Miranda Crace5-minute read
UPDATED: May 19, 2023
Are you in the process of buying a house and looking for a mortgage loan? An FHA loan – available to financially qualified borrowers – might be the best choice if you’re a first-time home buyer or looking to make a lower down payment. Although FHA loans are a popular option with many benefits, you’ll still have to pay closing costs, however.
Let’s look at the ins and outs of FHA loans, closing costs and how to reduce closing costs if you’re going with an FHA mortgage loan option.
An FHA loan is a mortgage that’s insured by the government, specifically the Federal Housing Administration (FHA). This type of loan is popular for first-time home buyers and those with low-to-moderate incomes because of the relatively low down payment requirements and affordable closing costs, as well as more relaxed credit score requirements.
To get an FHA loan, you must work with an FHA-approved lender and meet certain requirements. An FHA loan can also come with a fixed interest rate or as an adjustable-rate mortgage, and with a 15- or 30-year loan term.
Closing costs are fees the buyer or seller pays at the closing table before the real estate transaction is completed. Closing costs can include a range of costs and fees – among them title insurance, appraisal fees and origination fees – and must be paid on closing day.
The average closing costs are 3 – 6% of the home’s purchase price, depending on loan type and other factors.
FHA closing costs are similar to conventional loan closing costs, ranging anywhere from 2 – 6% of the purchase price, though sometimes more. Let’s take a look at a few fees and costs you’ll be paying at closing with an FHA loan.
Your lender fees will vary depending on the mortgage lender you choose. These fees usually include the:
Some mortgage lenders waive these fees and costs in full, but if that’s not an option, you can negotiate them.
Your mortgage lender isn’t the only one involved when you’re closing on your home. Some other third-party fees you might have to pay include the:
Before closing, your lender should provide you with an estimate of all the closing costs you’ll need to pay.
Prepaid fees are paid in advance to cover any costs that might arise in the future. These fees are generally listed as flood and hazard insurance premiums, homeowners insurance, an escrow deposit or real estate taxes.
When you go with an FHA loan, you’re required to pay mortgage insurance premiums (MIP). You’ll pay an upfront MIP equaling 1.75% of your loan principal and then make ongoing annual MIP payments. These payments typically range from 0.45 – 1.05% of your loan principal and are included in your monthly mortgage payment.
MIP helps protect the mortgage lender if the borrower defaults on the loan.
So how much are closing costs on an FHA loan? It depends on the purchase price of the house. Let’s say you get a loan for $200,000. Your mortgage lender and other involved third parties will charge you all the various fees you’ve incurred, such as origination fees, appraisal fees, etc. Something like an origination fee on its own might be 1% of your loan; that portion would be $2,000, in this case. You’ll then need to pay all other third-party fees, too.
In general, you’ll want to budget for 2 – 6% of the loan amount. In this case, that would probably mean $4,000 – $12,000 or more in closing costs.
Let’s take a deeper look at how to calculate FHA loan closing costs, because it shouldn’t be a secret once you arrive on closing day.
After you apply and are approved for your loan, your mortgage lender will send you a loan estimate within three days explaining the terms of your loan along with estimated closing costs.
Home Affordability Calculator
Using our home affordability calculator can give you a better idea of what’s in your price range and what you’ll be able to afford in down payment and closing costs.
If you’re struggling to afford closing costs, you’re not alone. Here are a few options available to explore if you need closing cost assistance.
One option to avoid upfront closing cost fees is to roll the closing costs into your FHA loan. You’ll then be paying a higher monthly payment, but this option helps when you’re short on upfront money. Not all closing costs can be rolled into your loan. Prepaid interest, taxes, homeowner’s insurance premiums, interest owed at closing, and your escrows for taxes and insurance cannot be rolled into your loan amount, so remember that even if you roll costs into your mortgage, there will still be fees to be paid at closing.
Another option is to ask the seller to pay some of the closing costs. This can be tricky when it’s a seller’s market because the seller will have the upper hand, but it never hurts to ask. It’s important to look at the housing market when considering whether to ask the seller to pay any of your closing costs.
Many states have programs or grants for closing-cost assistance. These are typically for first-time home buyers or low-to-moderate income families. You can find many of these resources on the U.S. Department of Housing and Urban Development (HUD)’s website.
FHA loans allow you to receive money in the form of a gift from someone you know to use toward closing costs or your down payment. If you go this route, you’ll typically need to provide your lender with a gift letter that includes the giver’s contact information, gift amount and a disclaimer saying you don’t need to repay them.
As previously mentioned, no two mortgage lenders are alike, and lenders rarely if ever charge the same fee. This can work in a borrower’s favor because it allows you to shop around before choosing a lender and compare their fees before committing to one.
Just like any other mortgage loan, an FHA loan requires you to pay closing costs. Depending on the lender you go with, you’ll pay more or less in closing costs, so it’s important to shop around and do your research when choosing a mortgage lender. You also have the option to apply for grants or assistance, roll your closing costs into your FHA loan or utilize gift money.
If you’re ready to get rolling on the home-buying process, start your mortgage application with Rocket Mortgage® today.
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