What are the Closing Costs for an FHA Loan

Let’s break down what closing costs are, why they’re necessary, and specifically, what they amount to for an FHA mortgage loan.

What the heck are Closing Costs?

Closing costs are the fees and expenses you pay to finalize a mortgage (not just an FHA loan). This includes lender fees like underwriting, processing, discount points, loan origination fees, loan origination points, property appraisal, title fees, escrow fees, settlement services, insurance premiums, and taxes. These costs often catch first-time homebuyers off guard because they may not be expecting these additional expenses.

There are a lot of people that work on your transaction!  Typically, closing costs range from about 2% to 5% of the loan amount, but this can significantly differ based on your location, what State you’re in, the type of property, and the lender.  It’s really important to shop for these fees and not just look at the interest rate!

Pro tip– a lot of these fees can be negotiated!  Asking the loan officer if there’s anything that they can do to discount the rate or fees goes a long way.  Seriously, just ask!

FHA Loan Specifics

FHA loans have their own set of rules and costs. An FHA loan is a mortgage insured by the Federal Housing Administration, designed to reduce the barrier to homeownership for those with less-than-perfect credit histories or who can afford only small down payments.

Required Closing Costs for an FHA Loan

When you take out an FHA loan, you’ll encounter several mandatory costs:

• Appraisal Fee: Your home will need to be appraised by an FHA-approved appraiser ($500-$1000)
• Loan Origination Fee: This fee is paid to the lender for creating the loan (1-2% of the loan amount)
• Mortgage Insurance Premium (MIP): You will need to pay upfront MIP (1.75% of the loan amount, rolled into the loan) and an annual premium (.55% of the loan balance, but paid monthly)
• Title Insurance: This insures you against problems with the title to your property (varies widely, usually 2% of the purchase price)
• Recording Fees: These fees cover the cost of recording the mortgage with the local government (usually a few hundred $)

Optional Closing Costs

There are other costs that might not be required but could apply to your scenario:

• Loan Discount Points: You can purchase these points to lower your interest rate.  One point is 1% of the loan amount
• Home Inspections: While FHA requires an appraisal, it doesn’t mandate a home inspection, which is optional but highly recommended.

How to Estimate Your FHA Loan Closing Costs

When you apply for an FHA loan, your lender is required to provide a Good Faith Estimate (GFE) of your closing costs. It’s critical to review this document carefully and ask your lender any questions you have. Keep in mind that these costs will typically be due in cash at the time of closing, so you need to be financially prepared.  The seller is allowed to contribute to these fees, so that could/should be part of the negotiation of the home price.

An Example of Closing Costs from a recent FHA Loan

This home was recently sold in Arizona and used an FHA Loan.

Purchase Price: $400,000
FHA Loan Amount: $392,755

Loan Charges included:

Origination Fee 1.5% – $5,891.33
Admin Fee – $500
Doc Prep Fee – $60
Processing Fee – $200
Underwriting Fee – $995
Validation Services Fee – $175
Appraisal Fee – $550
Credit Report Fee – $120.69
Flood Certification – $13.50

Total Mortgage Fees: $8505.52
Seller Credit toward fees: $4,000
Net mortgage cost to buyer: $4,505.52

The total title fees were: $1,840

The MIP (mortgage insurance premium) was $6755.00 and rolled into the loan amount.

This buyer did receive a down payment assistance from $19,963.60 and a credit from the real estate agent in the amount of $1,524.80.

This buyer was able to purchase this home with only $2,000 out-of-pocket!

Ways to Manage Your Closing Costs

These are a few strategies you can use to manage the burden of closing costs:

Seller Concessions: In some cases, the seller may agree to cover some of your closing costs

Lender Credits: Some lenders will offer credits that cover a portion of your closing costs in exchange for a higher interest rate

Gift Funds: FHA allows you to use gifts from family members towards your costs

Down Payment Assistance:  There are down payment assistance programs that will help cover a portion of the down payment

It’s worth noting that each of these strategies may have long-term financial implications, so weigh these decisions carefully.  For example, increasing your interest rate to get a lender credit may actually increase the total cost of the loan in the long term.

In Conclusion

While FHA loans offer an accessible path to homeownership, it’s super important to be clear on the costs involved in order to plan accordingly.

Finding a good lender who will work with you and help you understand these costs is key. Don’t hesitate to seek advice from mortgage consultants and real estate agents who can provide valuable guidance through your first-time home buying experience.  FHArates.com is a great place to shop for a great FHA lender!

Are there any other aspects of FHA loans or closing costs you’d like us to cover? Feel free to drop your queries and suggestions in the comments below!

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