FHA closing costs: what to know

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:

• Title insurance
• Title search
• Appraisal
• Inspection
• Credit report fee
• Notary fee

» 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

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.