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How Much are FHA Loan Closing Costs?
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The Federal Housing Administration (FHA) makes it easier to get a mortgage than other popular types of financing. The catch: You’ll pay extra for FHA loan closing costs in exchange for more lenient borrowing requirements.
Before you apply for an FHA loan, here’s an overview of the closing costs you’ll pay.
How much are FHA closing costs?
Besides your down payment, you’ll pay 2% to 6% of the loan amount in closing costs for a typical mortgage, depending on your loan amount. In 2018, FHA borrowers paid an average of $7,402 in closing costs, according to a new report from the Consumer Financial Protection Bureau (CFPB) analyzing Home Mortgage Disclosure data from that year.
FHA loans tend to be more expensive than conventional loans, according to the CFPB. But FHA financing may be the only option if you have a credit score between 500 and 620. You won’t qualify for a conventional loan if your score is below 620. FHA borrowers pay two types of FHA mortgage insurance premiums: annual and upfront. One is paid at closing in a lump sum, while the other is charged annually and paid as part of your monthly mortgage payment.
What is included in FHA closing costs?
Besides mortgage insurance premiums, you pay the same type of fees for an FHA loan as you would for other home loans. To qualify for an FHA loan, lenders follow the same mortgage process as other loan types by checking your credit, income, debts and assets. A lender will also order a home appraisal to assess your home’s value.
Because FHA mortgage insurance premiums make up such a big chunk of total FHA closing costs, here’s a table that shows what you’ll pay (depending on your down payment), loan term and the loan amount.
FHA mortgage insurance premium costs
The upfront mortgage insurance premium (UFMIP) on all FHA loans is 1.75% and is financed into your loan amount. The annual mortgage insurance premium ranges from 0.45% to 1.05% of your loan amount, depending on the term, loan amount and down payment. The MIP is charged as an annual fee and is divided by 12 and added to your monthly mortgage payment.
Let’s look at an example: If you borrow $200,000, the $3,500 UFMIP will be added to the base loan amount, making your total loan amount $203,500. To calculate the MIP when putting down 3.5% on the $203,500 total loan amount, the annual MIP charge would be 0.85%. That adds $144.15 to your monthly mortgage payment.
A higher down payment helps reduce mortgage insurance closing costs but, unlike PMI, FHA MIP cannot be canceled as you build equity. FHA MIP is paid for the life of the loan unless you make a 10% down payment. In that case, you’ll pay MIP for 11 years.
FHA appraisal fees
The standard cost for a conventional loan appraisal is $300 to $400, but an FHA appraisal ranges from $300 to $700. In addition to providing an opinion of value, an appraiser has to inspect the home to verify it meets FHA property requirements, driving up the cost of the appraisal.
If the home doesn’t meet FHA’s property guidelines, repairs may be required and you may have to pay additional inspection fees to ensure the repairs were done properly.
Standard loan closing costs
Origination fee. When a lender issues a loan, it’s called an “origination.” The fee may include processing, underwriting and funding your mortgage.
Credit report. A fee to get a copy of your credit scores and reports.
Flood certification fee. A fee to verify if the home is in a federal flood zone and to determine if flood insurance is required.
Flood monitoring fee. An additional fee may be charged for monitoring the flood status of a property depending on the flood determination.
Tax monitoring. A fee that sets up a monitoring service to track whether you’re making tax payments on time.
Lender’s title insurance. The lender requires you pay for a title insurance policy to protect them against any title problems such as judgments or tax liens. You may also want to buy an owner’s policy for additional protection.
Discount points. This upfront fee is charged as a percentage of your loan amount to get a lower interest rate.
Escrow account fee. If you want your property taxes and insurance included in your monthly mortgage payment, the lender collects a portion of your homeowners insurance, monthly mortgage insurance premium and property taxes to set up an account to pay those items.
Prepaid fees. Prepaid fees are costs you pay before they’re due. For example, this can include prepaying the first year of homeowners insurance premiums.
Who pays for FHA closing costs?
There’s no such thing as a no-closing cost FHA loan. However, there are ways you can reduce the amount you pay out-of-pocket.
- Ask for a gift. A relative, friend, employer, charity or local government agency providing closing cost assistance for first-time buyers can gift you money toward FHA closing costs. Proof of gift funds must be documented and a signed gift letter is required.
- Apply for closing cost assistance. Banks and housing finance agencies in your area may offer FHA closing cost assistance. There may be income limits and other restrictions, so read the fine print before you apply.
- Ask the seller to pay them. Up to 6% of your FHA closing costs can be paid by the seller, and the credit can be used to pay the UFMIP.
- Roll the costs into your loan. There are two ways to finance FHA closing costs on a purchase loan: Increase your interest rate and ask the lender to pay the fees, or increase your loan amount to pay them. To roll in closing costs in a regular FHA refinance loan, you can increase your loan amount only. For an FHA streamline refinance, your only option is to have the lender pay in exchange for a higher rate.
Within three days of completing a loan application, your FHA-approved lender must provide you with an FHA loan estimate so you can review the terms and closing costs. Keep a copy of this document to compare to the final closing disclosure you’ll receive three days before closing.