You don’t have to give up your dream of owning a home when finances are tough. If you’re a first-time homebuyer with limited down payment resources, have a lower credit score, or have experienced foreclosure or bankruptcy, there are some situations where Federal Housing Administration (FHA) loans can be incredibly flexible. The best FHA lenders may have the tools to work with you so homeownership is achievable, whatever your unique financial situation.
Financing with an FHA loan can get you into a home at a reasonable cost. Here is what you need to know about FHA closing costs and other important loan information.
How much are FHA closing costs?
Closing costs on an FHA mortgage loan are typically around 3% to 4% of the loan amount. For a $400,000 mortgage, you would likely spend $12,000 to $16,000 in closing costs.
FHA closing costs vs. conventional closing costs
An FHA loan does have an added expense that could be avoided with a conventional loan (depending on the down payment amount): the upfront mortgage insurance premium (MIP).
The MIP fee is 1.75% of the loan amount, and it’s required on all FHA loans. For a $400,000 home, that’s $7,000.
What are FHA closing costs made up of?
Costs vary widely around the country according to state law and local customs as to what is required and who is required to pay the various closing costs. Some closing costs are paid as a percentage of the loan, while others are fixed amounts. Here’s a hypothetical breakdown of what you can expect to pay in FHA closing costs for a $400,000 home.
- Origination charges: $2,000 to $4,000 (0.5% to 1%)
- Upfront mortgage insurance premium: $7,000 (1.75%)
- Appraisal: $500
- Title closing fee: $450
- Attorney: $500 to $1,000
- Survey: $527
- Pest inspection fee: $100
- Flood certification: $600
- Transfer taxes: $0 to $8,000 (0% to 2%), depending on local law
- Title insurance and fees: $1,800
- Credit report fee: $20
- Recording fee: $30
Your real estate transaction may not include every one of these costs, and there may be other costs you’ll need to pay that are not on this list. But this gives you a general idea of what closing costs you’ll be paying and how much, on average, it will cost.
Keep in mind you’ll need to also pay prepaid expenses. Prepaid expenses aren’t considered closing costs, but you will pay them at closing. These include expenses like taxes, homeowners insurance premiums, and partial-month interest payments.
How to lower FHA closing costs
Paying closing costs isn’t fun, quite frankly. Closing costs don’t lower your loan amount or provide you with ongoing services — they’re administrative costs to obtain a mortgage and transfer the title to your name in a real estate transaction. You pay them one time.
And while some closing costs aren’t negotiable, there are some key things you can do that can make a big difference in your bottom line. To lower your FHA closing costs, try these ideas:
Compare lenders
Finding the best mortgage lender requires a little research on your part. You may see different lenders quote a range of fees and annual percentage rates (APRs) that affect both the cost of your loan over time as well as how much you’ll pay at closing; it’s important to compare your options to find the best rates and offerings.
When you’re comparison shopping for a mortgage, you may want to try negotiating with these FHA lenders. Lenders can pay for some closing costs or offer you a higher rate in exchange for a no-closing-cost loan.
Shop around for negotiable costs
Closing costs you can shop around for are noted on your loan estimate document. They include things like title insurance, attorneys fees, the cost of a home inspection, settlement fees, and other costs from third parties that are variable and can be selected by the borrower.
Put down a larger down payment
A larger down payment will decrease the amount of upfront mortgage insurance premium you pay. It will also reduce the amount of your mortgage monthly premium.
Get a shorter term
The annual MIP premium goes down substantially with a loan term of 15 years or less. This won’t change the 1.75% upfront MIP due at closing, but if you get FHA loan pre-approval, you may be able to see if you qualify for a shorter term and save on annual MIP costs.
Ask for seller concessions
You can negotiate with the seller to help cover your closing costs. It may be possible to offer more than the list price for the property and then ask for a percentage or dollar amount back to apply toward the closing costs.
FAQ
What is an FHA loan and how does it work?
The term “FHA” refers to both a loan program and the name of the organization that insures those loans, the Federal Housing Administration. It’s part of the U.S. Department of Housing and Urban Development, which means FHA mortgage loans are directly insured by a government agency. Mortgages like this are considered some of the best first-time homebuyer loans for their flexibility and affordability.
To be clear, the FHA doesn’t originate loans for consumers. To get an FHA loan, you must go to an FHA-approved lender who will originate the loan for you.
FHA requirements are more flexible than conventional mortgage requirements. Some of the best FHA lenders offer loans characterized by low down payments, low closing costs, more flexible credit qualifications, and even home improvement loans, such as an FHA 203(k).
Are FHA closing costs higher than conventional loan costs?
One closing cost that is significantly larger is the upfront mortgage insurance premium (MIP), which you’ll pay at closing. It is 1.75% of the loan amount, so a $500,000 loan would generate a $8,750 PMI closing cost for an FHA loan. You’ll also pay a monthly mortgage insurance fee while you have an FHA loan. With conventional loans, it is possible to pay your mortgage premium entirely upfront, but it’s more typical to see mortgage insurance paid monthly. Conventional mortgage insurance also drops off when a loan reaches 80% of its original value, whereas it never drops on an FHA loan.
How can I lower my FHA closing costs?
Some costs can’t be negotiated, but you can shop around for a lender. Lenders have different fees and you may see if they are willing to pay for some of your closing costs. You can also shop around for some closing costs provided by third parties, such as title insurance, attorney fees, or recording fees.
Can you roll FHA closing costs into a loan?
It is possible to roll FHA closing costs into a loan, but you’ll need to consult with your lender and possibly revise your offer and real estate contract.
What is the minimum credit score for an FHA loan?
It is possible to get an FHA loan with a credit score as low as 500, but there is a 10% down payment requirement. Credit scores above 580 are eligible for the maximum financing amount.
What is the minimum down payment on an FHA loan?
The minimum down payment requirement for an FHA loan is 3.5% of the purchase price, though it can vary by credit score.
