Of course, you can get a low down payment with a loan guaranteed by the Federal Housing Administration, but that doesn’t mean you’ll avoid paying other closing costs. You will be charged certain FHA closing costs, including those that conventional loans generally do not require.
What are the FHA closing costs?
FHA closing costs include mortgage insurance, lender and third party fees, and prepaid items that are due when signing your mortgage documents. These are paid in addition to your FHA deposit. Here is the breakdown:
Mortgage loan insurance premium
One of the generally mandatory fees is the FHA mortgage insurance premium or MIP. It totals 1.75% of your loan amount, due at closing. You can also finance this charge as part of your loan.
You will also find that an additional 0.45% to 1.05% continuous FHA PMI is built into your monthly payment. Although the rate remains the same throughout the life of the loan, the premium is adjusted annually based on the remaining principal loan balance.
Initial and ongoing mortgage insurance premiums are an expense you won’t pay conventional loan if you make a deposit of 20% or more.
The fees listed as lender fees will have names such as:
You can also decide to buy reduction points – prepaid interest which lowers the interest rate on your loan. Buying discount points is optional, but if you do, you will find them in the list of lender fees.
Third Party Fees
This is a category of fees for services offered by other providers, and could be:
Premium for the title insurance policy (for the lender and option to buy for the buyer as well).
Prepaid fees – some of which are shared between buyer and seller – include:
Security deposit for taxes and insurance.
Insurance premiums against floods and risks.
How To Lower Your FHA Closing Costs
Closing costs vary widely depending on where you live, says Brian Sullivan, public affairs specialist for the US Department of Housing and Urban Development, which oversees the FHA mortgage program. That is: your costs and their names may vary.
“Your costs and their names may vary.“
But there are ways to lighten the load. To reduce your FHA loan closing costs, you can:
Ask the seller to pay a portion of your closing costs. The seller will have to pay their share of closing costs, including real estate commissions, which is not a small number. You can ask the seller to pay a portion of your settlement fee, but the likelihood of this happening may depend on the activity in your local real estate market. In one “seller’s market,” not really.
Fund some of your closing costs. You can add closing costs to your loan balance to lower your upfront costs, but your monthly payment will be higher, as will the interest you pay over the long term.