Who Pays Closing Costs on an FHA Loan?

The Federal Housing Administration (FHA) offers government-insured mortgages, making homeownership more accessible, especially for first-time homebuyers. These loans feature lenient borrowing requirements and lower down payment options compared to conventional loans. Understanding the associated closing costs is an important financial consideration. This article clarifies who is responsible for paying these costs, outlining the roles of the borrower, seller, and lender, and FHA-specific rules.

Understanding FHA Closing Costs

Closing costs are fees incurred at the close of a real estate transaction, paid by various parties. These expenses are separate from the down payment and typically range between 2% and 6% of the loan amount for FHA loans.

FHA loans include specific fees that differentiate them from conventional mortgages. A mandatory cost is the Upfront Mortgage Insurance Premium (UFMIP), a one-time charge equal to 1.75% of the loan amount. Other common closing costs include appraisal fees, credit report fees, loan origination fees, title insurance fees, escrow fees, and recording fees.

FHA loans also require an annual Mortgage Insurance Premium (MIP), which is paid monthly as part of the mortgage payment. This annual premium typically ranges from 0.15% to 0.75% of the loan amount, depending on factors like loan term and loan-to-value (LTV) ratio. This ongoing cost, along with the UFMIP, helps protect the lender against potential losses if a borrower defaults on the loan.

Borrower’s Closing Cost Responsibilities

Borrowers are responsible for a range of closing costs associated with an FHA loan. The Upfront Mortgage Insurance Premium (UFMIP) is a direct obligation, though it can be financed into the loan amount. The annual Mortgage Insurance Premium (MIP) is a recurring cost paid monthly as part of the mortgage payment.

Other costs borne by the borrower include loan origination fees, charged by the lender for processing the loan, typically ranging from 0.5% to 1% of the loan amount. Appraisal fees, necessary for evaluating the home’s value and ensuring it meets FHA standards, are also the borrower’s responsibility. Credit report fees, attorney fees, and recording fees for documenting the property transfer are further examples of borrower-paid expenses. Borrowers may also choose to pay discount points to reduce their interest rate over the life of the loan. Each discount point typically costs 1% of the loan amount.

Seller and Lender Contributions

FHA guidelines allow other parties to contribute to a borrower’s closing costs, reducing the borrower’s out-of-pocket expenses. Sellers can contribute up to 6% of the lesser of the sales price or the appraised value of the home towards the buyer’s closing costs. This limit prevents inflated home prices and protects loan integrity.

Seller contributions can cover eligible costs, including loan origination fees, discount points to buy down the interest rate, title insurance, appraisal fees, and the Upfront Mortgage Insurance Premium (UFMIP). These contributions cannot be used to cover the borrower’s minimum down payment. The specific amount of seller contribution is negotiated as part of the purchase agreement.

Lenders can also assist with closing costs through lender credits. A lender credit offsets some or all closing costs in exchange for a slightly higher interest rate on the loan. This option benefits borrowers who prefer lower upfront costs, even with higher monthly payments. Borrowers can negotiate these credits with their loan originator, broker, or bank.

Managing Your Out-of-Pocket Closing Costs

Borrowers have several strategies to manage or reduce their out-of-pocket closing costs on an FHA loan. One approach involves negotiating with the seller for concessions, as FHA rules allow sellers to contribute up to 6% of the sales price toward closing expenses. This negotiation can happen during the initial offer stage, reducing the cash required at closing.

Another option is to explore lender credits, where the lender covers some closing costs in exchange for a slightly higher interest rate. While this may increase the total interest paid over the life of the loan, it can lower the upfront cash needed. For certain fees, like the Upfront Mortgage Insurance Premium (UFMIP), borrowers can roll this 1.75% charge into the overall loan amount, spreading the cost over time.

Throughout the process, it is important for borrowers to review the Loan Estimate and the Closing Disclosure documents carefully. The Loan Estimate, provided within three business days of application, estimates all costs. The Closing Disclosure, received at least three business days before closing, details final costs. Comparing these documents and asking questions about any discrepancies helps ensure transparency and allows for final adjustments before signing.