How much are closing costs? Who pays them? What is included?
This article explores closing costs, more specifically FHA closing costs. How much the seller can pay and how to negotiate lower closing costs.
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What are Closing Costs?
Closing costs are fees charged by lenders, mortgage brokers, and originators. Closing costs on an FHA loan range between 2%-5%. One of the main factors in the amount of closing costs you’ll pay is your credit score, the lower your score, the more risky the loan is, the higher your closing costs will be.
If you have a good credit score, you can go to any bank and get a loan. Lenders will have to compete for your business, so the lender fee is usually much lower.
Average Closing Costs on FHA Loans
5 Ways to Get Lower Closing Costs on Your FHA Loan
Several different factors come into play when lenders determine the fees they charge borrowers.
Your credit score will pay one of the biggest factors in how much closing costs you pay.
The lower a borrower’s credit score, the higher risk they present, so lenders will charge higher fees to offset that risk.
1. Increase your credit score
By increasing your credit score, you can open up your options. More lenders will be able to help you, and you will have more negotiating power. First, pull your report and scores from Credit Sesame or Credit Karma. Checking your credit score will not hurt your credit.
Pay down the balances on your credit cards. If you are carrying high balances, your score will suffer significantly.
Get added as an authorized user if you have a friend or family member with a credit card account in good standing.
You can ask them to add you to the account as an authorized user. When they do, the account and all of its history will appear on your credit report and will increase your score.
Check out this article for more tips on how to increase your credit score.
2. Shop Multiple Lenders
If you only got a good faith estimate from one or two lenders, you need to shop around. You can have your credit pulled by multiple lenders within a 30 day period, and it will not hurt your score.
This is called “rate shopping,” where you are given a grace period to have multiple lenders pull your credit, and it will just count as a single inquiry. Take the lender quotes back to each lender and ask them to beat it.
3. Negotiate with Your Lender
Closing costs are not set in stone; like most things, they can be negotiated. Using loan estimates from other lenders is a good way to start negotiating lower closing costs on your FHA mortgage. Keep on asking for credits and a reduction in fees until they can’t do it anymore.
4. Check for Random Fees
The loan estimate you get from your lender will breakdown every fee they’re charging. Courier fees, a fee to pull your credit report, fees for mailing documents, etc. These are random fees some lenders charge to try to get the most out of a borrower.
If you notice any of these charges, tell your loan officer you’re not paying those fees. In all likelihood, they will waive the fees to keep you as a customer.
5. Search for Settlement and Title Companies
Not all title companies will charge the same rate. You can take the initiative and contact other companies to find the one that offers the best deal.
How much are closing costs?
The average closing costs on a mortgage loan is between 2%-5%. On a home with a purchase price of $200,000, the typical costs will be between $3,000-$5,000.
These costs will vary depending on the lender you use. Closing costs are made up of several different fees charged by your lender. Fees include a credit report, loan origination fee, survey, etc. The loan-to-value ratio also affects these costs.
A lower loan-to-value ratio means a less risky mortgage loan, and will you be able to get lower closing fees. Your credit score also has a big impact on the closing fees you’ll pay.
Who pays closing costs?
The buyer is responsible for paying the closing costs; however, the seller can pay the buyer’s closing costs. Sellers may contribute up to 6% of the property’s sales price toward the buyer’s closing costs. Your real estate agent will need to work seller paid costs into the contract.
How Your credit score affects your closing costs
If you have poor credit, then a lender will charge more closing costs because of the mortgage’s increased risk. You will want to improve your credit score as much as possible to get the lowest closing fees possible.
There is a wide range of credit scores borrowers have when applying for FHA loans. FHA requires a low credit score of just 500-579 with a 10% downpayment.
However, it isn’t easy to get approved for a mortgage with a score in this range. It is recommended you take some time to work on fixing your credit score before applying.
Typical closing costs based on credit score
- 500 – 579 credit score – 4%-6% closing costs
- 580 – 619 credit score – 2.5%-4% closing costs
- 620 – 699 credit score – 2%-3% closing costs
- 700+ credit score – 1%-2% closing costs
What’s included in FHA closing costs?
- Loan Origination fee
A percentage of the loan amount the mortgage lender charges.
- Discount points
1 point is equal to 1 percent.
- Appraisal Fee
The fee is paid to have the home appraised by a 3rd party appraiser.
- Credit report
Lenders will charge you for pulling your credit report.
- Tax service
Lenders hire 3rd party companies to ensure there are no liens or taxes owed on the home.
- Owner Title Policy
The fee charged for the delivery of the title and any escrow fees.
- Title insurance covers any legal damages if a seller cannot legally transfer the title. This policy protects the borrower and the mortgage lender.
- Attorney witness for the closing
Fee the attorney charges for witnessing the transaction at the title company.
- Underwriting fee – Fee lenders charge for underwriting the mortgage loan.
Lenders will charge a fee for having all the documents ready for closing.
- Pre-paid property tax – You will be charged the remaining annual property tax on the home. If the seller pays taxes for the full year, you will reimburse the seller for your portion of the taxes.
- Home Inspection
Covers the cost of having the home inspected by a certified home inspector.
Fees for using courier and postal services to deliver all mortgage-related documents to the parties involved.
The fee to get accurate property and boundary measurements by a licensed surveyor.
- Wire transfer
Fee for using a wire transfer to send funds to the lender.
Other fees required for a mortgage
- Closing Costs – Fees charged by lenders for processing and issuing the loan typically amount to 2%-5% of the loan amount.
- Home Appraisal – Home appraisals are used to determine the market value of the home, On average, the appraisal will cost $300-$500
- Home Inspection – A home inspection is done before closing on a home to ensure there are no major repairs that need to be done to the property
There are more fees than just what is included in closing costs. Such as an inspection fee.
While a home inspection is not required most of the time, it’s a great idea to get one to make sure there are no underlying issues in the home. Some first-time homebuyers choose to save money and not have an inspection performed on the property. However, this is a huge mistake.
Learn from other first-time buyer’s mistakes and spend the $300-$00 to have the home inspected. Hazard insurance and home insurance premium are put into an escrow account monthly and paid by the mortgage lenders. FHA up-front mortgage insurance premiums are 1.75% of the loan amount and often include closing fees.
FHA Closing costs are separate from your down payment
The FHA rules state that the closing cost fees can never be included in your down payment; these are completely separate fees.
Get a Good-Faith Estimate
After you are pre-approved for a mortgage, your lender must provide you with a GFE (good-faith estimate) within 3 days. A GFE is a form that provides you with basic information about the terms of the loan and estimated costs to you in acquiring the loan.
If you feel that the closing costs are high, you can shop with other lenders to either get a better deal or help you negotiate your closing costs with your current lender.
FHA Closing Costs FAQ
Are closing costs included in an FHA loan?
Closing costs are a fee charged for various items the lender charges. These fees are an additional cost that is added to the amount of the loan. FHA does allow closing costs to be paid by the seller. A friend or relative can also gift the closing cost amount to the borrower.
Can you roll in closing costs on an FHA loan?
Yes. Typically the closing costs are rolled into the loan. You will not have to pay cash out of pocket for the closing costs.
Can the seller pay the closing costs for me?
Yes. The seller can pay FHA closing costs.
How much can a seller contribute to closing costs on an FHA loan?
FHA allows the seller to pay up to 6%