How Much Are Closing Costs on an FHA Loan?
Prepare for your FHA home purchase by understanding the full scope of associated closing expenses and available financing methods.
Closing costs represent various fees and expenses incurred at the final stage of a real estate transaction. These are distinct from the down payment and typically include charges from the lender, third-party service providers, and prepaid expenses. Budgeting for these costs is essential for a home purchase.
Federal Housing Administration (FHA) loans are a popular mortgage option, especially for first-time homebuyers, due to lower down payment requirements and more flexible credit guidelines compared to conventional loans. These loans are insured by the FHA, protecting lenders against borrower default. While FHA loans offer advantages, they come with specific closing costs. Anticipating these expenses is crucial for a clear financial picture before finalizing the loan.
Understanding FHA Closing Costs
Closing costs associated with FHA loans generally fall into three main types: lender fees, third-party fees, and prepaid items. These categories encompass charges that accumulate as a loan progresses from application to closing.
Lender fees are charges imposed by the mortgage lender for processing and originating the loan. An origination fee covers administrative costs, typically 1% of the loan amount. Other lender charges include underwriting fees, which compensate the lender for assessing creditworthiness and property value, and processing fees, which cover internal application costs.
Third-party fees are collected by independent service providers. The appraisal fee pays for a professional evaluation of the property’s market value, important for FHA loans due to specific appraisal requirements. A credit report fee is for obtaining the borrower’s credit history. Title insurance fees protect both the lender and homeowner against ownership claims; a lender’s policy is required, and an owner’s policy is recommended.
Additional third-party expenses may include attorney fees, if legal counsel is involved, and recording fees, paid to the local government to register the property transfer and mortgage. Survey fees are for verifying property lines and boundaries. Escrow fees are paid to the escrow or closing agent for managing transaction funds and documents.
Prepaid items are expenses paid at closing that cover costs beyond the closing date. Property taxes often require several months of prepayment to establish an escrow account. Homeowner’s insurance premiums for the first year are also typically paid upfront at closing to ensure the property is insured.
FHA loans also involve specific mortgage insurance premiums (MIP). This includes an upfront mortgage insurance premium (UFMIP), a one-time charge, and an annual mortgage insurance premium, paid monthly as part of the mortgage payment. These premiums protect the lender against borrower default, a standard FHA requirement.
Typical Amounts and Payment for FHA Closing Costs
The total amount of closing costs for an FHA loan typically ranges from 2% to 5% of the loan amount, though varying by location, lender, and transaction. For a $300,000 loan, this could be $6,000 to $15,000. These figures are estimates, and actual costs are disclosed on the Loan Estimate and Closing Disclosure forms.
Buyers primarily pay closing costs out-of-pocket at closing. Funds are wired to the escrow or closing agent, and fees are itemized on the Closing Disclosure. Buyers should ensure they have sufficient liquid funds in addition to their down payment to cover these expenses.
FHA loans permit seller concessions, allowing the seller to contribute towards the buyer’s closing costs. A seller can contribute up to 6% of the lesser of the sales price or the appraised value. On a $300,000 home, the seller could contribute up to $18,000 towards FHA-allowable closing costs.
These seller concessions can cover various buyer costs, including origination fees, discount points, appraisal and credit report fees, title insurance, and prepaid items like property taxes and homeowner’s insurance. However, seller concessions cannot fund the buyer’s down payment. The 6% limit is a maximum, and any amount contributed by the seller must be documented in the purchase agreement.
Lenders may offer credits to offset closing costs in exchange for a slightly higher interest rate on the loan. A lender might provide a $2,000 credit, but the interest rate might increase by 0.125% or 0.25%. This option reduces immediate out-of-pocket expense at closing but results in higher monthly payments and a greater total loan cost over its lifetime.
The FHA Upfront Mortgage Insurance Premium (UFMIP), typically 1.75% of the base loan amount, is usually not paid out of pocket at closing unless chosen. Instead, it is added to the principal balance of the mortgage, increasing the overall loan amount but reducing the cash needed at closing.