Do FHA Loans Have Closing Costs? What to Expect

FHA loans, known for their lower down payment requirements and flexible credit criteria, make homeownership accessible. Like all mortgage types, FHA loans involve closing costs. These are fees and expenses incurred during the home purchase transaction, separate from the loan amount and down payment.

The Nature of Closing Costs in FHA Loans

FHA loans, insured by the Federal Housing Administration, do have closing costs. These costs are distinct from the loan’s principal amount and the borrower’s down payment. Closing costs are fees charged by lenders and third parties for services necessary to process and finalize a mortgage loan and transfer property ownership.

Borrowers receive a loan estimate from their lender detailing these estimated costs, followed by a closing disclosure with the final accounting of fees before closing. FHA loan closing costs generally range from 2% to 6% of the home’s purchase price.

Common FHA Closing Cost Categories

FHA loan closing costs encompass several categories: fees paid to the lender, charges for third-party services, and prepaid items. One distinct FHA-specific cost is the Upfront Mortgage Insurance Premium (UFMIP), which is 1.75% of the loan amount and is paid at closing.

Lender fees cover costs associated with originating and processing the loan. These include origination fees, which compensate the lender, and underwriting fees for evaluating borrower eligibility. Other lender charges include processing fees and discount points, paid to reduce the interest rate over the loan’s term.

Third-party fees are paid to various professionals and services involved in the transaction. Examples include appraisal fees for valuing the property, credit report fees, and title insurance fees to protect against defects in the property’s title. Other third-party costs can involve escrow fees, attorney fees, recording fees, and surveys.

Prepaid items are expenses paid at closing to cover costs that accrue after the closing date. These include initial property taxes, homeowner’s insurance premiums, and per diem interest, which covers interest from the closing date to the first mortgage payment. These amounts are often placed into an escrow account.

Strategies for Managing FHA Closing Costs

Borrowers have several avenues to manage or cover their FHA loan closing costs, reducing the amount of cash required at closing. One common strategy involves seller concessions, where the seller agrees to pay a portion of the buyer’s closing costs. FHA guidelines permit sellers to contribute up to 6% of the home’s sales price toward the buyer’s allowable closing costs, including the Upfront Mortgage Insurance Premium (UFMIP). This contribution cannot exceed the actual closing costs.

Another option is to receive lender credits. A lender might offer a credit to offset some closing costs in exchange for the borrower accepting a slightly higher interest rate on the loan. While this reduces upfront expenses, it can result in higher monthly payments over the life of the loan.

FHA loans also permit the use of gift funds from approved sources to cover closing costs, in addition to the down payment. Acceptable donors typically include family members, employers, or charitable organizations, and these funds must be properly documented with a gift letter confirming no repayment is expected.

Borrowers can also choose to pay closing costs directly out-of-pocket using their own funds. This method avoids increasing the loan amount or accepting a higher interest rate. Finally, the Upfront Mortgage Insurance Premium (UFMIP), which is 1.75% of the loan amount, is typically financed into the loan, reducing the immediate cash needed at closing for this specific fee. While financing UFMIP means paying interest on it over time, it significantly lowers the cash required at closing.