What Are FHA Closing Costs and Who Pays Them?

Closing costs are the fees and expenses borrowers pay to obtain an FHA mortgage. Understanding what closing costs are, which ones you must pay, which can be financed or covered by sellers, and the FHA limits on charges helps you plan your finances and avoid surprises at closing. This article explains the FHA closing cost requirements based on the official FHA Handbook 4000.1.

What Are Closing Costs?

Definition

Closing costs are fees, charges, and prepaid items necessary to close an FHA mortgage. They are separate from the down payment and are paid at closing (loan settlement).

Who Charges Them?

Charged by lender (mortgagee):

Origination fees
Processing fees
Underwriting fees
Appraisal fees
Credit report

Charged by third parties:

Title company (title search, title insurance)
Escrow/closing agent
Recording fees
Document preparation
Survey

Not the Same as Down Payment

Important distinction:

Down payment = portion of purchase price borrower provides (not financed)
Closing costs = fees and prepaid items paid at closing
Closing costs CANNOT be applied toward the minimum down payment requirement

Types of Closing Costs

Origination Fees

Definition: Charges for originating, processing, and closing the mortgage.

FHA limits:

The lender may charge a "reasonable origination fee."
Must comply with HUD's Qualified Mortgage Rule
Typical range: 0.5% to 1% of the loan amount
No specific FHA maximum, but must be customary and reasonable for the area

What's included in the origination fee:

Lender processing costs
Underwriting expenses
Document preparation
Copying and courier services
These cannot be charged separately if included in the origination fee

Note: This is NOT the same as Upfront Mortgage Insurance Premium (UFMIP).

Discount Points

Definition: A charge from the lender for choosing a specific interest rate. One point = 1% of the loan amount.

How they work:

Borrower pays points up front to "buy down" the interest rate
Lower interest rate = higher point cost
Example: 1 point on $300,000 = $3,000

FHA rules:

Borrower CAN pay discount points
Points are part of the total cash to close
Interested parties (sellers, builders) can pay points for the borrower (up to limits)
Borrowers cannot be charged excessive points

Appraisal Fees

Definition: Fee charged for property appraisal.

FHA standard:

Lender and appraiser negotiate appraisal fee
FHA does not establish appraisal fees
Reasonable and customary fees (typically $300-600)
Borrower pays appraisal fee
Can be collected at pre-approval or at closing

Second appraisal:

The lender can require a second appraisal if the FHA collateral risk assessment requires it
Cost of second appraisal CAN be financed as part of closing costs
The lender pays for a second appraisal if there is a deficiency in the first appraisal

Credit Report Fee

Definition: Fee for obtaining the borrower's credit report.

FHA rules:

Lender charges a reasonable and customary fee
Typically $10-30
Merged-in file report (three-bureau report) standard
Paid at pre-approval or closing

Title Fees

Title examination/search:

Lender's cost to verify property ownership/title history
Reasonable and customary fees
Typically $100-300

Title insurance:

Owner's policy (homeowner is insured)
Lender's policy (lender is insured)
FHA requires a lender's policy
Seller typically pays the owner's policy (but can be negotiated)
Reasonable and customary for the area

Recording Fees and Taxes

Definition: Fees charged by the local government to record deeds and mortgages.

What's included:

Recording fees for the mortgage document
Recording fees for deed
Documentary stamp taxes
Recording taxes
County/municipal filing fees

FHA standard:

Reasonable and customary for the area
Varies significantly by state/county (typically $50-500+)
The borrower typically pays these

Survey Fees

Definition: Cost of surveying property to verify boundaries and improvements.

FHA rules:

Required if the lender or borrower requests
Optional if property appraisal is acceptable
Reasonable and customary fees
Typically $300-600
Borrower pays survey costs

Closing/Settlement Agent Fees

Definition: Fees charged by escrow, title company, or attorney handling closing.

FHA standard:

Reasonable and customary fees
Typically split between buyer and seller (varies by state)
Varies significantly by location ($300-1,500+)
Service includes coordinating the closing, preparing documents, and handling funds

Homeowners Insurance (Hazard Insurance)

What it is:

Insurance protecting against fire, wind, and natural disasters
Required by FHA
Lender requires proof at closing

Prepaid at closing:

First year premium paid at closing
Goes into escrow account
The lender pays from escrow when the premium is due

Typical cost:

Varies by property type, location, and age
Typically $500-2,000/year for a standard home
Higher for older homes or riskier areas

Prepaid Property Taxes

What it is:

Property taxes are paid in advance to establish an escrow account
Not taxes owed to the local government
Escrow amount used to pay taxes when due

How June 15

alculated pJanuary 1ary 1m (daily amount)
Depends on closing date and local tax due dates
Example: Closing on June 15, taxes due January 1 next year = ~7 months prepaid

Typical range:

Highly variable by location
Can be $500-3,000+ depending on property value and tax rate

HOA/Condo Fees (if applicable)

Prepaid to the homeowners' association:

If the property is in an HOA or condo building
Month-to-month or annual fees
Pro-rated if mid-month closing

Typical range:

Varies dramatically ($50-500+/month depending on community)

Flood Insurance (if applicable)

When required:

Property located in Special Flood Hazard Area (SFHA)
FHA requires flood insurance for the life of the loan

At closing:

First year premium prepaid and placed in escrow
The lender pays from escrow when the renewal is due

Typical cost:

$300-2,000+/year depending on risk level
Varies by FEMA flood zone

Prepaid Items

Definition

Prepaid items are expenses for future obligations paid at closing and typically placed in an escrow account.

Examples of Prepaid Items

Included:

Homeowners (hazard) insurance premiums
Flood insurance premiums
Property taxes
HOA fees
Mortgage insurance premiums
Per diem interest (daily interest from closing to first payment)

NOT included:

Down payment
Origination fees
Appraisal fees
Credit reports
Title insurance (usually)

Per Diem Interest

What it is:

Interest accrued from the closing date to the date of the first mortgage payment
CaJune 115, daily interAugust 11, number of days

Example:

Loan amount: $285,000
Interest rate: 6.5%
Closing date: June 15
First payment: August 1
Per diem interest covers June 15-30 (15 days) plus July 1-31 (31 days)

Typical range:

$200-500, depending on loan amount and interest rate

Interested Party Contributions (Who Pays What)

Definition

Interested Parties are parties with an interest in the transaction who can contribute toward the borrower's closing costs.

Includes:

Seller
Builder
Developer
Real estate agent (in some cases)
Family members (with restrictions)
Employer (relocation assistance)

Does NOT include:

Lender
Third-party originators (TPOs) that also make the loan
Appraisers

The 6 Percent Rule

FHA maximum limit:

Interested parties may contribute up to 6% of the sales price toward the borrower's closing costs

What this covers:

Origination fees
Other closing costs
Prepaid items (taxes, insurance, etc.)
Discount points
Interest rate buydowns
Mortgage insurance premiums

Example:

Purchase price: $350,000
6% of price: $21,000
Seller can contribute up to $21,000 toward the borrower's closing costs

What Contributions CANNOT Cover

6% cannot be used for:

Borrower's minimum required investment (down payment)
Minimum reserve requirements
Debt repayment
Collection accounts
Any amounts beyond actual closing costs

Important: If seller contributions exceed the actual closing costs, the excess is considered an "inducement to purchase" and may affect loan approval.

Contributions Exceeding 6 Percent

If interested parties contribute more than 6%:

Excess is considered "an inducement to purchase."
Treated as cash for the borrower instead of a loan credit
May reduce the loan amount
Treated as income potentially affecting DTI
Can complicate loan approval

Premium Pricing Exception

Premium pricing credits from lender or TPO are EXCLUDED from 6% limit if:

Lender or TPO is NOT the seller, agent, builder, or developer
Premium pricing = credit for choosing a higher interest rate

Example:

Borrower chooses 7% rate instead of 6.5% and receives a $5,000 credit from the lender
This credit doesn't count toward 6% limit
Can be used to pay all closing costs if coverage is needed

What Lenders Can and Cannot Charge

Customary and Reasonable Requirement

FHA standard:

All fees must be "customary and reasonable" for the area
Cannot exceed the actual cost of service
The lender cannot inflate charges
If multiple quotes are available, the borrower typically chooses

Fees Lenders Can Charge

Permitted:

Origination fee (reasonable amount)
Processing fee
Underwriting fee
Appraisal fee
Credit report fee
Document preparation
Courier/mailing fees
Tax service fee
Loan lock-in/rate lock fees (if commitment given)
Flood determination fee
Survey fee (if required)

Fees Lenders CANNOT Charge

Not permitted:

Referral fees (to real estate agents, builders, etc.)
Broker points
Administrative closing fee (if already charged origination fee)
Application fees (must include in origination fee)
Junk fees (inflated charges for services already covered)
Inspection fees (if appraisal provided)
Underwriting fees (must include in origination fee)

Tiered Pricing Rules

Lender pricing restrictions:

The lender cannot vary charges by more than 2 percentage points for the same product
Cannot discriminate based on protected characteristics
Must document any variations
Prevents predatory pricing practices

Discount Points and Interest Rate Buydowns

Discount Points (Permanent)

Definition: Upfront charge to permanently reduce the interest rate.

How it works:

1 point = 1% of the loan amount
Borrower pays up front, the rate is lower
Reduces the monthly payment permanently
Borrower breaks even in 5-7 years, typically

FHA rules:

Borrower CAN pay points
Seller/builder CAN pay points for borrower (within 6% limit)
Points are financed as part of a loan

Example:

Loan: $300,000
Rate without points: 7.0%
1 point cost: $3,000
Rate with 1 point: 6.75%
Monthly savings: ~$135/month

Interest Rate Buydowns

Permanent buydown:

Seller or builder pays lender to reduce rate
Reduces the borrower's rate for the life of the loan
Borrower gets a lower payment permanently

Temporary buydown (2/1 or 3/2):

The rate is reduced for the first 1-3 years
Rate steps up to permanent rate
Builder/seller pays lender for subsidy
Common in builder financing
Qualifies toward 6% seller contribution

Financing Closing Costs

What CAN Be Financed

Fees that can be financed:

Origination fee
Appraisal fee
Credit report
Recording fees
Title examination
Discount points
Some prepaid items

Financed as part of the loan amount:

Increases the total mortgage amount
Reduces borrowers' out-of-pocket cash at closing
Increases the monthly payment

What CANNOT Be Financed

Cannot be financed:

Down payment/minimum required investment
Hazard insurance premiums (must be in escrow)
Property taxes (must be in escrow)
HOA fees (typically paid upfront)
Home inspection costs
Earnest money deposit

Closing Cost Examples

Example 1: $300,000 Purchase, 3.5% Down

Purchase price: $300,000 Down payment (3.5%): $10,500 Loan amount: $289,500

Typical closing costs breakdown:

Item	Cost
Origination fee (0.75%)	$2,171
Appraisal fee	$500
Credit report	$25
Title examination	$150
Title insurance (lender)	$400
Recording fees	$100
Closing agent fee	$350
Hazard insurance (year 1, prepaid)	$1,200
Property taxes (prepaid ~3 months)	$1,800
Per diem interest	$250
Homeowners Association (if applicable)	$200
Total closing costs	$7,146

Seller contribution (up to 6% of $300,000 = $18,000):

Seller pays lender $7,146 for borrower's closing costs
Borrower cash to close: Down payment of $10,500 only

Example 2: $400,000 Purchase, 10% Down, Borrower Pays Closing Costs

Purchase price: $400,000 Down payment (10%): $40,000 Loan amount: $360,000

Typical closing costs breakdown:

Item	Cost
Origination fee (0.75%)	$2,700
Processing fee	$500
Appraisal fee	$600
Credit report	$25
Title examination	$200
Title insurance (lender)	$600
Recording fees	$200
Closing agent fee	$500
Flood determination fee	$50
Hazard insurance (year 1, prepaid)	$1,400
Property taxes (prepaid ~3 months)	$3,000
Per diem interest	$400
HOA fees (1 month prepaid)	$350
Total closing costs	$10,525

Cash needed to close:

Down payment: $40,000
Closing costs: $10,525
Total cash: $50,525

Cash to Close Verification

What "Cash to Close" Means

Total cash borrower must provide at closing:

Down payment (minimum required investment)
ALL closing costs and prepaid items
Any other out-of-pocket expenses

What it does NOT include:

Earnest money deposit already paid (credited at closing)
Seller credits (reduce cash needed)
Gifts from family

Lender Verification

Lender must verify:

Borrower has sufficient funds from acceptable sources
Funds are actually available
Funds come from documented, acceptable sources
No borrowed funds (except for gift funds with proper documentation)

Borrower must provide:

Bank statements showing cash availability
Documentation of earnest money deposit
Proof of approved closing cost credits

Key Takeaways for FHA Closing Costs

Customary and reasonable requirement - All fees must be for actual services, competitive, and appropriate for the area
Cannot count toward down payment - Closing costs are separate from the minimum required investment
Origination fee is the primary charge - "Reasonable" amount for originating, processing, and closing the loan
6% seller contribution limit - Interested parties can pay up to 6% of the sales price toward closing costs
Prepaid items required - Insurance, property taxes, per diem interest paid at closing
Can finance many costs - Origination fee, appraisal, points can be financed as part of the loan amount
Borrower must verify cash - Lender verifies sufficient funds from acceptable sources for full cash to close
Premium pricing credits excluded - Premium pricing credits don't count toward 6% interested party limit
Discount points optional - Borrower can choose to pay points to reduce the interest rate
Cannot charge junk fees - Lender cannot charge duplicate or inflated fees for the same service

Conclusion

FHA closing costs typically range from 2-5% of the loan amount and include origination fees, appraisal, title, recording, insurance, and prepaid items. Understanding what can be charged, what can be financed, and who can contribute helps you plan your closing costs accurately and avoid surprises at settlement.