaluate the loan application.
- Document Preparation Fee: Lenders charge this to manage the loan paperwork.
- Application Fee: Some lenders may charge a fee to process the loan application.
- Rate Lock Fee: You have to pay the mortgage rate lock fee to secure an interest rate for your loan.
3. Third-Party Fees
Third-party fees in closing costs for FHA loans are charges from external service providers involved in the mortgage process. These fees can include:
- Appraisal Fee: It is the cost for evaluating the property’s value. The average cost of a home appraisal in the US is between $300 and $500.
- Title Insurance Fee: This fee protects you against ownership disputes and claims. Title insurance costs range from 0.5% to 1% of your home sale price.
- Inspection Fees: These fees cover home inspections, including general assessments and pest inspections.
- Attorney Fees: These costs cover legal services related to closing.
4. Prepaid Expenses
Prepaid expenses aren’t technically closing costs. However, you have to pay them at the same time. They include:
- Prepaid Insurance and Taxes: Upfront payments for homeowners’ insurance and property taxes.
- Prepaid Interests: Interest paid in advance to cover the period between closing and your first mortgage payment.
- Escrow Deposits: The lender holds escrow deposits for future insurance and tax payments.
How to Calculate FHA Loan Closing Costs?
To calculate FHA mortgage closing costs, first determine the home’s purchase price. You can use a home price estimator to get an approximate value. Once you have the loan amount, here’s how you estimate the total closing costs:
Loan Amount × (Percentage) = Closing Costs
These costs can vary based on location, lender fees, and FHA-required insurance premiums. Review your lender’s Loan Estimate for a detailed breakdown.
How Can You Reduce Your FHA Loan Closing Costs?
FHA closing costs can add up, but here are 5 tips to minimize them:
1. Compare Mortgage Lender Fees
Different lenders may charge different amounts for origination, underwriting, and processing fees. Evaluate your options to save on your total closing costs.
2. Negotiate With Your Lender
Many lenders can offer favorable terms, so don’t hesitate to negotiate. Your lender might even agree to waive fees like courier or wire transfer charges upon request.
3. Ask for Seller Concessions
Seller concessions allow the seller to cover a portion of the buyer’s closing costs. FHA guidelines permit sellers to contribute up to 6% of the home’s price toward closing costs. This can include appraisal fees, property taxes, and title insurance.
4. Look for Closing Costs Assistance Programs
Many states and local governments offer closing cost assistance programs to help reduce the financial burden of buying a house. These programs may provide grants, low-interest loans, or forgivable loans.
5. Ask for Financial Gifts
Financial gifts from family or friends can help you reduce upfront expenses. FHA gift funds can cover up to 100% of the down payment and closing costs. Make sure to obtain a gift letter to ensure compliance with FHA guidelines.
How Do FHA Loan Closing Costs Work?
FHA loan closing costs typically range from 3% to 4% of the purchase price. They include fees for mortgage insurance, lender services, and third-party evaluations.
To reduce these expenses, request seller concessions, use assistance programs, and seek financial gifts from family or friends. These proactive steps are sure to make your homebuying experience more affordable.
Frequently Asked Questions
What if I can't afford closing costs?
You can reduce your closing costs with seller concessions, gift funds or local assistance programs.
Can you roll closing costs into mortgage?
Yes, you can roll closing costs into your FHA mortgage instead of paying upfront. However, this increases your total loan amount and interest costs.
Do closing costs include down payment for FHA loan?
No, closing costs are separate from down payment. Closing costs cover fees related to the loan, while down payment is the initial payment toward the home's purchase price.
