A Study of Closing Costs for FHA Mortgages

This study presents findings on how much Federal Housing Administration (FHA) borrowers pay in closing costs when they buy a house, how much these costs vary, and factors to which the variation is related. The analysis uses data from a national sample of 7,560 FHA-insured, 30-year fixed-rate home purchase loans closed in May and June of 2001. Data were collected on how much borrowers paid for lender or broker services, title services, and real estate agent’s services, and linked to information on borrower and loan characteristics, including loan amounts, interest rates, credit history, income, borrowers’ race and ethnicity, and the racial composition and educational attainment in the borrower’s neighborhood. The analysis focuses in turn on fees paid to lenders and mortgage brokers, to title companies, and to real estate agents. Findings from this study shed new light on important questions about the competitiveness and transparency of the home purchase and financing process. In addition to varying with loan amount, property value, and the borrower’s credit score, the total fees paid for the loan also vary significantly based on characteristics of the lender, the borrower, education levels and racial composition in the borrower’s neighborhood, and the state where the home sale occurs. Total loan costs are higher when yield-spread premiums, discount points, and seller contributions to closing costs are present. Borrowers with “no-cost” loans effectively pay $1,200 less for loan origination services than borrowers who pay some lender/broker fees in cash. The “no-cost” loans also reveal a market that looks more competitive in other important ways: among these loans, there is little relation between the level of education in a borrower’s neighborhood and how much the borrower is charged, and almost no relation to the borrower’s race or the racial characteristics of the borrower’s neighborhood. This suggests that the complexity introduced by loan terms that involve a combination of cash and interest rate, with variations in yield-spread premiums, points, and even seller contributions makes it more difficult for consumers to figure out their total costs and contributes to higher prices and higher fees for lenders and brokers.