FHA Home Loan Closing Costs: How Much Should I Expect To Pay?
Author:
Victoria ArajMay 2, 2024
•5-minute read
If you’re in the market for a new home, especially your first, you may want to consider using a Federal Housing Administration (FHA) loan. These loans are similar to conventional ones but tend to be easier to qualify for and are generally more affordable in the long run.
Like conventional loans, when you get an FHA loan, you’ll have to pay closing costs. These costs can be a little different from conventional ones, so let’s take a look at the components of FHA closing costs and some strategies for reducing them.
What Are FHA Closing Costs?
No matter the type of home loan you choose, all mortgages come with closing costs. The general rule of thumb is to plan on having between 3% – 6% of your total loan amount on hand for closing costs.
The closing costs with an FHA loan come with a mix of costs and fees that differ from those of conventional loans.
What Are The Benefits Of An FHA Home Loan?
Essentially, FHA loans are an option for borrowers who might not qualify for a conventional loan. They typically require 3.5% down and are available to individuals with past credit problems and lower credit scores.
FHA loans are also designed with some flexibility and can be manually underwritten. That means borrowers have an opportunity to get approved for a loan even if they don’t have a strong credit history.
Next, let’s take a look at what your closing costs are composed of with an FHA loan and some strategies for reducing them.
FHA Closing Costs: A Closer Look
What are home buyers paying for at closing? There are many moving parts to a home purchase and getting an FHA mortgage. Let’s explore some items you could be responsible for paying.
Upfront Mortgage Insurance Premium (MIP)
The FHA collects Mortgage Insurance Premiums (MIPs) to fund its operations. First, you’ll need to pay an upfront MIP equal to 1.75% of the home’s purchase price.
So, if you buy a $300,000 home, you’d pay $5,250 in upfront MIP. You may be able to add that to your mortgage so you don’t need to have the cash at closing. However, it’ll make your mortgage payments more expensive over time.
In addition, you’ll need to pay an annual MIP, which is divided up and added to your monthly mortgage payment. Your annual MIP will vary depending on the amount of your loan, the size of your down payment and the length of your repayment term.
Lender Fees
When you apply for your mortgage, your lender begins the underwriting process. This is an assessment of the amount of risk you present as a borrower based on your financial information. Your lender will gather your information, review it and prepare all the documents for closing.
The home buyer reimburses the lender for these activities on their behalf by paying:
- A mortgage origination fee
- An underwriting fee
- A document preparation fee
Third-Party Fees
While not an all-inclusive list depending on your situation and location, these are the most common third-party fees home buyers pay at closing:
- Owner’s title insurance policy premium
- Notary fee
- Credit report fee
- County clerk’s recording fees
- Appraisal fees
- Courier fee
- Real estate attorney fees
- Flood certification fee
Prepaid Expenses
Prepaid expenses aren’t technically closing costs, but you’ll have to pay them around the same time, so it’s helpful to think of them in the same category. These include expenses like prepaid insurance and taxes, prepaid interest and initial escrow payments at closing.