Buying a home with an FHA loan offers accessible financing for many buyers, especially first-time homebuyers or those with lower credit scores. However, understanding FHA closing cost limits is crucial to managing the additional expenses associated with the mortgage process.
FHA closing cost limits primarily focus on ensuring fees are reasonable and customary for the local market and regulating seller contributions:
-
Reasonable and Customary Fees: Lenders and third parties (like appraisers and title companies) must charge fees that align with typical rates in the borrower’s geographic area. The FHA does not set a total dollar cap but requires fees to reflect market standards.
-
Seller Contributions (Seller Concessions): Sellers can contribute up to 6% of the home’s sale price or appraised value (whichever is less) toward closing costs, prepaid expenses, and discount points. This can substantially reduce the buyer’s out-of-pocket costs.
-
Fee Restrictions: While there’s no strict percentage cap on all closing costs, FHA guidelines require lender fees such as origination fees to be reasonable for the work performed. The FHA also prohibits unjustified or duplicative “junk fees”.
Common Closing Costs in an FHA Loan
Closing costs typically range between 2% and 5% of the loan amount and include:
- Lender Fees: Origination, underwriting, processing, appraisal, and credit report fees
- Third-Party Fees: Title insurance, escrow, recording, and attorney fees
- Prepaid Expenses: Property taxes, homeowner’s insurance premiums, and prepaid interest
Who Pays FHA Closing Costs?
- Buyer: Responsible for most closing costs unless others contribute.
- Seller: May pay up to 6% of the home’s value toward the buyer’s costs.
- Lender: May offer lender credits, often in exchange for a higher interest rate.
- Others: Gifts from family/friends and occasional contributions from real estate agents.
It’s important to note that the 6% seller limit includes all assistance from the seller, such as prepaid expenses and discount points.
Tips to Manage FHA Closing Costs
- Negotiate seller concessions to maximize their contributions.
- Shop multiple FHA-approved lenders to compare fees and credits.
- Review your Loan Estimate carefully to understand and question fees.
- Consider lender credits if short on upfront cash but evaluate long-term costs.
- Use gift funds properly documented per FHA guidelines.
Common Misconceptions
- The FHA does not pay closing costs; it insures the loan.
- There isn’t a hard 1% cap on origination fees; fees must be reasonable.
- Seller concessions may not cover all costs; buyers might still pay a balance.
Related Articles
For further guidance, see our FHA Loan article and learn about Mortgage Closing Costs.
Sources:
- HUD FHA Handbook 4000.1: https://www.hud.gov/program_offices/housing/sfh/handbook_4000_1
- Consumer Financial Protection Bureau, Closing Costs: https://www.consumerfinance.gov/consumer-tools/mortgages/closing-costs/
- Investopedia, FHA Loan Overview: https://www.investopedia.com/terms/f/fhaloan.asp
Understanding FHA closing cost limits helps you navigate your home purchase with confidence and potentially save thousands by leveraging seller contributions and negotiating fees.
