How to Lower FHA Closing Costs
FHA loans are often the choice for home buyers who are low on cash to cover the down payment and closing costs. Although FHA loans are easier to get approved for and allow for a lower down payment, the closing costs can be more expensive than conventional mortgages. Read our article on FHA closing costs so you can be prepared for what these costs could mean for you.
5 Ways to Lower FHA Closing Costs
- Seller Closing Cost Contributions
- Lender Paid Closing Costs
- Gift Funds
- Negotiate Lender Fees
- Rolling the FHA Closing Costs into the Loan
These 5 methods will either lower or completely eliminate your out of pocket closing cost fees. You can use one or a combination of more than one of these to purchase your home with as little out of pocket costs as possible. You can see our complete closing cost estimate here.
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Seller Closing Cost Contributions
Seller contributions are the most effective way to lower your out of pocket closing costs. The FHA guidelines permit sellers to contribute up to 6% of the purchase price towards closing costs.
Seller closing cost contributions are typically agreed upon during the price negotiations between the buyer and seller. Usually, the borrower will agree to pay close to the seller’s asking price in exchange for the seller helping to pay for the buyer’s closing costs.
Lender Paid Closing Costs
In some instances, borrowers can have their closing costs covered by the lender. Keep in mind that most of these closing costs are real costs that the lender will have to pay on your behalf. As a result, they will need to make up the losses in covering your closing costs somewhere.
Lenders earn their commission based upon a formula that is calculated off of the loan amount and the interest rate for your loan. This means the lender will likely need to lock you in at a higher interest rate to earn the additional commissions needed to cover your closing costs.
If you plan on staying in the home for more than just a couple of years, selecting this option of lender paid closing costs is likely not the best option for you. Over time, the higher interest rate will cost you much more than what the closing costs were.
Gift Funds to Cover Closing Costs
Home buyers who are low on cash are able to receive gift funds from a relative to cover their down payment. Those gift funds may also cover the closing costs as well. Using gift funds for closing costs is the second most popular way to lower your out of pocket closing costs.
Read out article about FHA gift funds to see how that works and what is needed.
Negotiate Lender Fees
There are some standard and customary lender fees that are not mandated by the FHA, but are likely going to be charged by your lender. These fees may or may not be real costs incurred by your lender. Either way, some of these may be reduced or completely eliminated from your transaction. Examples of some of these fees are as follows:
- Loan Origination Fees
- Discount Points
- Underwriting Fee
- Document Preparation Fee
- Wire Transfer Fee
These are only some of your FHA closing costs but they are costs that are typically generated by your lender versus third parties. Similar to lender paid closing costs, the reduction or elimination of these costs above may result in a slightly higher interest rate.
Rolling FHA Closing Costs into the Loan
Another method to lower FHA closing costs is to roll them into the loan amount. FHA guidelines do permit borrowers to also borrow the closing costs, but they cannot borrow the down payment.
The key element here is the home needs to appraise for more than the purchase price. For example, if the home purchase is $200,000 and your closing costs are $5000, the home must appraise for at least $205,000 if you want to roll the additional $5,000 in closing costs into the loan.
Read our article on rolling closing costs into an FHA loan for more information.
Conclusion
The five options referenced above all will help to eliminate or lower FHA closing costs. They key thing to understand is no matter what option you choose above, you are still paying for these costs one way or another. Receiving a gift from a relative is the only true way to eliminate paying for FHA closing costs. The other options are simply just creative ways to finance the closing costs rather than paying for them at closing.
If you would like to discuss your options or learn more about the process, please complete our contact form here and someone will call you to discuss your FHA loan options and how to lower FHA closing costs.
Related Questions
How much are FHA closing costs?
FHA closing costs are typically anywhere from 2%-4% of the purchase price of the home. The lower the purchase price, the higher the closing cost percentage. This is due to the fact that there are many fixed costs that are not tied to the loan amount.
Can the Appraisal Cost be Negotiated?
Appraisals are performed by third party appraisal companies. They need to get paid for the work they do and you cannot negotiate these costs. However, your lender or seller could possibly contribute towards the cost of the appraisal.
Why is FHA Mortgage Insurance so High?
FHA mortgage insurance is an expensive insurance policy that protects the lender against your default. FHA loans can be risky when there are home buyers who only put 3.5% down and sometimes have poor credit. Read our article about FHA mortgage insurance to learn more.