Because Federal Housing Administration (FHA) loans are provided by financial institutions, taking out an FHA loan entails closing costs that must be paid by a homebuyer after signing mortgage documents. Since FHA loans are insured by the U.S. government, closing costs are typically lower compared to standard mortgages.

FHA Loans

FHA loans are issued by banks and other financial institutions that have been approved by the U.S. Department of Housing and Urban Development (HUD). FHA loans are specifically designed for households with low income that cannot qualify for regular mortgages. Because the U.S. government provides insurance to financial institutions in case a borrower defaults, the criteria to qualify for an FHA loan is lower. Specifically, financial institutions require lower down payments, lower closing costs and a lower income threshold to qualify for FHA loans.

A borrower is still responsible for paying closing costs since financial institutions incur various costs associated with issuing FHA loans, such as origination fees, credit report fees, attorney's fees, appraisal fees and title search fees.

Mortgage Insurance Premium

A borrower who obtains an FHA loan is required by the U.S. government to pay a mortgage insurance premium up front and subsequent monthly mortgage insurance premiums. All mortgage insurance premiums must be remitted to HUD. An upfront mortgage insurance premium is typically paid right after a mortgage is closed and is equal to 1.75% of the base loan amount. Rates on monthly mortgage insurance premiums vary depending on the loan amount, duration of the loan and loan-to-value ratio.