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The closing costs on FHA loans encompass several fees charged by the mortgage lender and others involved in the lending process. On your closing day, you need to be ready to pay both your FHA loan down payment and these closing costs. The costs typically run 2 percent to 6 percent of the home’s purchase price.
When you apply for an FHA loan, your lender will give you a loan estimate, which includes a preliminary tally of closing costs. Three days before your closing date, you’ll get a closing disclosure with a final accounting of closing costs, along with a detailed breakdown of those FHA loan fees.
The costs you’ll pay at closing fall under four main categories:
While the upfront premium comes at a standard rate (more on that below), the other FHA closing costs often vary. For instance, one lender might charge a 1 percent origination fee, while another lender won’t charge one at all.
One requirement when taking out an FHA mortgage: mortgage insurance premiums (MIP). This includes an upfront premium paid at closing, equal to 1.75 percent of the loan principal.
You’ll also pay annual MIP, which is rolled into your monthly mortgage payments for the life of the loan. The amount you’ll pay depends on your loan amount, loan term and loan-to-value (LTV) ratio.
Not all mortgage lenders charge the same fees, and some lenders don’t charge fees at all. Depending on which FHA lender you work with, you might be able to negotiate some fees. These fees include, but aren’t limited to:
You might find your lender offers a lower interest rate but higher fees. Some of these fees might be reflected in the annual percentage rate (APR), so be sure to compare this figure when weighing FHA loan closing costs.
In addition to your lender, there are other providers involved in the home purchase process, and they charge fees as well. Among them, these usually include the appraisal and title search and insurance fees.
The loan estimate shows 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.
Prepaid items are costs related to your home or mortgage that you’ll pay in advance. Although technically different from FHA mortgage closing costs, you’ll still need to cover these at closing:
FHA closing costs vary widely by lender and location. Typically, a borrower can expect to pay between 3 percent and 6 percent of the home’s purchase price in closing costs. On a $400,000 home, for example, you’d need to budget $12,000 to $24,000 to cover your 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 tips to lower your FHA closing costs:
If you’re worried about having enough cash at the closing table, you might consider rolling your upfront mortgage insurance premium into your loan amount. You’ll have to pay slightly higher monthly payments and more interest with this option, but it’ll reduce some of your upfront costs.
FHA lenders don’t all charge the same fees. When you shop around for a mortgage lender, ask about fees to get a sense of what different lenders charge. This can also help you spot fees that seem out of the ordinary.
Every state runs a housing finance agency that often connects borrowers — especially first-time homebuyers — with down payment and closing cost assistance.
With an FHA loan, the seller is allowed to pay some of the buyer’s closing costs, up to 6 percent of the home’s sale price. Not every seller agrees to this, however, especially if there are other offers on the table. If you’re working with a Realtor, they can help you figure out the best approach to this strategy.
FHA loans allow buyers to accept financial gifts from a family member, close friend, employer, labor union or charity. If you receive this financial support, you’ll need to provide your lender with a gift letter. This letter needs to include the giver’s contact information, the gift amount and a disclaimer that you won’t need to repay them.
Yes. As with other types of mortgages, you can roll FHA closing costs into your mortgage. This means you’ll pay less at the closing, but higher monthly payments, as well as more interest. This move is really about determining what’s more important to you: avoiding a payment now, or paying more for it in the future.
FHA loan closing costs are not the same as the down payment. The closing costs include charges like the origination fee, any mortgage points and the cost for third-party services like the appraisal. The down payment, on the other hand, is the portion of the home’s purchase price you’re paying upfront, rather than financing with the loan. For an FHA loan, this amounts to a minimum 3.5 percent.
You’ll receive a closing disclosure that outlines your exact closing costs at least three business days before the closing.
Arrow Right Contributor, Personal Finance
