FHA Closing Costs: Beware Of These Hidden Costs

The closing expenses for FHA loans include various charges from the mortgage lender and other parties engaged in the loan process. On the day of your closing, you should prepare to cover both your FHA loan initial payment and closing expenses. 

When you request an FHA loan, your lender will provide a loan estimate containing an initial summary of closing costs. Three days prior to your closing appointment, you will receive a closing disclosure detailing the final breakdown of closing expenses and specific FHA loan charges.

What’s included in FHA loan closing costs?

The expenses due at closing can be categorized into four main groups:

• Initial mortgage insurance premium
• Fees from the lender
• Fees from third parties
• Prepaid expenses

Although the upfront premium is fixed at a standard rate (discussed below), other FHA closing expenses can differ. For example, one lender may impose a 1 percent origination fee, whereas another lender may not charge any fee at all.

Upfront mortgage insurance premium (MIP)

When you get an FHA mortgage, you’ll need to pay mortgage insurance premiums (MIP). This involves an initial premium paid during closing, amounting to 1.75% of the loan principal. Can you roll closing costs into the loan with FHA financing? Absolutely. 

However, remember that including it in the loan means you’ll pay interest on it, increasing your overall costs. While you’re accountable for the premiums, they safeguard the lender in case you can’t repay the mortgage.

Lender fees

Not all mortgage lenders have the same fee structures, and some may not charge any fees at all. Depending on the FHA lender you choose, there may be room to negotiate certain fees. Common FHA loan fees include:

• Origination fee
• Underwriting fee
• Application fee
• Credit check fee
• Document preparation fee
• Rate lock fee
• Points for lowering your interest rate

Your lender might offer a lower interest rate but compensate with higher fees. These fees factor into the annual percentage rate (APR), so it’s important to compare this when considering FHA loan closing costs.

Third-party fees

Apart from your lender, other service providers play a role in the home buying process and also levy charges. These typically encompass fees for appraisal, title search, and insurance. Review the initial closing cost estimate to identify fixed third-party expenses and those open to comparison. Opting for a more cost-effective provider for the latter may lead to potential savings.

Prepaid expenses

Prepaid items are expenses paid in advance. While distinct from your FHA mortgage closing costs, you must still manage them at closing. Depending on the seller’s urgency to close a deal, you could negotiate for them to cover some of these costs. Prepaid expenses include:

• Real Estate Property Taxes
• Homeowners Insurance
• Flood and hazard Insurance
• Per-diem Interest

How much are FHA closing costs?

Closing costs can vary significantly based on the fees imposed by your chosen lender for the type of FHA loan as well as the location of your home. Typically, borrowers should anticipate paying between 3% and 5% (sometimes higher) of the home’s purchase price in closing expenses. For instance, on a $400,000 home, you should allocate $12,000 to $20,000 for covering closing costs. While these numbers do seem high for the first time home buyer, remember the 1.75% MIP that we spoke about earlier? This fee can be rolled into the loan to reduce the out of pocket for you.  It’s important to note that both your FHA loan down payment and closing costs are required at the closing. Ensure you have adequate funds to cover all items outlined in the closing disclosure provided by your lender, in addition to your down payment.

How to reduce FHA closing costs

If you aim to lessen immediate expenses or reduce the overall cost of your loan, explore these strategies to decrease your FHA closing expenses.

Finance your upfront mortgage insurance premium

If you’re concerned about having sufficient cash at closing, you could think about including your upfront mortgage insurance premium in your loan amount. Opting for this may lead to higher monthly payments but will help lower your initial expenses.

Compare mortgage lender fees

Not all FHA lenders have identical fee structures. When comparing options, request a breakdown of lender fees to understand the varying costs. This can also assist in identifying any fees that appear unusually high.

Explore FHA closing cost assistance programs

Many states operate housing finance agencies that link borrowers, particularly those with low to moderate incomes and first-time homebuyers, to aid with down payments and closing costs. Bankrate has assembled a directory of such programs for first-time homebuyers organized by state to assist in exploring available choices.

Ask the seller to pay some closing costs

When utilizing an FHA loan, sellers can cover a portion of the buyer’s closing costs, up to 6% of the home’s sale price. Not all sellers agree to this, especially when there are competing offers. If you have a Realtor, they can assist in determining the optimal approach for this tactic.

Get a gift

FHA loans permit buyers to receive financial gifts from family members, close friends, employers, labor unions, or charities. If you receive such support, you must give your lender a gift letter containing the giver’s contact details, the gift amount, and a statement that you are not required to repay the gift.

Buy mortgage points

Paying mortgage points, also known as discount points, can reduce your loan’s interest rate by about 0.25 percent per point. Each point costs 1 percent of the loan amount. For instance, if you borrow $400,000, you’d pay $4,000 for one point.

While this approach increases your closing costs, it can lead to significant long-term savings since you’re paying upfront rather than spreading out the borrowing expenses over a 15- or 30-year mortgage term. However, if you don’t plan to stay in the home that long, paying points may not be worthwhile.

Key takeaways

When finalizing the purchase of your home using an FHA loan, you will come across closing costs that typically range from 3% to 5% of the total purchase price. These costs include upfront Mortgage Insurance Premium (MIP), appraisal fees, loan origination charges, and expenses related to title services. It’s important to understand these fees so be sure to talk with an FHA loan expert by calling 719.247.6622.