How Much Are Closing Costs on an FHA Loan?

Closing costs are fees and charges incurred during a real estate transaction, separate from the down payment. These expenses are paid by either the buyer or seller, or both, when a property changes ownership or a loan is finalized. They cover services and administrative tasks needed to complete the sale or refinance. These costs are typically a percentage of the loan amount or purchase price, varying by transaction and location.

Understanding FHA Specific Closing Costs

FHA loans include specific closing costs that protect the lender if a borrower defaults. Two primary fees are the Upfront Mortgage Insurance Premium (UFMIP) and the annual Mortgage Insurance Premium (MIP). The UFMIP is a one-time charge, currently 1.75% of the loan amount. Borrowers pay this at closing or can finance it into the loan balance. This premium is a requirement for all FHA loans.

An annual Mortgage Insurance Premium (MIP) is collected, typically divided into 12 monthly installments and added to the regular mortgage payment. Most borrowers can expect to pay an annual MIP rate of around 0.55% of the total loan amount in 2025. The duration for which MIP is paid depends on the initial down payment. If the down payment is less than 10%, MIP is generally required for the entire loan term. If the down payment is 10% or more, the MIP may be canceled after 11 years.

Itemized Closing Cost Categories

Beyond FHA-specific mortgage insurance premiums, FHA loans involve other closing costs, generally ranging from 2% to 6% of the total loan amount. These expenses fall into several categories, including fees charged by the lender, costs for third-party services, and amounts prepaid for future property expenses. The specific amounts for these fees can vary based on the lender, the property’s location, and the service providers involved.

Lender fees represent charges for processing and underwriting the loan. These typically include an origination fee, which covers the lender’s administrative costs for creating the loan. Underwriting fees are for evaluating the loan application and borrower’s creditworthiness, while processing fees cover the clerical work involved in preparing the loan documents. Discount points are an optional fee paid to the lender at closing to reduce the interest rate over the life of the loan.

Third-party fees are paid to external professionals. An appraisal fee covers a professional assessment to determine the property’s market value and ensure it meets FHA health and safety standards. Credit report fees cover the cost of obtaining the borrower’s credit history. Title insurance fees include a lender’s policy, which protects the lender’s interest in the property, and an owner’s policy, which protects the buyer from future claims against the property’s title.

Survey fees are for verifying property lines and identifying any encroachments. Attorney fees may be applicable in states where legal professionals are required to oversee the closing process. Flood certification fees determine if the property is located in a flood zone, necessitating flood insurance.

Escrow and prepaid items are funds collected at closing to cover expenses that will be due shortly after the transaction closes or to establish an escrow account for ongoing payments. This includes a portion of the annual property taxes and the first year’s homeowner’s insurance premium. An initial deposit into an escrow account is also collected to ensure funds are available for future property tax and insurance payments. Government recording fees are paid to local government authorities to officially record the deed and mortgage documents, making the transaction public record.

Official Disclosure of FHA Closing Costs

Borrowers receive official documentation detailing their closing costs at different stages of the loan process. The Loan Estimate (LE) is the first key document, provided by the lender within three business days of receiving a mortgage application. This form provides an estimate of the loan terms, projected payments, and estimated closing costs, allowing borrowers to compare offers from various lenders. It outlines the estimated interest rate, monthly payment, and the total cash needed to close the loan.

As the loan process progresses, a more definitive document, the Closing Disclosure (CD), is provided. Lenders must deliver the Closing Disclosure to the borrower at least three business days before the scheduled closing date. This form presents the final, binding figures for all loan terms, closing costs, and financial details of the transaction. The three-day review period for the Closing Disclosure is mandated to give borrowers sufficient time to compare the final costs against the initial Loan Estimate and ask any questions before signing.

Responsible Parties for FHA Closing Costs

The primary responsibility for paying most closing costs in an FHA loan transaction typically falls to the borrower. However, there are mechanisms through which a borrower’s out-of-pocket expenses can be reduced. One such mechanism involves seller concessions, where the seller agrees to contribute towards the buyer’s closing costs. For FHA loans, sellers are permitted to contribute up to 6% of the home’s sales price towards the buyer’s allowable closing costs, prepaid expenses, and discount points.

This 6% limit is applied to the sales price and can cover various fees such as loan origination fees, title insurance, appraisal fees, and even the Upfront Mortgage Insurance Premium. It is important to note that seller concessions cannot be used to cover the buyer’s down payment. The negotiation for seller concessions usually takes place during the offer stage of the home purchase.

Another option to offset closing costs is through lender credits. In this scenario, the lender may offer to cover some or all of the borrower’s closing costs in exchange for a slightly higher interest rate on the loan. This arrangement can reduce the immediate cash required at closing, though it may result in higher monthly payments over the life of the loan. Both seller concessions and lender credits provide avenues for borrowers to manage the financial burden of closing costs on an FHA loan.