FHA Closing Costs: What’s Included and How Much You’ll Pay

What Fees Can FHA Homebuyers Expect at Closing?

FHA loans are designed to help make homeownership more affordable for Americans with moderate incomes or lower credit scores.

But like any mortgage, FHA loans require the borrower (or seller) to pay closing costs, even though they’re backed by the U.S. Federal Housing Administration (FHA). Some of these costs are the same as those for other types of mortgages, and some are unique to FHA loans.

Knowing FHA closing costs can help you budget confidently and avoid unpleasant surprises on closing day.

How Much Are Closing Costs on an FHA Loan?

When you’re buying a home with an FHA loan, closing costs can average between 2% and 6% of the home’s purchase price. That means you might pay between $5,000 and $15,000 in closing costs if you’re buying a house that costs $250,000. The exact number will depend on the loan amount and type, lender, and location.

Who Pays FHA Closing Costs?

Ultimately, the buyer is responsible for paying closing costs when buying a home with an FHA loan, but there are several ways to reduce how much you pay out of pocket. Seller concessions, lender credits, and gift funds can all help offset your upfront closing expenses, which we’ll now cover in more detail.

FHA Closing Costs: What’s Included

FHA closing costs include upfront mortgage insurance premium (MIP), lender fees, third-party fees, and other prepaid expenses. Let’s take a closer look at these costs.

Upfront Mortgage Insurance Premiums (UFMIP)

One of the closing costs required for an FHA loan is the upfront mortgage insurance premium (UFMIP). Only FHA loans have this requirement. This premium is equal to 1.75% of the base loan amount.

Example: If you’re borrowing $200,000 with an FHA loan to finance the purchase of a house, you’ll need to pay a mortgage insurance premium (MIP) of $3,500. This premium can be rolled into your total loan amount.

FHA borrowers also pay an annual MIP. The fee is built into your monthly payment and lasts for at least 11 years, or for the life of the loan, depending on your down payment.

Standard Lender Fees

You're responsible for some fees associated with the mortgage underwriting process, including:

• Origination fee: A fee charged for creating and processing your loan. It may be a flat fee or a small percentage of the loan amount.
• Discount points: Discount points are upfront interest payments that lower your mortgage interest rate. One discount point is equal to 1% of the loan amount and typically lowers your mortgage rate by 0.25%.
• Application or underwriting fees: These fees cover the review of your financial documents and final approval of your loan.

Third-Party Fees

Third-party costs are fees from independent professionals involved in the homebuying process, other than your lender. They include:

• Appraisal fees: An FHA home appraisal is an estimate of the home’s value performed by a state-licensed professional who charges a fee for this service.
• Title search and insurance: A title search verifies that there are no liens against the property and confirms that the seller is the property’s legal owner. Title searches are also done by a professional who charges a fee for the work. These fees can be included in your FHA closing costs. Title insurance, which guarantees coverage of anything missed during the title search, is also required when getting a mortgage.
• Attorney fees: Real estate attorneys aren’t involved in every FHA loan closing, but if your state requires one or you decide to hire one, you’ll have to pay for their services to review documents or handle the closing.
• Credit report fee: Lenders will likely pull your credit report from one or more bureaus to evaluate your credit score, and the cost of that report is passed on to you.

Prepaid Costs

There are also some upfront expenses you’ll have to pay before closing, such as:

• Homeowners insurance: The first year’s premium for your homeowners insurance has to be paid up front to ensure your coverage begins immediately.
• Property taxes: A portion of your upcoming property taxes is collected at closing and held in escrow.
• Prepaid interest: This is the interest you’ll be charged from your closing date until your first full mortgage payment.

Can You Roll Closing Costs Into an FHA Loan?

Borrowers may be able to finance their closing costs into their loan amount, as long as it’s not an FHA streamline refinance. So if you’re borrowing $250,000 to buy a home and your closing costs are $7,500, you may be able to get a mortgage for $257,500.

Keep in mind, however, that increasing the amount of your mortgage will increase the total amount of money you pay in interest over the life of the loan.

FHA Streamline Refinance Closing Costs

You’re also required to pay some closing costs when you refinance an FHA loan with the FHA streamline refinance program, which replaces your current FHA mortgage loan with a new one. An FHA streamline refinance features less paperwork and faster closings than other types of refinances.

When you refinance your FHA loan using the streamline process, you’ll pay a new UFMIP equal to 1.75% of the unpaid loan balance. If your current FHA loan is less than three years old, you may qualify for a partial refund of your previous UFMIP. You can finance the cost of the new UFMIP into your new loan amount.

You may also have to pay title fees, recording fees, taxes, and other closing costs as part of a streamline refinance. Unlike UFMIP, you can’t finance these closing costs into your new loan balance. You must pay them at closing.

How To Lower FHA Closing Costs

There are several ways you can look into reducing how much you’ll need to pay at closing:

• Negotiate seller concessions: The FHA allows sellers to contribute a portion of the home’s price toward a buyer’s closing costs. However, FHA seller concession limits cap this amount at 6%. These seller concessions can cover lender fees, title charges, and prepaid expenses.
• Apply allowable gift funds: You can use gift funds from family members, close friends, employers, or an eligible charitable or nonprofit organization to cover closing costs and down payments.
• Use a homebuyer assistance program: Many state and local governments have formal assistance programs to help with closing costs or down payments.

You likely can’t eliminate every FHA loan expense, but these strategies could help you lower how much you have to save and bring to closing, which can be especially beneficial for first-time homebuyers.

Final Thoughts: FHA Home Loan Closing Costs

Understanding FHA closing costs is an important part of planning for your new home purchase with an FHA loan. By reviewing what’s included, who can contribute, and how to reduce your upfront expenses, you can make informed decisions and benefit from a budget you’re comfortable with as you prepare to buy your home.

To begin your homebuying journey and find out how much money you can save with an FHA loan, get prequalified today to get a personal estimate and determine your next steps.