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FHA Loan Closing Costs: What Are They?
While you’ll pay closing costs in some form or fashion for any type of mortgage loan, the FHA closing costs vary somewhat from the fees that make up the conventional loan closing costs. For instance, FHA loans closing costs are greatly affected by the required mortgage insurance that this type of loan comes with.
With FHA loans, each buyer must pay an additional 1.75% of his or her loan amount at closing — which will obviously affect how much cash you need to close. Of course, if you are buying a house with an FHA loan, there are a few more things to keep in mind, too. Before you decide what type of loan you’re going to use, you need to know what you’re getting into.
FHA loans vs. conventional loans
FHA loans and conventional loans have a lot of differences when it comes to qualifications and thresholds. Right off the bat, the main difference between an FHA loan and conventional loan is that FHA loans are secured by the Fair Housing Association, a department within the federal government, whereas conventional loans are not. Because the U.S. government insures FHA loans, lenders are able to have less stringent standards for qualifying for this type of loan, which often makes FHA loans the go-to for many homebuyers.
[ See: What Is an FHA Loan? ]
For example, you can obtain an FHA loan with a credit score as low as 580 and will only be required to make a 3.5% down payment, but it’s also possible to get one with a credit score between 500 and 579, too. You will need to make a higher down payment if your score is that low — in this case 10% or more — but you’re still getting access to needed funds.
In contrast, to get a conventional loan you will need a credit score of at least 620, but the requirement can be as high as 640 or more depending on the lender. If your credit score is below that, you often don’t have an option of making a higher down payment to compensate. You will simply have to switch loan types if you are adamant about purchasing a home — and an FHA loan is one option.
In general, FHA loans have the following advantages over conventional loans:
- No income limits
- Cheaper mortgage insurance
- Lower credit scores requirements
- Lower down payment requirements
- Options with bad credit scores below 579
As for disadvantages, FHA loans have the following drawbacks:
- Higher standards for the home itself — meaning more stringent inspection requirements
- Must pay mortgage insurance for the life of the loan
- Can only be used for a primary residence purchase
- Lower loan amounts
Before deciding which loan to apply for, speak with a loan officer. They will be able to outline all of your loan options based on your unique financial and credit situations. FHA loans can be the best loan option for many buyers, but that’s not always the case. In many cases, a conventional loan may make the most financial sense.
[ Next: How to Calculate Your Mortgage ]
FHA closing costs
When getting approved for a loan, your loan officer will give you a breakdown of the cash needed to close before you make an offer on any house. The exact amount you’ll need will vary depending on your loan amount, the home’s location and any specifics that come with the home purchase. The good news is that it’s never a surprise. You will know what you’ll need long before closing.
When closing on a house bought with an FHA loan, you can expect the following to be part of your closing costs:
Lender fees: A lot of your closing costs will come directly from your lender. You’ll pay fees for such things as:
- Interest rate lock-in (0.25% to 0.5% of loan amount on average)
- Document preparation ($100 on average)
- Loan origination (0.5% to 1% of loan amount on average)
- Underwriting ($350 or more on average)
Mortgage insurance: Even though your loan is technically insured by the government, buyers must pay for extra mortgage insurance on the loan. There is an upfront fee of 1.75% on FHA loans for the mortgage insurance premium. There is also a monthly fee that you’ll pay each year, which varies from 0.45% to 1.05% of your loan amount. How much you pay depends on the size of your loan, the amount of your down payment, and your selected loan term (15, 20, or 30 years).
[ Read: The Guide to FHA Refinance ]
Prepaid fees: Regardless of your loan type, prepaid fees include such things as real estate taxes, per diem interest, flood insurance and hazard insurance. The amount of these fees will depend on your home, the purchase price and the location.
Third-party fees: It takes a lot of people working behind the scenes to sell a house, and all of the work done comes with a fee you’ll pay for at closing. You’ll pay such fees as:
- Appraisal fee ($450 or more on average)
- Courier fee ($20 on average)
- Notary fee ($10 on average)
- Credit report fee ($25 on average)
- Recording fee ($70 or more on average)
- Attorney fees ($750 or more on average)
Factors of FHA closing costs
Most borrowers with FHA loans will pay approximately 3% of their home’s purchase price at closing. For example, a $300,000 house would require about $9,000 at closing. The exact amount you’ll pay will be affected by a variety of factors, but 3% of the principal amount is the norm.
Fortunately, FHA rules allow buyers to roll some of the closing costs into the loan itself. Doing so means you will end up paying more in the long run because of interest paid on the extra amount rolled into the principal over time, but the monthly cost difference with your mortgage payment won’t change that much. If closing costs are the final hurdle to you and homeownership, this is a valid strategy.
[ More: How APR Affects Your Morgage ]
The other option is a gift that helps your down payment. If a loved one wants to gift you the money needed for closing costs, they may do so. The money can’t be borrowed by the buyer, however, because this would affect their debt-to-income ratio. It must be a gift in the eyes of your lender.
A seller may help with closing costs, but with FHA loans, the seller can only cover closing costs up to 6% of the purchase price. However, most people only pay 3% of the purchase price at closing — so if the seller agrees to pay, you may not have to worry about closing costs.