When you use an FHA loan to buy a home, you’ll accumulate certain fees and charges along the way. Collectively, these are known as your FHA closing costs. Some of the fees come from the mortgage lenders. Others come from third parties such as home appraisers, title companies, and credit-reporting agencies.
FHA closing costs average around 3% of the home’s purchase price. They vary by state, with loan costs being higher in states with higher tax rates. There are other variables that can affect the total amount you pay at closing, such as prepaid interest points.
Let’s take a closer look at the average FHA closing costs for 2016:
Average FHA Closing Costs for Buyers, 2016
According to the Federal Reserve, closing costs for FHA and conventional loans average around 3% of the home’s purchase price. But in some areas with higher tax rates, they can be as high as 5% or 6%. These averages includes both lender and third-party fees.
Here’s how the 3% average would play out at different loan amounts:
|Loan Amount||Average Closing Costs*|
* These are just average FHA closing costs. The exact amount you pay will vary depending on several factors. Your mortgage lender should give you a loan estimate when you apply for a mortgage, and that document will show your estimated closing costs.
As mentioned earlier, geography plays a role here. Some states have average FHA closing costs that are twice as high as other states. So the amount you pay to close your loan might be higher or lower than the estimates shown above, partly depending on where you live. According to Bankrate.com, the states with the highest closing cost averages include Hawaii, New Jersey, Connecticut, West Virginia and Arizona.
Discount Points Increase Your Upfront Costs
In addition to location and loan size, there are other variables that can affect the amount you pay at closing. For instance, if you choose to pay discount points to secure a lower mortgage rate, it will increase your overall closing costs. But it will also reduce the amount of interest you pay over the long term, and that could work out to your advantage.
This is one reason why it’s hard to give a specific number for average FHA closing costs. Some borrowers pay points up front, in exchange for a lower mortgage rate. Other borrower choose to skip the points and take the higher rate, in order to minimize their upfront costs.
One discount point equals one percent of the loan amount. For example, a home buyer who is borrowing $200,000 would pay $2,000 for a single discount point (to secure a lower mortgage rate). This added cost is usually rolled in with the other closing costs, so it increases the amount due on closing day.
Loan Estimates and Closing Disclosures
Average FHA closing costs aren’t very useful, from a financial planning perspective. For planning purposes, you need to have some idea what your costs will be. Fortunately, there are some government-mandated mortgage documents designed to help with this. They are the loan estimate and the closing disclosure.
The “Know Before You Owe” mortgage disclosure rule, implemented by the Consumer Financial Protection Bureau (CFPB), requires mortgage lenders to give you an estimate of your FHA closing costs shortly after you apply for a loan. This document is known as the “loan estimate.” It highlights the most important elements of the transaction, allowing you to easily compare costs among competing lenders. This document is generally provided within three business days of your application.
Lenders must give you another document, known as the “closing disclosure” a few days before you close. This is an updated document that shows what your actual (not estimated) costs will be.
Bottom line: The average FHA closing costs shown above give you a ballpark idea of what home buyers have to pay. But you shouldn’t use those numbers for planning or decision making. Instead, use the Loan Estimate form provided by your lender to get a more accurate picture of your closing costs.