Average FHA Buyer Closing Costs in 2014 (and Who Pays Them)

Summary: This article explains the average or typical amount paid for FHA closing costs in 2014, which can range from 2% to 5% of the purchase price. This guide is based on industry-wide trends and surveys. The numbers presented below are merely averages. Your actual closing costs could be more or less than the typical amount, based on a variety of factors that are explained in the article.

Let's start with some quick definitions:

FHA Loan -- This type of mortgage loan is insured by government agencies, specifically the Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). The insurance assigned to the loan protects the lender against financial losses that may occur if the borrower defaults, or stops paying, on the loan. The actual funding is provided by a mortgage lender in the private sector -- not by the government.

Closing Costs -- These are the various fees and charges that can add up during the mortgage origination, underwriting and settlement process. They include a variety of things such as home appraisals, credit reports, title searches, survey fees, courier fees, recording fees, processing fees, and more. Almost all home loans have them. FHA buyer closing costs must be paid during settlement / closing, which is the final step in the mortgage process.

How Much Are FHA Closing Costs in 2014, on Average?

FHA loans come with closing costs just like any other type of mortgage. These costs can easily add up to thousands of dollars, above and beyond the principal and down payment. There's actually not much difference between FHA (government-insured) and conventional (non-government-insured) home loans, where closing costs are concerned. The average amount paid is about the same on both sides of the fence.

So, how much will your FHA closing costs be? This number can vary based on a variety of factors, most notably the size of the loan and the amount of pre-paid interest points paid (if any). So the easiest way to explain it is in terms of a percentage.

The 2% - 5% Rule of Thumb

On average, FHA buyer closing costs add up to somewhere between 2% and 5% of the overall mortgage amount. So on a mortgage loan of $250,000, the closing costs could easily exceed $10,000. But they could also be as low as $3,000, or even lower.

The exact amount will vary based on (A) the state in which you reside, (B) the size of your loan, and (C) whether or not you choose to pay points for a lower interest rate -- among other variables. So these numbers are certainly not set in stone. Still, they give you some idea of what you might end up paying.

Regional Differences

The average amount paid toward closing costs also varies by state. Some states have additional taxes that get factored in, while others do not. All of these variables affect the total amount due at closing.

According to Bankrate.com, Hawaii, Alaska, South Carolina and California are among the most expensive states for FHA closing costs, topping out at around $3,000 per transaction (on average). Wisconsin, Missouri and Kansas were on the low end of the spectrum, with average closing costs in the $2,000 range.

According to a recent nationwide survey, home buyers paid around $3,700 on average in loan-related fees and charges. This survey considered all types of mortgage loans -- FHA and conventional alike.

So check with a mortgage lender or broker in your state to get a more accurate estimate of average closing costs for FHA loans in 2014.

What's Included: FHA Allowable Fees and Charges

The Department of Housing and Urban Development has a list of closing costs that can be charged to a borrower. These are referred to as "allowable costs." Anything that is not on their list is, by definition, considered as non-allowable.

Allowable fees for an FHA loan can include* costs for the following types of services:

Mortgage origination
Deposit verification
Attorney services
Home appraisal (learn more about FHA appraisals)
Title insurance and examination
Document preparation
Property survey
Pulling credit reports

* This is list is not exhaustive. Your lender might charge fees not shown on this list.

A few years ago, there were several types of charges on the "non-allowable" list (i.e., closings costs that FHA borrowers were not permitted to pay). But in 2006, HUD removed most of the items from the non-allowable list. They reduced the list to just one item. Currently, the only non-allowable closing cost for FHA loans is the fee for tax services. HUD guidelines clearly state: "borrowers may not pay a tax service fee." In most cases, the seller or lender will cover this fee.

Reference: To learn more about this subject, refer to HUD Handbook 4155.1, Chapter 5, Section A, entitled "Settlement Requirements."

Look at Your Good Faith Estimate (GFE)

When you apply for a home loan, the lender must give you an itemized list of charges and fees associated with your loan (i.e., closing costs). This document is known as the Good Faith Estimate or GFE. While it's only an estimate, it should be fairly close to the actual amount due at settlement. GFE estimates are usually accurate within 10% of the actual amount due. So it's a pretty good indicator of what you'll have to pay to close the loan.

Lenders must provide you with a GFE within three business days of your application submission. This is according to the Real Estate Settlement Procedures Act, or RESPA.

Who Pays Them, the Buyer or Seller?

You've probably heard that everything is negotiable in the real estate world. This maxim applies to FHA closing costs as well. Technically speaking, they are mostly the buyer's costs because it is the buyer's mortgage loan. But that doesn't mean the seller can't chip in. It's negotiable!

In fact, this is one of the advantages of using an FHA loan to purchase a home. Sellers are allowed to contribute a significant amount toward the buyer's overall closing costs -- up to 6% of the sale price. This is known as a seller concession.

The Department of Housing and Urban Development (HUD) sets all of the rules and requirements for this program. According to HUD Handbook 4155.1, Chapter 2, Section A:

The seller and/or third party may contribute up to six percent of the lesser of the property's sales price or the appraised value toward the buyer's closing costs, prepaid expenses, discount points and other financing concessions.

You can learn more about seller concessions in Part 2 of this article.

Disclaimers and notes: This guide answers the question, How much are FHA buyer closing costs, on average, in 2014? The figures, statistics and trends presented above are deemed reliable but not guaranteed. Most of them came from third-party sources, such as industry surveys and studies. We have simply compiled them for your convenience. It's important to understand that every mortgage scenario is different. Similarly, every real estate transaction is different. As a result, your FHA closing costs might add up to more or less than the averages stated in this article.