FHA Home Loan Closing Costs: How Much Should I Expect To Pay?

If you’re in the market for a new home, especially your first, you may want to consider using an 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 what FHA closing costs comprise and some strategies for reducing them. 

When you buy a home with a home loan, you’ll need two piles of cash ready to go at the closing table. One for your down payment and one for 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 that come along with an FHA loan are generally the same as conventional ones, although the mix of costs and fees might look a little different.

FHA loans are a type of non-conforming loan available through private lenders. They are government-insured loans designed with low- and moderate-income wage earners in mind. Essentially, FHA loans are an option for borrowers who might not qualify for a conventional loan. They typically require only 3.5% down and are available even to those with past credit problems and lower credit scores. 

FHA loans are also designed with some debt-to-income ratio (DTI) limit flexibility, and can be manually underwritten. That means the decision to approve isn’t left to an algorithm – borrowers have an opportunity to explain why their credit problems are behind them to a human being.

Next, let’s take a look at what your closing costs are comprised of with an FHA loan, and some strategies for reducing them

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 of the things you could be responsible for paying.

Mortgage Insurance Premium (MIP)

A mortgage insurance premium (MIP) is the FHA counterpart to private mortgage insurance (PMI). Home buyers with a conventional mortgage must pay PMI until they reach 20% equity in their home.

MIP works a little differently. The FHA collects MIP to fund its operations, and it does so in two ways. There’s an upfront MIP payment you’ll pay at closing – 1.75% of the purchase price – and annual MIP, which is divided up and added to your monthly mortgage payment.

Your monthly MIP costs 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, and there 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, prepare all the documents for closing and then potentially offer any add-ons like a mortgage rate lock fee. 

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

• Supplemental loan origination fee, if applicable (discussed below)

• Interest rate lock fee, if applicable

Third Party Fees

This might not be a complete list, depending on your situation and location, but 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 you may as well consider them to be in the same category. These include expenses like prepaid insurance and taxes, prepaid interest and initial escrow payments at closing. 

In general, the rule of thumb is that closing costs amount to between 3% – 6% of the home’s purchase price. The upfront MIP payment of 1.75% of the purchase price often makes FHA loans slightly more expensive upfront.

At least three business days prior to closing, you will receive a Closing Disclosure. This will provide an exact list of all your costs and what you owe. 

It is very important that you read your Closing Disclosure carefully and make sure there are no errors. The disclosure should contain all the information regarding your loan. Once you receive your Closing Disclosure, make time to meet with your agent and/or real estate attorney until all your questions are answered to your satisfaction. 

The FHA will let you roll your financing costs into your mortgage, a practice known as a no-closing-cost mortgage, which means that they’ll be added to your principal balance. You’ll then pay them off with the rest of the loan amount. 

This may seem like a good idea, but remember: when you roll your closing costs into your principal, you’ll pay interest on the closing costs as well. This will increase your interest costs over the life of the mortgage. 

Closing costs may seem like a strain when added to your down payment and other home buying costs. Here are some strategies that might help you reduce the potential burden of these costs. 

Ask For Seller Concessions

Seller concessions are a way for the seller to assume some of the buyer’s costs and reduce the demand on their cash at closing. Simply put, the seller agrees to pay some of the buyer’s costs. In a seller’s market, it may be harder to negotiate concessions since sellers have the upper hand. In a buyer’s market, however, a buyer can potentially ask sellers to assume some of the closing costs without reimbursement.

Government regulations limit the amount a seller can pay toward a buyer’s costs. That’s because the government doesn’t want to inflate housing prices by allowing sellers to, for example, agree to sell their house for $200,000 but offer to pay $50,000 in seller concessions. For this reason, the FHA limits seller concessions to up to 6% of the purchase price.

Negotiate With Your Lender

The saying “it never hurts to ask” applies to mortgage lenders as well. For example, your lender may be willing to waive a courier or wire transfer fee for you upon request. Though you won’t always get something waived, there’s always a chance you could. Don’t be afraid to negotiate with your prospective lender. The worst they can do is say no. 

Accept Gifts From Benefactors

There are rules in place regarding the use of gift funds when applying for a mortgage. Home buyers getting conventional mortgages will find that they must be able to account for the money in their bank accounts. Lenders will generally want you to explain any gift that’s over half the amount of your household’s monthly income.

If your parents give you a $10,000 gift toward your home purchase, and that $10,000 suddenly appears in your bank account as you begin the home buying process, you’ll likely have to provide a gift letter to prove that those funds do not need to be repaid. 

With an FHA loan, you must comply with the FHA’s regulations to qualify.  It allows you to use gifts from these sources toward your down payment and closing costs:

• Borrower’s family member

• Borrower’s employer or labor union

• A close friend with a clearly defined interest in the borrower

• A charitable organization

• A governmental agency assisting low/middle-income families or first-time home buyers

Home Buyer Assistance Programs

There are a wide variety of programs at all levels of government and housing nonprofits whose mission it is to help first-time or low- and moderate-income wage earners attain homeownership, which remains one of the most important ways to accumulate wealth in the U.S. 

First-time home buyer assistance programs are generally available to anyone who hasn’t lived in a home they owned for the past 3 years. One aimed specifically at helping first time buyers with closing costs is Fannie Mae’s HomeReady program. If you complete an online home buying class and go on to buy an eligible home, you can benefit from reduced down payment and mortgage insurance requirements offered by Fannie Mae.

The Department of Housing and Urban Development (HUD) maintains a database of all local resources offering home buying assistance. Take a look and see if your state or city offers assistance that can help you get to closing with the cash you need.

When you're just learning about the ins and outs of mortgages, it can seem overwhelming to keep it all straight. We’re here to answer all of your home buying questions.

Does an FHA loan cover closing costs?

You can roll your closing costs into the loan and pay them off along with the principal. It’s called a no-closing-cost loan. Of course, there’s a downside: you’ll have to pay interest on your closing costs, which means it will likely be more expensive in the long run.

Where do I go to get an FHA loan?

The FHA insures loans from private lenders that align with its requirements. Here at Rocket Mortgage^®, we offer conventional, FHA and VA loans. 

Not every lender offers FHA loans, but many do – so be sure to shop around to get an idea of various lenders’ offerings.

Can I buy a multiunit home with an FHA loan?

The FHA defines a single-family home as any home with one to four units. You can use an FHA loan to purchase a multiunit, single-family home as long as you occupy one of the units for a minimum of 1 year. 

Why do sellers seem to decline offers with FHA mortgage preapproval letters?

When you use a government-insured loan to purchase a home, the home must meet the government’s livability standards. That means the FHA appraisal process can create problems and delays. For this reason, given a choice of offers, many sellers will go with a conventional mortgage or – better still – an all-cash offer. 

What is an FHA 203(k) renovation loan?

If the home you’d like to buy with your FHA loan doesn’t meet the U.S. Department of Housing and Urban Development (HUD)’s livability standards, you might consider applying for a FHA 203(k) renovation loan to complete the repairs needed to make the home safe and sound. When the repairs are completed, you may move into your newly renovated space and the loans will be combined into one monthly payment.

Who pays real estate agents’ commissions?

Typically, the seller will pay both their own and your agent’s commissions, though closing costs can be negotiated.

The Bottom Line: Closing Costs Are An Inevitable Expense Of Getting A Mortgage

No matter what type of mortgage you ultimately choose, closing costs will be a factor of your home buying experience. Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn’t diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.

Ready to apply for your FHA or conventional loan? Apply online now and find the best option for you.