FHA loan closing costs explained: what are they, who pays, and more
Federal Housing Administration (FHA) loans are in a category of mortgages called government-insured mortgage loans. Examples of government-insured (also known as government-backed) mortgage loans are Veterans Administration (VA) and United States Department of Agriculture (USDA) mortgage loans.
Conventional loans are backed by or insured by private lenders and are not government-backed or government-insured.
Like conventional loans, FHA loans come with fees that must be paid during the closing of the transaction. More specifically, a Mortgage Insurance Premium (MIP) is required for most FHA single-family mortgage loans.
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What is an FHA mortgage loan?
FHA loans have been helping people become homeowners since 1934. The Federal Housing Administration (FHA) is part of the
U.S. Department of Housing and Urban Development, and provides mortgage insurance on loans made by FHA-approved lenders. FHA mortgage loans were created to help more [people become homeowners, particularly first-time homebuyers and those who have low credit scores and/or low income.
The FHA insures mortgages on single-family homes, and multifamily properties, throughout the United States and its territories. When shopping for a mortgage many homebuyers will consider an
FHA vs. a conventional loan.
What are FHA loan closing costs?
Closing costs on a house are necessary to settle the transaction between all the parties involved in the sale of the property. The parties include the seller, the buyer, a title company, possibly the buyer and/or seller’s attorney, and the real estate agent(s).
When you get a
mortgage loan insured by FHA, you have to pay an up-front Mortgage Insurance Premium (MIP), which can be included in the loan amount. You will also have to pay a monthly insurance premium that is added to the regular mortgage payment. FHA uses the premiums to pay the lender if you default on your mortgage.
How much are FHA loan closing costs?
If you complete a mortgage application, the lender or mortgage broker will send you a Good Faith Estimate (GFE) that lists the loan terms and the settlement charges (closing costs) you would pay if you are approved for the loan. The GFE explains which charges may change (or be recalculated at time of closing) and which charges will remain the same. The GFE is a standardized form that all lenders use, which makes it easy for people who are shopping for a mortgage to compare each lender’s typical FHA closing costs. Your lender can explain how closing costs work.
Closing costs will vary depending on the loan amount and unique aspects of your mortgage transaction. Generally, average FHA loan closing costs
are
between 2% and 6% of your loan amount.
Who pays for FHA loan closing costs?
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
Generally, buyers pay most of the closing costs, including mortgage application fees, a credit check fee, an attorney fee, property taxes and homeowners’ insurance, and other fees associated with executing the mortgage and taking ownership of the home.
Sellers may have costs that include an attorney’s fee and commission paid to the listing real estate agent. In some cases, repairs are needed to a home which the seller may agree to take care of prior to closing, or in lieu of repairs the seller may give the buyer money to cover these costs. Money paid by the seller to the buyer at closing is called seller concessions. These terms are agreed to and will be added to the sale contract.
Closing cost breakdown
Here are some typical FHA closing costs:
Mortgage Insurance Premium (MIP). This FHA-specific premium, currently at 1.75% of the mortgage amount, can be rolled into the mortgage amount. It is charged on all FHA new home purchases and refinances.
Up-front mortgage insurance premium (UMIP). This premium is required for all FHA loans and is paid at closing.
Monthly mortgage insurance premium. In addition to the UMIP, FHA borrowers will pay a monthly MIP which is based on their calculated annual MIP payment.
Lender fees. These can include an application fee, underwriting fee, credit check fee and other lender charges. All lenders charge fees but will vary. Some may be negotiable, while other fees are not. Be sure to ask all lenders you speak with to give you a Good Faith Estimate of fees.
Third-party fees. This includes fees paid to an attorney, title company, survey company, notary, courier, and other service provides that are essential to the sale transaction.
Prepaid expenses. These are fees that would be paid earlier in the start of the purchase process, such as a good faith deposit, down payment, etc. At closing, a settlement attorney or closing company will ensure that all fees are accurately accounted for and paid to the appropriate parties in the transaction.
How to keep your FHA loan costs down
Some
closing costs can be negotiated lower or even eliminated, but you will need to ask your lender if this is possible. Other costs cannot be negotiated. Here are some tips for reducing FHA loan costs:
Compare lender fees. Fees vary by lender, so it’s always smart of compare lender rates and fees.
Rolling closing costs into loan. While FHA guidelines allow some closing costs to be included in the loan amount, rolling closing costs into a loan will cost you more in the long run because you will ay interest on the fees. Ultimately, it's always better to not pay interest on a debt, and in general, paying your closing costs in cash is almost always the better option.
Seller concessions. Some sellers may offer to pay some of a buyer’s costs as an incentive to sell the home. This may include a home warranty, prorated property tax, an appraisal, or inspection fee.
Closing cost assistance. Financial assistance and other programs may be available that provide funds to qualified homebuyers. If you are a first-time buyer or have a low income, you may qualify. Be sure to ask each lender when you’re shopping for a mortgage.
Ask family and friends for help. First-time homebuyers, young adults moving out of their parents’ home, and newlyweds often use gift money to pay for closing costs. While family and friends may offer money, be sure to have a clear understanding of whether the money needs to be paid back, or if it is truly a gift.
Buy points. Also known as discount points, these are percentage points you can buy to reduce your overall mortgage interest rate. Each point you purchase reduces the interest rate but comes with a fee that is paid to do so. All lenders offer discount points.
Where can I get an FHA loan?
Credit unions, banks, and online lenders can provide FHA loans. However, it is always a good idea to speak to a mortgage loan representative at the financial institution where you currently have your accounts.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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