It’s easy to overlook FHA loan closing costs, especially if they pale in comparison to your down payment (one of the many benefits of a FHA loan). But these costs can add up. So it’s important to know what to expect in terms of expense and be aware of your options for covering these costs.
Here’s everything you need to know about FHA loan closing costs.
What are FHA Loan Closing Costs?
FHA loan closing costs are the expenses you incur for taking out an FHA loan when you purchase a home.
These costs are different from your down payment. Your down payment goes toward the purchase of your new home while closing costs are mainly used to cover the services of the many professionals it takes to complete the real estate transaction on your behalf.
What Specific Expenses are Included?
FHA closing costs expenses typically include:
- The upfront mortgage insurance premium. This applies to borrowers to put less than 20% down (which is most FHA borrowers since a key benefit of FHA loans is the ability to put down as little as 3.5%).
- Lender fees. Nearly all lenders charge origination fees to cover the work involved in opening a new loan. Other common lender fees include underwriting fees, document fees, and application fees.
- Third-party fees. Buying a home typically involves fees to third parties for services like home inspections, appraisal, title research, credit checks, and notarizing signatures, and delivering documents to the different professionals involved in the deal.
- Prepaids. Some homeownership expenses need to be prepaid for your first year at closing. These typically include homeowners insurance, property taxes, and per-diem interest.
How Much are FHA Loan Closing Costs?
FHA closing costs vary greatly, depending on your chosen lender, your third parties, and even the time of year you close on your home (since this impacts your prepaid items like taxes and insurance).
These costs typically fall somewhere between two and six percent of your purchase price.
What are My Options for Covering FHA Closing Costs?
With enough planning, many home buyers are able to save enough money in the months leading up to their purchase to cover their FHA closing costs out-of-pocket.
But if that’s not the case for you, here are a few other options to consider.
- Ask a friend or family member to gift the closing costs. The FHA has specific rules for using gift funds to cover your down payment and closing costs, but if you know someone willing and able to give you the money you need, it’s a good option.
- Ask the seller to pay some of your closing costs. This only works when you have leverage in negotiating a deal with the seller. In a hot seller’s market, sellers have zero incentive to pay any of the buyer’s closing costs.
- Roll the closing costs into your loan. Depending on the circumstances, you might be able to just add these costs to your loan and avoid paying them out-of-pocket at closing. Just know that this will add to your loan total and will likely result in paying more in interest over the term of the loan.
FHA loan closing costs aren’t the same for all buyers. If you have questions about your unique circumstance, contact us at OVM Financial. We’re happy to review your finances and your goals to see if an FHA loan is the best option for you and to guide you on applicable closing costs. You can reach us at 757-296-2148.