How Much Are FHA Closing Costs?
How Much Are FHA Closing Costs?
You can expect to pay an average of $2500 in closing costs for an FHA loan. This represents anywhere from 2%-5% of the loan amount. Your true costs will depend upon your loan amount and your credit score. A good faith estimate is critical in determining what your costs will be for your scenario.
Does this seem like a very general answer to the question? Yes, it is because there are so many factors that go into determining how much your FHA closing costs will be that it is impossible to pinpoint one answer for every scenario. Here is what goes into determining your closing costs..
First, it is important to understand that most of the costs are things that need to be passed on to you by your lender. Often borrowers believe that all of the costs are nonsense and are nothing more than just another profit center for the lender. Not true. Much of it is required based upon guidelines that have been set by government legislation.
Main Factors That Impact Your Closing Costs
- Credit Score – I mentioned this in other articles but your credit score is so important and is the main factor in so many things from your interest rate to your credit scores. In fact, your credit scores are more important than saving for a down payment.
- Loan Amount – Many of the calculations for the list of FHA closing costs below are derived from the loan amount. Especially when one of the items on the list of closing costs is based off of a percentage.
List of FHA Closing Costs – Not all of these costs may apply to you. The goal here is to list everything that you may encounter so check with one of our lenders to see what your true closing costs would be for your scenario. Every lender must provide you with a good faith estimate up front. This estimate must calculate these costs accurately so there are no surprises for you. The costs below do not include your down payment but are included in that range of 2%-5% that I referenced above.
- Credit Report – Mandatory charge for pulling your credit report. Should be around $25
- Appraisal – Every purchase will require an appraisal to make sure the home is worth what you are paying. This cost can vary based upon the price of the home. It is also regulated now. This could cost you a minimum of $450 and your lender will order this for you.
- Title Search – A title company will need to do a search against the title of the home to determine whether there are any liens against the property. Those liens would need to be settled at closing. An example would be a loan against the home from the seller. They may have a second loan too. You do not want to find out years later that there is an unpaid loan on your property which YOU would have to settle. This title search protects you.
- Title Insurance – This is a one time insurance policy that is calculated based upon your purchase price. It is nothing more than an insurance policy that would protect you in the event that the title search company did not do their job properly. You would think that THEY should have to have the insurance coverage but unfortunately that is not how it works.
- Tax Service Fee – This fee is in place to do a search on the tax history and to make sure that the taxes have been paid and there is nothing owed to the township. The lender does not want to be in a situation where they loaned money against a property but now it is being foreclosed upon due to unpaid taxes.
- Attorney Fee – Depending upon your location, some use attorneys to review the contracts and to deal with the title company. Some lenders also have an attorney fee at closing that the borrowers need to pay for. If your realtor typically draws up the contracts and they are comfortable not using an attorney, then this can save you some money.
- Underwriting Fee – In some instances, lenders may charge an underwriting fee. This may vary. Check your good faith estimate.
- Document Fee – Some lenders charge a document fee. This is something they charge to prepare the docs to close your loan and is possibly negotiable.
- Home Inspection – Paying for a home inspection is not mandatory but is something I would highly recommend. You will pay at least $350 or more depending upon the size of your home and the scope of the inspection. If you have a septic system this may also cost more to inspect. It is a step that is well worth the costs. The inspection may reveal some things that need immediate attention. Those repairs and costs can be negotiated into the sale of the home which in most instances will save you more than what you paid for the inspection.
- Wire Transfer Fee – A small cost associated with wiring the money from the lender to the seller.
- Survey – A survey is something that shows the official property boundaries, the structures on the property, and their proximity to those boundaries. It is important because you want to make sure the prior owner did not make improvements on the property that were not approved and potentially need to be removed. If they added a garage or even placed a shed too close to the property line. Maybe your neighbor did something that is encroaching on your property. A new survey is not always required. The lender may allow a copy of an existing survey (available at town hall) to be provided.
- Loan Origination Fee – This is the profit that the lender makes for closing your loan.
- Discount Points – You should only be paying points if you elect to pay them in exchange for a lower rate. For example, if you wanted to lower your rate the lender may tell you that for one point (1 point = 1% of the loan), you can reduce your rate by .5%. That would be the lender’s cost for reducing your rate. This is the only time you should be paying discount points.
- Pre-Paid Property Tax – You may be asked (by the township) to pay the balance of the taxes for the quarter or the year. At closing, the seller would receive a credit for any taxes they already paid for any time period after your closing.
- Tax Escrows – In some instances, the lender will pay your taxes for you and will include that payment as part of your monthly mortgage payment. They will require you to pay up to 3 months in advance so they have an escrow amount to pay your taxes for you in the event that you are late with your mortgage payments.
- Homeowner’s Insurance – You will need to pay for your insurance policy up front. This will happen prior to closing and will be between yourself and y our insurance agent. Your lender may also escrow your insurance as well.
- FHA Upfront Mortgage Insurance – This is an insurance policy of 1.75% of the loan amount. Mandatory for everyone who wants an FHA loan.
Good Faith Estimate (GFE)
A few years ago, new legislation made it mandatory that every borrower receive a good faith estimate before a lender can collect any fees from you. Not only is this mandatory but the estimate must be accurate of the lender would be responsible for absorbing some of the differences. Make sure that you read this carefully to fully understand your costs.
Seller Closing Cost Contribution
If you are concerned whether you will have enough money to close your loan, then use this as a way to negotiate with the seller. In this example, the seller may agree to reduce the cost of the home by $5,000. At that point, you can ask them to reduce the price by $2,000 but also provide $3,000 to be used for your closing costs. The seller may contribute 5% or even up to 6% of the price of the home. So, use this to your advantage when negotiating to purchase your home.
Gift Funds To Help Pay For Closing Costs
Gift Funds can be used to pay for the 3.5% down payment. So, you can look at it as if this is helping to pay your closing costs because you can then use your down payment money for the closing costs. The gift must come from a relative or whoever qualifies based upon the current FHA guidelines. It must also be a “gift” with no expectation of repayment. Gift funds may come from the following:
- A relative
- A close friend
- A government agency
- A labor union
- Your employer
- A charitable organization
Important Things to Know About FHA Loans and The Costs
- FHA loans offer very low rates while also requiring a small down payment
- FHA loans also have a lower credit score requirement than other loan programs.
- Flexibility in having seller contributions and gift funds from relatives.
- Your costs (especially with the mortgage insurance) may seem higher, but this is the price you pay for the benefits referenced above.
FHA loans really are a great in that they help borrowers with limited funds to get into a home without a high interest rate.
Are you a veteran? Read why VA Loans may be the best loan program out there.
Frequently Asked Questions About FHA Closing Costs
Q: Are closing costs included in FHA loans?
A: They must be paid out of pocket and are not rolled into your loan.
Q: Does the seller have to pay closing costs on an FHA loan?
A: No, the seller is not required to pay those costs. However, they can offer to contribute towards the borrower’s closing costs are part of the negotiation.
Q: Can FHA closing costs be gifted?
A: Down payment funds can be gifted by a relative.
Q: Is the lender making a lot of money off of closing costs?
A: No, most of those costs are mandatory third party costs.
Q: Do I have to use an attorney for an FHA loan?
A: No, you do not have to use an attorney and not using one can save you some money. However, some lenders have an attorney fee that they may charge you as part of their required costs.
Q: Do items placed for collection on my credit report need to be paid at closing?
A: If you have collections that exceed $2,000, they will need to be paid prior to closing.
Q: What credit score do I need to keep my closing costs down?
A: If your credit scores are 680 or higher, that should suffice.
Q: Why is title insurance important?
A: It protects you against unknown liens against your property.
Q: Is a survey mandatory when getting an FHA loan?
A: It may or may not be. You also may be able to save yourself some money by using an existing survey.