Closing Costs on FHA Home Loans

Introduction: Much of the FHA home loan information found online today is outdated. While some aspects of the program have remained the same over the years, there have been changing to the closing cost policy. Many of these outdated articles claim that you can pay a lot less in the way of closing costs on the FHA home loan, but this is not exactly true anymore.

FHA home loans have been getting a lot of press lately. In fact, all things mortgage-related have been in the news lately, due to our economic situation. But the FHA loan in particular has generated a lot of interest among home buyers lately. Why? Because it’s a way to get a good loan in a troubled economy, and to save money at the same time.

There are many benefits to these loans, but in this dose of Mortgage Wisdom I’ll focus on the FHA closings costs in particular. These loans are insured by the Federal Housing Authority, a branch of the federal government. Many people think that the government actually offers these loans, but that’s not the case. Private lenders offer FHA loans directly to consumers. The government simply insures the loans and establishes the guidelines associated with them.

Closing Costs Defined

When you hear the phrase real estate closing costs, it generally refers to a group of fees the buyer and/or seller must pay during the closing settlement process. These costs include such things as mortgage origination fees, attorney fees, tax adjustments, appraisal fees and more. Basically, whenever somebody moves a piece of paper during the mortgage application process, a fee is charged for it.

Collectively, these things are referred to as closing costs, because you must pay them during the closing process when buying your home. On average, these costs can add up to between 3% and 5% of the home loan amount. So on a mortgage loan of 250k, the closing costs could easily exceed $10,000. That s a big chunk of change, especially for a first-time home buyers.

FHA Loan Benefits

In the past, a key benefit of the FHA home loan program was that it limited closing costs in certain ways. Under the guidelines set forth by the Department of Housing and Urban Development (HUD), a borrower can only be charged for FHA loan closing costs that are customary and necessary  to close the loan. While this may sound a bit vague, it basically means that third-party costs cannot be marked up and passed along to you, the borrower.

The FHA has a list of closing costs that can be charged to a borrower. These are referred to as “allowable costs.” Anything that is not on the list is, by definition, considered as non-allowable.

Allowable fees for an FHA loan may include costs for the following types of services:

• Mortgage origination
• Deposit verification
• Attorney services
• Home appraisal
• Title insurance and examination
• Document prep
• Survey of the property
• Pulling credit reports

In the past, there used to be several things on the non-allowable lists (i.e., closings costs that could not be charged). But in 2006, the FHA basically eliminated this list. Or to be exact, they reduced it to only one item. Currently, the only non-allowable fees for FHA loans is the fee for tax services. Under FHA closing cost guidelines, this must be paid by the seller or the lender. But the fee for this service is typically less than $100.

FHA Loan Benefits

There are still plenty of benefits to getting a home loan backed by the Federal Housing Administration. You might have an easier time getting approved for the loan than you would without government backing. You may also get by with a smaller down payment than on a traditional loan. But saving a lot of money on closing costs is no longer a benefit of the FHA loan program. There’s a lot of outdated information online to the contrary. But the truth is you will still pay most of the traditional closing costs, even with an FHA-backed mortgage.

Learn more about FHA home loans.

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  By ward, June 16, 2009 @ 5:13 pm

  We have been approved for an FHA loan. we were told that down payment & closing costs will be $16k. we already submitted offer to sellers and did not ask for concessions. we have the down payment. can we roll closing costs into loan? are there any other resources that could help with closing costs?

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  By Jack, August 13, 2009 @ 12:58 am

  Yes, there are several resources one may utilize in order to offset the amount of closing costs. Speak to your lender regarding your needs and they’ll be able to point you in the right direction. In some states it’s the law they divulge certain information. There are also state/federal incentives to get people into a home, especially considering the area/neighborhood, city and if you’re first time home buyers. Good luck.

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  By Gary, October 2, 2009 @ 8:14 pm

  We found a builder we like and decided on a home. Sale price would be about $172K, and we will down pay that so we’re only financing $160K with an FHA loan. All along we’ve been led to believe our closing costs would be in the area of 5-7K (which looks to be the average for this amount), with the builder giving 5K towards that if we use their preferred lender.

  Turns out the total closing is $11,700 less the 5K leaving us paying $6,700 in closing. (?!) This just doesn’t sound right at all and I’m wondering what others think?

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  By Brandon, October 27, 2009 @ 3:22 pm

  Hi Gary. Unfortunately, it’s pretty common for the initial estimate to be much lower than the actual closing costs. It’s a trick that lenders use to bring in more business. There are some new laws going into effect in January of 2010 that may reel this in a little. Here’s an article that summarizes it well:
  New Rules for Good Faith Estimates