Many first-time homebuyers are drawn to FHA loans because of their low down payment requirements. But it's important to remember the down payment isn't the only payment you need to make on closing day.
Like any other type of mortgage, there are FHA loan closing costs and other fees you'll need to pay out of pocket when you close on your home. Let's take a look at what these fees are, how much they typically cost and how you can find the best deal for your FHA loan.
Closing costs are the various fees you pay your lender and other third parties for their efforts in underwriting your loan and transferring ownership of the home into your name. They cover everything from loan origination and appraisal fees to title insurance and flood-zone certification. For an FHA loan, they may also include your upfront mortgage insurance premium.
We'll cover the specific items in more detail below. What's important to know is that every mortgage comes with closing costs. You may be able to shop around for better rates, but you can't avoid paying FHA loan costs entirely. You'll usually pay these fees on closing day, but you may be able to roll some of them into your total loan amount.
FHA closing costs will typically be around 2%–4% of your loan. So, for a $300,000 FHA loan, you can expect to pay $6,000 to $12,000 in closing costs.
Why the range? There are many factors involved in determining your loan fees. Specific amounts can vary by state, and different lenders and third-party companies charge different amounts. Plus, closing costs tend to be lower — as a percentage — on larger loans. That's why it's important to get preapproved for your FHA loan with a few different lenders. Once you're preapproved, you'll receive a closing costs estimate that you can use to compare costs and find the most affordable option for you.
Your closing costs and down payment are two separate things. A down payment is a deposit toward your equity in the home — it's your initial slice of ownership in the property. Closing costs, on the other hand, represent fees you pay to secure financing and make sure the home is titled in your name.
It's important to factor in both FHA loan closing costs and down payment requirements when considering what you'll pay on closing day. Most homebuyers need to put down at least 3.5% for an FHA down payment on top of the 2%–4% in closing costs. For that $300,000 home, that brings your potential closing-day cash to between $16,500 and $22,500 on average.
Although it’s your lender who finances your home and not the FHA, the federal agency does insure your mortgage to protect your lender if you default. Because of this, all FHA loans include an upfront premium for mortgage insurance.
Your initial payment will cost 1.75% of your total loan amount — so $5,250 on a $300,000 loan.
You can pay it in cash on closing day or roll it into your loan. Keep in mind, though, that the latter option will increase your loan balance, raising your monthly payments and the total interest you'll pay in the long run.
In addition to your down payment, you'll need to be prepared to pay for several things when you close on your FHA loan. These fall into three buckets: lender fees, third-party fees and prepaid fees.
Lender fees vary by lender but typically include charges for:
These charges will not be the same for everyone, and your specific fees depend on your lender, location and individual factors. It's always best to compare FHA lenders so you can weigh your closing costs, interest rate and other loan terms.
Your lender plays a major role in the homebuying process, but there are other companies involved with your mortgage application. Charges for these services on your FHA loan can include:
Prepaid fees aren't really fees but costs related to your loan that you'll pay in advance. These typically include:
These aren't technically included in your closing costs, but they represent an additional amount you'll need to account for when you finalize your loan.
As you can see, these fees add up. But there are several ways you can save on closing costs when using an FHA loan.
This is the best way to ensure your closing costs are in the most affordable spot for you. The initial closing costs estimate will include a line-by-line breakdown of fees, so it's easy to compare your loan options. When you start your lender search, try to get preapproved with several different lenders so you can do a side-by-side comparison.
In some cases, you might have the leverage to request that the seller pay a portion of your closing costs. They can contribute up to 6% of the home's sale price on an FHA loan. On that $300,000 home, that means you could ask for up to $18,000 in concessions. Keep in mind that this becomes more challenging in a seller's market.
Many states have programs to assist first-time homebuyers or those with low and moderate incomes with costs involved with closings. These may include down payment or closing cost assistance. Research what's available in your state to help lower your out-of-pocket FHA fees.
FHA loans allow you to use gifts from a few sources, including family members, employers, labor unions, close friends and charitable organizations. You'll need to provide a letter from the source indicating the gift amount and a clear statement that it does not need to be repaid.
In some cases, you may be able to negotiate lower fees with your lender. This isn't likely to save you a whole lot, but it can shave off a small amount if your lender is willing to compete for your business.
Although you can never finance your down payment, you can roll many of your closing costs into your FHA loan balance. This will minimize how much cash you need to bring to the table on closing day. However, keep in mind that it will raise your loan balance, which will increase your monthly payments and cost you more in interest in the long term.
FHA loans are an affordable option for many first-time homebuyers and others who may have limited funds or poor credit histories. Still, it's important to look past the low down payment and attractive interest rates and make sure you understand all the costs associated with an FHA loan. Compare FHA loan fees from a few different lenders and explore your options for lowering your closing costs so you can feel confident as you head into closing day.