FHA closing costs: what to know

Find out how much your FHA loan will cost

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Using an FHA loan to buy your home can reduce how much money you’ll have to put down upfront. However, while FHA loans are considered easier to qualify for in terms of credit scores and debt-to-income (DTI) ratios, there are still several closing costs and additional fees to plan for.

We’ll walk you through how much FHA closing costs are and who pays what before you get your keys.

Key insights

  • For FHA loans, you will need to pay both upfront mortgage insurance and monthly mortgage insurance.
  • Closing cost assistance programs are available in most areas across the country and can either be in the form of grants or no- to low-interest loans.
  • Some lenders might allow you to roll your FHA closing costs into your home loan, but this can cause your interest rate and monthly payments to go up.

What are FHA closing costs?

An FHA loan requires a minimum down payment of 3.5% of the purchase price, but this isn’t the only amount of money you should have saved up before buying. You will also be required to pay additional costs such as a loan origination fee, appraisal fee, inspection fee and more.

Closing costs can vary by lender and location. Some states have significantly higher closing costs than others. For example, a CoreLogic report found that in 2021, Missouri had the lowest closing cost average, at $2,061 (including taxes), and Washington, D.C., had the highest, at $29,888.

How much are closing costs on an FHA loan?

"FHA closing costs are about equal to those of conventional loans, which means 3% to 6% of your loan value; however, the way those costs are structured are a bit different,” said Alex Caras, a broker at Magellan Realty in Chicago.

For example, if you plan to purchase a home that is $350,000, you will need $12,250 for the down payment (3.5% of the price) and at least another $10,100 to cover closing costs (3% of the loan amount).

Additionally, you will have mortgage insurance premium (MIP) payments — both upfront and then monthly through the life of your loan in some cases.

“Your costs for an FHA loan will include an MIP of about 1.75% that needs to be paid upfront,” said Caras.

The White House announced in February 2023 that the MIP payment for FHA loans for 2023 is now 0.55% annually for new borrowers, down from 0.85%.

“You end up paying more upfront with an FHA, but overall, the costs boil down to almost equal," said Caras.

Lender vs. third-party fees

Lender fees include charges associated with loan origination, underwriting, processing and administration and are typically nonnegotiable, though it doesn’t hurt to ask which fees can be waived, such as an application fee. Lenders might also charge for document preparation and a fee to lock in your interest rate.

Third parties also charge fees, though some might be optional or negotiable. Common third-party fees for an FHA mortgage include:

» MORE: How to negotiate your mortgage closing costs

Who pays closing costs on an FHA loan?

While the homeowner is responsible for the closing costs, FHA loan rules say that funds can be gifted from an employer or family member. The seller can also contribute up to 6% of the closing costs, though this is at the discretion of the seller.

You are more likely to have a seller contribute to closing costs if the market is slow or if the seller has had little interest in their home.

How to reduce your FHA closing costs

There is some wiggle room when it comes to lowering your FHA closing costs. Even if you can negotiate your closing costs down 1%, that will save you a couple thousand dollars. Here are some strategies to try:

  • Negotiate FHA fees. Ask your lender which fees it will waive or reduce so that you don’t have to walk away from the loan due to finances. Additionally, ask which fees are optional.
  • Seller concessions. Seller concessions are contributions from the seller to the closing costs. A seller can agree to cover up to 6% of the closing costs, but if the buying market is competitive, a seller might choose a buyer who doesn’t need this perk.
  • Closing cost assistance programs. There are programs available to both new and repeat buyers. These programs are available at the federal, state and county levels, so it is best to check with your real estate agent or lender for more specific information about what is available. For example, first-time homebuyers from underserved communities across California can receive up to $10,000 in closing costs assistance that does not need to be repaid.

» MORE: How to buy a house

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    Can I roll my FHA closing costs into the loan?

    Some lenders will allow you to roll most or all of your FHA closing costs into your loan total as long as you stay in the approved loan-to-value (LTV) ratio. Rolling your closing costs into your loan will save you money upfront, but it will cost you more in the long run, since you will be paying interest on these costs.

    What if I can’t afford FHA closing costs?

    You might qualify for closing cost assistance, which can either come as a grant that you don’t have to repay, a forgivable loan or a no- to low-interest loan you repay in tandem with your mortgage.

    Does my credit score matter with an FHA loan?

    Yes, you need to maintain a 580 or higher credit score throughout the mortgage process for the ability to put 3.5% down. If your score drops below 580, you will either need to put 10% down. Like other home loans, the better your credit score, the better your interest rate will be.

    Can I use gifted funds to pay FHA closing costs?

    Yes, you can use gifted funds from a wide variety of sources, including family members, your employer or a public assistance fund. The seller can also cover up to 6% of your closing costs.

    Bottom line

    FHA closing costs are an additional expense that homebuyers need to consider, typically ranging from 3% to 6% of the loan value. You may be able to negotiate these fees with your lender or reduce them via seller concessions or closing cost assistance programs.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. The White House, " Fact Sheet: Biden-Harris Administration Announces Action to Save Homebuyers and Homeowners $800 per Year ." Accessed May 21, 2023.
    2. CoreLogic, “ Average Closing Costs for Purchase Mortgages Increased 13.4% in 2021, CoreLogic’s ClosingCorp Reports .” Accessed May 22, 2023.
    3. Federal Deposit Insurance Corporation, “ 203(b) Mortgage Insurance Program .” Accessed May 22, 2023.
    4. U.S. Department of Housing and Urban Development, “ Section B. Acceptable Sources of Borrower Funds .” Accessed May 22, 2023.
    5. California Association of Realtors, “ HAF's Pathways To Homeownership Closing Cost Assistance Grant Program .” Accessed May 22, 2023.
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