FHA Closing Costs: What to Know

Sure, you can get a low down payment with a loan backed by the Federal Housing Administration, but that doesn’t mean you'll avoid paying other fees at closing. You will be charged some FHA closing costs, including ones that conventional loans typically don’t require.

» MORE: FHA loan basics

What are FHA closing costs?

FHA closing costs often include the mortgage insurance, lender and third-party fees, and prepaid items that are due when signing your mortgage paperwork. These are paid in addition to your FHA down payment. Here’s the breakdown:

Mortgage insurance premium

The upfront FHA mortgage insurance premium, or MIP, totals 1.75% of your loan amount and is due at closing. You can also finance this charge as a part of your loan.

You’ll also find that an additional ongoing FHA MIP is built into your monthly payment. While the rate remains the same for the life of the loan, the premium is adjusted annually based on the remaining principal loan balance. The annual premium ranges from 0.15% to 0.75% of the average outstanding loan balance.

Upfront and ongoing mortgage insurance premiums are one expense you won't pay on a conventional loan if you make a down payment of 20% or more.

Lender fees

Charges listed as lender fees will have names like:

• Origination fee.

• Underwriting fee.

• Processing fee.

• Supplemental loan origination fee (for FHA 203(k) renovation loans only).

• Interest rate lock fee.

You may also decide to buy discount points — prepaid interest that lowers your loan’s interest rate. Buying discount points is optional, but if you do, you’ll find them listed as a lender fee.

» MORE: Mortgage closing costs, explained

Third-party fees

This is a category of charges for services offered by other providers, and could be:

• Title insurance policy premium (for the lender and an option for the buyer to purchase as well).

• Notary fee.

• Credit report fee.

• Inspection fee.

• Recording fees.

• Appraisal fee.

• Courier fee.

• Real estate attorney fees.

• Flood certification fee.

Prepaid items

Fees that are paid in advance with some shared between buyer and seller include:

• Tax and insurance escrow deposit.

• Flood and hazard insurance premiums.

• Real estate taxes.

• Per diem interest.

» MORE: Calculate your closing costs

How to reduce your FHA closing costs

Taxes and laws vary by location — for example, whether you need a real estate attorney — so your closing costs (and what they’re called) may vary depending on where you live. You can’t negotiate everything, but there are some ways to lighten the load. To reduce your FHA loan closing costs, you could:

• Ask questions. If you don’t understand a fee a lender is charging you, ask for details. Politely requesting clarification might be enough for a lender to waive or reduce the fee.

• Shop around. If a service is provided by a third party, such as title search and insurance, you can compare costs between different providers.

• Negotiate with the seller to pay some 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 also negotiate with the seller to pay some of your settlement fees, but the likelihood of this happening can depend on how active your local real estate market is. In a “seller’s market,” not so much.

• Use a gift of cash from a friend or family member. FHA loan requirements allow gifts from family members, friends and even charitable organizations and employers. Down payment and closing cost grants are also available from state housing assistance programs.

• Finance some of your closing costs. You can add closing costs to your loan balance to reduce your upfront out-of-pocket costs, but your monthly payment will be higher, as may the interest you pay over the long term.