10. About FHA Closing Costs

by Local Title

Closing costs are an essential aspect of the home-buying process, including when securing an FHA loan. These costs cover various fees and expenses related to finalizing your mortgage and purchasing your new home. Understanding FHA closing costs can help you better prepare financially and avoid surprises on closing day.

What Are FHA Closing Costs?

FHA closing costs include various fees required to complete your home purchase and secure your mortgage. These costs typically range from 3% to 6% of the loan amount and can include the following:

  • Loan Origination Fee: This fee is charged by the lender for processing your loan application. It usually ranges from 0.5% to 1% of the loan amount.
  • Appraisal Fee: An FHA-approved appraiser must evaluate the property’s value and condition. The appraisal fee typically ranges from $300 to $500.
  • Home Inspection Fee: Although not always required, a home inspection is highly recommended to identify any potential issues with the property. Inspection fees usually range from $300 to $500.
  • Credit Report Fee: The lender will pull your credit report to evaluate your creditworthiness. This fee is typically around $30 to $50.
  • Title Insurance: Title insurance protects both the lender and the buyer against any claims or disputes over the property’s ownership. The cost of title insurance varies based on the property’s value and location.
  • Attorney Fees: In some states, an attorney is required to handle the closing process. Attorney fees can vary widely based on the complexity of the transaction and the attorney’s rates.
  • Recording Fees: These fees are charged by the local government to record the deed and other legal documents. Recording fees typically range from $50 to $200.
  • Prepaid Expenses: These include costs that need to be paid in advance, such as property taxes, homeowner’s insurance, and mortgage interest. The amount of prepaid expenses can vary based on the timing of your closing and the terms of your mortgage.

FHA Upfront Mortgage Insurance Premium (UFMIP)

One unique aspect of FHA loans is the upfront mortgage insurance premium (UFMIP). This one-time fee is required for all FHA loans and is typically 1.75% of the loan amount. You can choose to pay this fee at closing or roll it into your mortgage. Rolling the UFMIP into your mortgage increases your loan amount and monthly payments but can help reduce your upfront costs.

FHA Annual Mortgage Insurance Premium (MIP)

In addition to the UFMIP, FHA loans require an annual mortgage insurance premium (MIP). This fee is paid monthly as part of your mortgage payment and varies based on the loan amount, loan term, and loan-to-value ratio. The MIP ensures the FHA can continue to offer affordable loans to future borrowers by protecting the lender against default.

Assistance with Closing Costs

One of the benefits of FHA loans is the flexibility in covering closing costs. Various parties can help you pay for these costs, including:

  • Seller Contributions: Sellers can contribute up to 6% of the loan amount toward the buyer’s closing costs. This can be negotiated as part of the purchase agreement.
  • Lender Credits: Some lenders may offer credits toward closing costs in exchange for a slightly higher interest rate. This can help reduce your upfront expenses but will increase your monthly mortgage payments.
  • Gift Funds: You can use gift funds from family members, employers, or charitable organizations to cover your closing costs. These funds must be documented and cannot come from anyone with an interest in the property transaction.

Being aware of the various components and options for covering FHA closing costs can help you better prepare for the financial responsibilities of homeownership. By planning and understanding these costs, you can ensure a smoother closing process and a more secure financial foundation for your new home.