Understanding FHA Closing Costs

Today we’ll explore all of the ins and outs of FHA closing costs. But before we get too deep into the specifics, let’s quickly review one important question: What is an FHA loan?

An FHA loan, or Federal Housing Administration loan, is a home mortgage that is insured by the government and then issued by a bank or other approved lender. They’re a popular option for first-time homebuyers as well as low-to-moderate-income families. But like any loan, it's important to be aware of the closing costs involved — some of which conventional loans usually don't have.

Let’s break them down.

What are FHA closing costs?

FHA loan closing costs are the various fees and expenses that come into play when securing the loan. These costs go beyond the down payment and cover items such as mortgage insurance, lender and third-party fees, as well as prepaid items. It's good to have a clear understanding of FHA closing fees as you navigate through the loan process.

How much are FHA closing costs?

With an FHA loan, borrowers can expect to pay between 2% and 6% of the home’s purchase price. For example, a $300,000 house would typically require anywhere from $6,000 to $18,000 in costs.

Typical loan closing costs and fees

While these fees can differ from one lender to another, here's a list of some of the most common fees associated with closing:

●       Origination Fee:

○       This fee, often expressed as a percentage, typically falls between 0.5% and 1% of the total loan amount. It also includes any mortgage points tied to your interest rate.

●       Application Fee:

○       Usually non-refundable, application fees can typically range from $0 to $500.

●       Underwriting Fee:

○       Typically falling within the range of $400 to $1000, this fee covers the cost of evaluating and approving your loan application.

●       Rate Lock Fee:

○       Typically 0.25% of the total loan value, this fee secures your interest rate for a specified period.

●       Prepaid Expenses:

○       These expenses vary in price and cover items like tax and insurance escrow deposits, flood and hazard insurance premiums, real estate taxes, and per diem interest.

●       Additional Lender Fees:

○       These may vary, so we advise researching and asking questions about any additional lender fees specific to your loan agreement.

●       Mortgage Insurance Premiums

○       All FHA loans require a mortgage insurance premium (MIP).  Your FHA loan MIP will involve two payments – an upfront premium and an additional annual payment:

■       The MIP upfront payment equals 1.75% of the total value of your loan and is due at closing. It can either be financed into your loan amount or paid out-of-pocket at the time of closing.  Most borrowers choose to finance this fee. 

■       Your annual mortgage insurance costs will vary depending on your loan-to-value ratio (LTV), the size of your down payment and the length of your mortgage term.  Most FHA lenders will calculate your annual MIP as a monthly amount and add it to your mortgage payment.

Understanding these fees is crucial for making informed decisions during the loan process. Keep in mind your seller may have set limitations about who covers what. This is important information to review with your loan advisor, and all interested parties.

How to reduce closing costs on FHA loans

While closing costs cannot be avoided, there are a few strategies on how to reduce your out-of-pocket expenses. First, you’ll want to try to negotiate with your seller. There’s a chance that they may be willing to cover or eliminate some of the fees. However, if that doesn’t work, you still have plenty of options:

• Shop and Compare
  Before you make any decision, it's best to browse and compare loan options, especially when you can only make a small down payment. Here’s your chance to ask questions about discounts and rebates to ensure your decision aligns with your specific needs.
• Alternative services from loan estimate
  After you complete your loan application, your potential lender is required to provide you with a detailed loan estimate. These estimates list services such as pest inspection, title search, settlement agent, insurance binder, and more. Just because these are included, does not mean you are required to use those listed vendors. Shop around in each category and you may find more cost-effective options. Your situation is unique, and a little research could add up in savings.
• Closing cost assistance
  Depending on your state, you might qualify for closing cost assistance. Eligibility could mean thousands of dollars in relief, allowing you to keep more money in your pocket.
• Work with the seller
  Seller concessions are a way for the seller to assume some of the buyer’s costs. While negotiating with the seller tends to be much easier during a buyer’s market, understand that the seller’s circumstances are unique as well. They may be open to more than you anticipate.
• Gifts
  If fortunate enough to receive them, borrowers have the option of using monies from benefactors toward their down payment and closing costs. These could be from family members, employers, friends, charitable organizations, or governmental agencies. Just make sure to stay compliant with the regulations that the FHA has laid out for such help.
• Roll into the loan
  The FHA allows you to finance some of your costs into the loan, easing up-front expenses. Keep in mind that while this can be helpful initially, it may increase your monthly payments and the overall interest paid over time.
• Understand your MIP strategy
  If you put down more than 10% you may have the option to eliminate your MIP down the road. But important note: If you’re using a lower down payment, the only way to get rid of your MIP is by refinancing.

So, is an FHA loan right for you?                        

Like all mortgage options, FHA loans come with some inevitable costs.

The good thing is that you’re not alone. It’s important to ask questions, speak to professionals, and do the research to compare your options. The more work you can put into understanding the process, the more flexibility you’ll have to cut down on out-of-pocket expenses.