What Are FHA Closing Costs?

What Are FHA Loan Closing Costs?

On the day you finalize, or close, on the purchase of a home financed with an FHA loan, you must provide whatever portion of your down payment wasn't furnished as earnest money and pay certain fees, insurance premiums and taxes, known all together as closing costs.

Closing costs on an FHA loan include fees charged by the lender; payments to third-party professionals involved in the sale, and prepayment of taxes, casualty insurance premiums and other fees the lender requires to be kept in an escrow account. Closing costs also include an upfront payment on your mortgage insurance premium (MIP), a form of mortgage insurance unique to FHA loans.

Learn more: FHA Down Payment Requirements

How Much Are FHA Closing Costs?

Closing costs on FHA loans typically range from 2% to 6% of the home's purchase price. They can vary widely based on the following factors:

• Lender
• Local pricing for services such as home inspection and legal consultation
• Types and rates of property taxes applicable to the home you're buying

What Do FHA Closing Costs Include?

FHA closing costs are nearly identical to closing costs on conventional loans, with one exception. Here's what's included in FHA closing costs.

Upfront Mortgage Insurance Premium (UFMIP)

A closing cost that's unique to FHA loans is the upfront mortgage insurance premium (UFMIP), which is 1.75% of the loan amount. This is the initial payment on a mortgage insurance policy required on all FHA loans to protect the lender from loss in case you fail to pay your mortgage.

Additional MIP annual premiums are also required over the life of your loan. They are divided into 12 installments for each year of your loan term and added to your monthly mortgage payment. If you make a down payment of 10% or more on your FHA loan, you can have MIP removed after 11 years, provided you've made all of your payments on time. Otherwise, you'll pay MIP for the life of the loan or until you refinance your FHA loan.

Lender Fees

A portion of your closing costs goes to the lender:

• Origination fee: Lenders typically charge an upfront origination fee when they issue the loan.
• Discount points: Many lenders who offer FHA loans permit you to lower the interest rate on your mortgage through optional payments known as discount points. A payment at closing of 1% of the loan amount, or one point, typically reduces the interest rate on your loan by 0.25%. So, on a $400,000 loan, paying two points, or $8,000, at closing could reduce your interest rate from 5.5% to 5%, for example.

Third-Party Fees

If they haven't been paid beforehand, you are expected to provide payment at closing for professional services connected to the sale, which may include:

• Home inspection: Your lender will likely require a home inspection to check for potential concerns about the property's physical soundness, including necessary repairs that might not be apparent to an untrained visitor.
• Home appraisal: Mortgage lenders typically designate a home appraiser, whose services you must pay for, to determine the property's market value based on comparisons to the sale prices of similar properties recently sold in your area.
• Legal advice: It's advisable to have an attorney who's well-versed in state and local real estate law review your home sale documents before closing.
• Title search: Your lender will require a title search on the property to ensure the seller has legal standing to transfer the property to you, and that there are no unpaid taxes or liens attached to the property.
• Sales commissions: Historically, home sellers paid a percentage of the sale price to the agent or broker who handled a sale, and the seller's agent paid an agreed-upon portion of their commission to the buyer's agent. A 2024 legal decision changed that, so you may be responsible for paying your agent at closing.

Learn more: FHA Appraisal Guidelines and Inspection Requirements

Prepaid Expenses

The servicer of your FHA Loan will likely open an escrow account—a dedicated bank account into which a portion of your monthly loan payment will be placed—for payment of certain home-related expenses on your behalf. It's customary to front-load these accounts at closing, with a payment that covers most or all of the first year's escrow costs, which may include:

• Property taxes: These include taxes leveled by your state, town or county, including special-district taxes for services such as sewer systems, fire departments and municipal water.
• Homeowners insurance: Because your home acts as collateral on your mortgage loan, your lender will require you to maintain homeowners insurance coverage against fire and casualty until your loan is paid off.
• Hazard insurance: If your home is in an area at high risk for flooding, wildfires, hurricanes or other natural disasters, the lender may require prepayment on additional hazard insurance coverage against those events.

When Do You Find Out Your FHA Closing Costs?

Your closing costs and other details of your loan and purchase agreement will be detailed in a closing disclosure your lender must furnish at least three days before your closing. If you communicate clearly with your lender, your real estate agent and the seller during the purchase process, there shouldn't be any major surprises in the disclosure document.

How to Reduce FHA Closing Costs

Certain closing costs on FHA loans are set in stone, but others may be negotiable. Here are some options for minimizing closing costs on an FHA loan.

Ask for a Seller Concession

When negotiating a sale with a motivated seller, you may be able to get them to share your closing costs. You could ask them to cover specific closing-related expenses, such as appraisal or inspection fees, or you could ask them to contribute a percentage of the purchase price toward closing costs. The FHA limits seller concessions to 6% of the home sales price, and confines them to the following:

• Loan origination fees
• Prepaid items
• UFMIP payments
• Other closing costs

Tip: Getting concessions may be challenging in a seller's market, but your real estate agent should be able to help strategize on this.

Request a Gift

Rules governing FHA loans allow borrowers to put financial gifts from family members toward their down payment or closing costs. There is no limit on the amount of the gift, but it cannot be the proceeds of a loan or cash advance, and the giver must provide written confirmation that they do not expect to be repaid or otherwise compensated for the funds.

Explore Closing Cost Assistance Programs

States, municipalities and community organizations may offer financial assistance with down payments and/or closing costs for first-time homebuyers or borrowers with income that falls below a program-specific threshold. Ask your lender or real estate professional about local options or do a web search to find relevant opportunities.

Learn more: Down Payment Assistance Programs: How They Work

Roll the Costs Into the Loan

Your lender may permit you to finance your origination fee, UFMIP or other closing costs by adding them to the loan total to spread the payments out over the loan repayment term. Because interest is applied to the financed sum, this approach could add thousands of dollars to the total cost of your loan. But it also may allow you to complete the purchase of your home if you don't have other options to pay in cash.

Frequently Asked Questions

The Bottom Line

By lowering barriers to homeownership, FHA loans can be a great opportunity to get into the U.S. housing market. Like all mortgages, they come at a price, and closing costs are part of the deal. An understanding of FHA closing costs and your options for reducing them can help you land the loan you need, under terms you can best afford.

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