FHA Closing Costs

FHA Closing Costs

Home buyers will often create a budget to start saving for their down payment, but do not think about saving for their closing costs. In some instances, the FHA closing costs can be as much as or even more than the down payment.

This article will give you a good idea of how much your FHA closing costs will be, whether they can be financed and also how to get the seller to pay for them. You will also learn which closing costs are mandatory for all FHA loans, which costs are generated by the FHA lender, and which are third party costs that you would likely see regardless as to who your lender is.

How Much are FHA Closing Costs?

FHA closing costs average anywhere from 2% to 4% of the loan amount. Your actual costs will be tied to various factors such as your loan amount, credit score, and lender fees. Some of the costs are standard for all FHA loans, while others are lender-based or third party costs such as your appraisal.

Below is an itemized list of typical FHA closing costs. After you apply for an FHA loan, your lender will provide you with a good faith estimate detailing your closing costs.

When to Ask the Lender about FHA Closing Costs

We often hear borrowers immediately ask lenders what the FHA closing costs are in the first minute of the conversation. The lender will likely need to gather quite a bit of information and possibly run your credit score before giving you an accurate estimate.

Once you provide all of your details and documentation, the lender will provide you with an estimate which will clearly outline exactly what your closing costs will be.

Click to Get a Rate Quote from an FHA Lender with LOW Closing Costs

List of FHA Closing Costs

Below is a standard list of FHA closing costs. These costs are just an estimate and the costs may differ slightly depending upon your scenario, the lender you use, third parties involved, your credit score, and location.

  • Credit Report – ($25-$50) The credit report is something every lender will need to charge you for. If you have your own credit report, it cannot behow much are fha closing costs used for your loan. Every lender must run a new report which is automatically imported into your loan application with the monthly obligations populated.
  • Loan Origination Fee – (.5% – 1%) This is a fee that some lenders will charge to help offset some of their costs. Once their costs are covered, the rest is profit that the lender earns for helping with your loan. If you have a larger loan amount, your lender may be willing to reduce the origination fee percentage.
  • Discount Points – (1%-2%) We do not see discount points charged too often for FHA loans. You should only pay points when you are voluntarily buying your rate down to a lower percentage. If your lender is able to charge you 1 discount point (1% of the loan amount) in exchange for a rate reduction of .5%, then it may be worth it.
  • Underwriting Fee – ($350 – $975) Some lenders will charge an underwriting fee or processing fee. This is a fee that every lender may not charge and is likely negotiable. If you have a low loan amount, you can expect the lender to charge a fee like this to help with their costs of originating a small loan.
  • Document Preparation Fee – ($50-$100) Some lenders charge a document preparation fee as an additional fee for managing all of the paperwork and documents related to your loan. If you are able to avoid the underwriting fee referenced above, then paying a document fee is not that bad.
  • Home Inspection – ($300-$400) A home inspection is something that every home buyer should arrange for regardless as to whether you are getting an FHA loan. The inspection is not required by the FHA or the lender, but it is critical in helping to identify any critical problems the home may have. Consider hiring an additional inspector for the septic system if applicable.
  • Appraisal($450) The lenders will require an appraisal for every home purchase to be sure the home is worth what you are paying. They do not want to lend money against a home that is worth less than the loan amount. The lender will need to use an FHA approved appraiser. Appraisal costs can be higher for more expensive homes or for multi-unit properties. The benefit of getting an appraisal is the ability to negotiate with the seller after the inspection. If you are getting an FHA streamline refinance, then an appraisal is not needed.
  • Survey($400-$500) A property survey will reveal the official property boundary and will also show all of the structures including your home, a shed, pool or any other permanent structure. The survey will help to identify whether your new neighbor has something encroaching onto your property. Most important is it will reveal whether your new home has an addition or a structure that was built too close to a property line and potentially would need to be removed.  A copy of an existing survey may be on file at town hall. Secure a copy of this survey before paying for a new one. If the survey captures all of the structures that currently exist on your (and your neighbors) property, then you potentially can just use this copy rather than pay for a new survey.
  • Attorney Fee – ($750) Many home buyers some use attorneys to review the contracts in an added layer of protection. Some lenders also have an attorney fee at closing that the borrowers need to pay for. The attorney will often manage the title related activities referenced below.
  • Title Search – ($100) This is the fee charged by a title company to send someone to town hall to research whether there are any liens against the property you are about to purchase. Any open liens would need to be satisfied at closing. This title search will protect you against future claims for your property from a prior lien.
  • Title Insurance – ($900 – $1200) This is an insurance policy that paid once at closing and it basically protects you against any future deed or lien claims against your property. Title insurance is calculated based upon your purchase price.
  • Tax Service Fee – ($50) This fee is paid to research the existing property taxes for the property and to see whether the taxes have been paid to date or if they have been paid for future months. The taxes will need to be settled at closing based upon the findings of this research.
  • Recording Fees($70) This is the fee charged by your local county government to record the official real estate transaction between you and the seller.
  • Wire Transfer Fee – ($25) This cost is related to wiring the money needed to close your loan.
  • Pre-Paid Property Tax – (Varies based upon property taxes of the home). You will likely have to pre-pay taxes for the upcoming quarter at closing. If the seller has already paid for the next few months, then he or she will get a credit at closing.
  • Tax Escrows – (Varies based upon property taxes of the home). Some lenders prefer to pay taxes for you and will include taxes in your monthly mortgage payment. The escrow is a prepaid tax accrual so the lender has money on hand to pay the taxes on your behalf. If your property taxes increase, your lender will need to increase your mortgage payment to cover the difference.
  • Notary Fees($10) not always a fee that is paid but there is the possibility that a fee for a notary could be required.
  • Homeowner’s Insurance – ($400-$1200) You will be required to pay your first year’s homeowners insurance premium in advance. This is often done just prior to closing and you will need to show documentation that this has been done. The cost of your insurance premium is negotiated between yourself and the insurance company. Homeowners insurance prices may rise and fall depending upon factors that you may or may not have control over. They also could be higher if you also need flood insurance.
  • Flood Certification Fee($15) The flood certification is the official opinion of FEMA as to whether the home you are purchasing is in a flood zone. It will help determine whether flood insurance will be needed and to what degree.
  • FHA Upfront Mortgage Insurance MIP – (1.75%) This is an insurance policy of 1.75% of the loan amount and is standard for every FHA insured loan. This insurance premium covers the government cost of protecting the lender against the possibility that you default on the loan.

These are the standard and customary closing costs that you can expect for an FHA loan. When you compare FHA closing costs to conventional closing costs, one of the major differences is the upfront mortgage insurance cost of 1.75% of the loan amount. Most of the other costs would be similar regardless as to which loan program you choose. Read more about FHA mortgage insurance.

If you need help with closing costs, then read our article on FHA closing cost assistance.

Comparing Lender Closing Costs

When shopping for a lender, you should compare closing costs the same as you would the interest rate. Lender fees are tied to the rate that you are quoted which means you should look closely at the closing costs and the rates simultaneously.

For the most part, lender closing costs will be similar but where the differences usually reside are with the origination fees, discount points, underwriting fees and application fees. Some lenders will increase origination fees or discount points to quote a lower rate. That is okay if you are aware and are making the decision to pay more in lender closing costs in exchange for a lower rate.

What you really must consider is which fees are driven by the lender and which fees the lender has no ability to lower or waive. The majority of the closing costs are not lender generated. 

When comparing lender closing costs, you should always get the estimate in writing. Complete this form to get a comparison.

Can FHA Closing Costs be Financed?

The FHA guidelines do permit some closing costs to be financed or rolled into the loan. Closing costs do not include your down payment amount and the FHA is clear that the minimum borrower contribution towards the purchase of the home must be at least 3.5% even if that money comes as a gift from a relative. If the gift from the relative is large enough, it can cover the down payment plus the closing costs.

The benefit of rolling the FHA closing into the loan is that it can help with some of the sticker shock associated with closing costs.

Can the Seller Pay for FHA Closing Costs?

FHA guidelines permit the seller to contribute up to 6% of the purchase price of the home towards closing costs. This is a great way to get a negotiated closing cost credit from the seller.

How Can I Lower the FHA Closing Costs?

The best way to get the lowest possible closing costs is to negotiate with the FHA lenders. They do have some wiggle room on the fees that are generated by the lender. It comes down to how much they are willing to make on your loan versus the other lenders out there. We can help you to get a quote from a lender who has competitive rates and closing costs.

Prior to having a discussion with the lender about closing costs, it is important to realize which costs are generated by the lender and which are third party generated. The lender can only control their own costs.

If you speak to a lender who is offering no closing costs (or very little), then make sure the rate is still competitive. Some lenders may offset the low closing costs with higher rates.

Can FHA Closing Costs Be Gifted?

FHA closing costs can be gifted and would follow the same FHA gifting rules apply for closing costs as they do for the down payment. If you are receiving a gift from a relative they can provide you with money for the down payment, the closing costs, or both. If your lender requires reserves they can also provide you with those funds too.

Are Closing Costs Separate from the Down Payment?

Closing costs are always separate from the down payment and cannot be combined. However, when a lender is evaluating your ability to qualify and purchase the home, they will combine both the down payment and closing costs to determine the cash needed to close the loan.

FHA guidelines are clear that the borrower needs to come to the table with a minimum of 3.5% for the down payment even if that money is a gift. The closing costs can be funded by the seller, the lender, or any extra gift funds that are leftover.

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