FHA closing costs: What they cover and how to reduce them

What you'll learn

— What FHA closing costs are

— Estimated FHA closing fees

— Tips to reduce your overall costs

Federal Housing Administration (FHA) loans have low down payment options and flexible credit requirements. While they’re typically more affordable than conventional loans, one thing doesn’t change: paying closing costs.

In this guide, you’ll find out what FHA closing costs cover and how much you can expect to pay. Plus, explore a few tips on reducing the final bill.

When does it make sense to take out an FHA loan?

FHA loans can be a good option for certain borrowers, like first-time buyers and people with lower credit scores. You may qualify for an FHA loan with a credit score as low as 500, but you’ll have to put down at least 10%. If your credit score is 580 or higher, you only have to put down 3.5%.

Interest rates can also be lower than those of conventional mortgages. The government backs FHA loans, which protects lenders in case the borrower defaults. This makes mortgages less risky for providers so they can offer more favorable rates to buyers.

Browse affordable FHA loan terms with Better and see if this mortgage fits your budget. Sign on to your fully online dashboard to compare rates, talk to experts, and track the home buying process. 

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What are FHA closing costs?

FHA closing costs are the fees you pay at the end of the home buying process to finalize the sale. 🏠

These closing costs are similar to those for conventional loans, with one extra component: mortgage insurance premiums (MIP). They protect the lender in case of default. Borrowers pay for insurance with an up-front lump sum, then make monthly payments throughout the life of the loan.

While MIP is similar to private mortgage insurance (PMI) in purpose, MIP isn’t as flexible. Lenders remove PMI under certain circumstances, like reaching 20% equity or making a larger down payment. On the other hand, MIP almost always lasts throughout the life of the loan.

What are the estimated closing costs on an FHA loan?

FHA estimated closing costs are generally about 2–6% of the loan amount (not the purchase price). This is a little higher compared to the 2–5% for conventional loans. The expanded range is primarily due to MIP.

While it might not sound like a huge increase, even a 1% difference can mean significantly higher costs. For example, if you took out a mortgage for $500,000, each percentage point would add an extra $5,000.

When you apply for a mortgage, the lender will give you a document called a loan estimate. This contains your approximate closing costs, lender fees, and projected monthly payments. Your mortgage provider will give you the final price in your closing disclosure at least three days before the deal goes through.

What types of fees can be included in FHA closing costs?

Here are a few specific FHA mortgage fees you can expect. ✅

Lender fees

These are a variety of fees for lender services. One of the most significant is the origination fee, which covers the administrative work providers do to process and fund your mortgage. This fee will run you about 0.5–1% of the loan amount.

There’s also the underwriting fee. Lenders charge this for evaluating your application during approval. This involves verifying factors like your income, assets, and credit score.

Lenders may also charge for services like pulling your credit score, locking in an interest rate, or obtaining title insurance.

Appraisal fee

FHA loans almost always require an appraisal to ensure the property meets a certain set of characteristics. These are called minimum property standards, and they focus on ensuring the home is safe to live in. 

These appraisals average about $750. That’s a little higher than the $400 average for conventional mortgages because it factors in stricter property standards. Home size, type, and location can influence the final appraisal bill.

Mortgage insurance premiums

MIP costs have two types of fees: up front and annual. The up-front premium is 1.75% of the loan amount, making up a sizable chunk of the total closing costs. For a loan of $500,000, this premium would amount to $8,750.

Annual costs range from 0.15–0.75% of the loan balance, depending on factors like the initial loan amount, down payment, and loan term. Despite the name, you’ll pay these in monthly installments as part of your mortgage payment.

Third-party fees

Some closing costs go to third parties instead of the lender itself. Here are a few common ones:

— Prepaid fees are expenses you’ll pay over time but require an advance installment. Common costs include homeowners insurance and property taxes.

— Attorney fees cover the work real estate attorneys do to ensure the deal satisfies all legal requirements. Prices vary between $150–$500 an hour.

— Transfer taxes are a fee for reassigning ownership of a home. These costs vary depending on location, and some states don’t require them.

Tips for reducing FHA mortgage closing costs

You can’t get away from closing costs, but there are strategies to lower the final sum. Here are a few:

— Shopping around: Lender fees vary, and by comparing estimates from different providers, you can zero in on the option with the lowest price. Keep in mind that low lender fees aren’t the only consideration. For instance, partnering with a provider who offers low lender charges but high interest rates could impact your budget heavily over time. In this case, pricier lender services could be more affordable over the long term.

— Obtaining closing cost assistance: Contact local housing agencies to learn about cost assistance programs. They’re typically either grants or additional loans with favorable terms. You may also be able to get help with the down payment, lowering your expenses even more.

— Using lender credits: Some lenders let you reduce closing costs in exchange for a higher interest rate. This often results in a higher cost overall, but it’s useful if you need a little help at the start and expect to have more cash later.

— Negotiating: While they may not accept, there’s no harm in asking your lender to waive or reduce certain fees. You might have the best luck with smaller costs like wire transfer and document preparation fees.

See how much you could save with an FHA loan from Better

FHA loans are a great option for home buyers looking for good terms, a low down payment, and flexible qualification criteria. Don’t let closing costs intimidate you — the experts at Better can guide you through the process.

We’ll work with you to find a mortgage that matches your goals and budget. You can apply in as little as three minutes and lock in a competitive interest rate completely online. If you ever have questions or concerns, our support team is on-hand 24/7 to help.

Get started today to take your first step toward homeownership with Better.

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FAQ

Do FHA loans cover closing costs?

No, closing costs are a separate expense. Some lenders offer a no-closing-cost option that lets you roll the charges into the loan amount. However, that means you’ll end up paying interest on the closing fees, which may be pricier in the long run.

How much are closing costs on an FHA loan?

Typical closing costs on an FHA loan are 2–6% of the loan amount. This factors in the added cost of paying the up-front mortgage insurance premiums every FHA loan requires.

What assistance is available for FHA loan closing costs?

There are several ways to obtain closing cost assistance to help with your up-front expenses. Try asking the seller to chip in for closing costs, using gift funds from a loved one, or negotiating with your lender.

Your state or local government may also have options to assist with both closing costs and down payments.