How Much Is Closing Cost for FHA Loan?

When purchasing a home, understanding the various financial obligations involved is essential, and closing costs represent a significant portion of these expenses. These costs are fees paid at the conclusion of a real estate transaction, distinct from the down payment. For those considering a Federal Housing Administration (FHA) loan, specific considerations regarding these costs apply.

Understanding Closing Costs Generally

Closing costs encompass a range of fees associated with finalizing a home purchase. These fees are paid at the close of the real estate transaction and cover services required to transfer property ownership and secure the mortgage. These costs typically range from 2% to 6% of the loan amount.

Common categories of closing costs include lender fees, third-party charges, and prepaid expenses. Lender fees, such as loan origination fees and underwriting fees, are charged by the mortgage provider for processing and approving the loan. Third-party fees cover services from external providers, including appraisal fees, title insurance, attorney fees, and recording fees. Prepaid expenses are costs paid at closing for future housing expenses, such as property taxes and homeowner’s insurance, which are often placed into an escrow account.

FHA Specific Closing Costs

FHA loans come with particular closing costs, primarily involving the Mortgage Insurance Premium (MIP). This premium protects the lender in case of borrower default, a requirement due to FHA loans often having lower down payment and more lenient credit requirements. There are two components to FHA MIP: an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP.

The UFMIP is a one-time charge, 1.75% of the base loan amount, which is typically due at closing. Borrowers have the option to finance this UFMIP by rolling it into their loan amount, although this increases the total loan balance and the amount paid over time. The annual MIP is an ongoing fee, paid in monthly installments as part of the mortgage payment, with rates generally ranging from 0.15% to 0.75% of the loan balance. The duration for which the annual MIP must be paid depends on the loan-to-value (LTV) ratio and the loan term; for instance, if the down payment is less than 10%, MIP is typically paid for the entire loan term, while a 10% or greater down payment may allow for cancellation after 11 years.

FHA loans also require an FHA-approved appraisal, which evaluates both the home’s market value and its compliance with the FHA’s minimum property standards for safety, security, and soundness. While a standard home inspection is highly recommended, the FHA appraisal serves a distinct purpose, focusing on the property’s eligibility for FHA financing. The cost of an FHA appraisal typically ranges from $300 to $700, varying by location and property characteristics.

Estimating Your FHA Closing Costs

The total amount of FHA closing costs is not a fixed figure but rather an estimate influenced by several factors. These costs generally fall within a range of 2% to 6% of the loan amount, though less expensive homes might see a higher percentage due to fixed costs. The specific amount will vary based on the loan amount, the property’s geographical location due to differing state and local taxes and fees, and the specific fees charged by the chosen lender.

Borrowers receive detailed estimates of their closing costs through a document called the Loan Estimate (LE). Lenders are required to provide this form within three business days of receiving a loan application, outlining the loan terms, estimated interest rate, and a breakdown of anticipated closing costs. This initial estimate allows borrowers to compare offers from different lenders. A final, more accurate breakdown of costs is provided in the Closing Disclosure, which borrowers receive at least three business days before the scheduled closing date.

Paying FHA Closing Costs

Borrowers are primarily responsible for paying their closing costs. However, several avenues exist to help cover these expenses, reducing the amount of cash required out-of-pocket at closing.

Seller Concessions

One common method involves seller concessions, where the seller agrees to contribute a portion of the sales price towards the buyer’s closing costs. For FHA loans, seller concessions are limited to 6% of the home’s sales price. These funds cannot be used for the down payment but can cover various closing costs, including loan origination fees, appraisal fees, and prepaid expenses.

Lender Credits

Lender credits offer another option, where the lender provides a credit to offset some closing costs, often in exchange for a slightly higher interest rate on the loan. While this reduces upfront costs, it can increase the total amount paid over the life of the loan.

Gift Funds

Additionally, gift funds from eligible sources, such as family members or approved non-profit organizations, can be used to cover closing costs. These gift funds typically require specific documentation, including a gift letter from the donor, to ensure compliance with FHA guidelines.

At the closing table, payment for closing costs is typically made via wire transfer or a cashier’s check.