With the exceptions of the Internal Revenue Service's W-2 and the dreaded Form 1040, the Federal form most familiar to the ordinary citizen is the HUD-1. This form, also called the Settlement Statement, records the money flows that take place when the ownership of a home is transferred from a seller to a buyer. The HUD-1 is a valuable financial record for both parties, because it itemizes the various fees, taxes, discount points, reserves, and other charges associated with closing a real estate transaction. For this reason, it also is a potentially valuable source of information for those interested in understanding closing costs and the hurdle they present to becoming a homeowner.

HUD has just completed an exploratory study showing that it is possible to use the HUD-1 forms filed in the case binders of mortgages insured by the Federal Housing Administration (FHA) to shed useful light on closing costs.¹ The Department intends to greatly expand this work in the coming year. This issue of U.S. Housing Market Conditions summarizes what HUD learned about the size and nature of closing costs from this preliminary work.

Cautions

1. These results are based on a small sample—212 FHA loans endorsed in June 1997. The next stage will involve much larger samples to produce more precise estimates.
   
   
2. Basing the analysis only on FHA loans may introduce some biases. Because there are limits on the principal that FHA will insure, sales of more expensive houses do not usually involve FHA insurance.² This restriction also may result in a geographical bias because the average price of housing varies so much from area to area. Finally, FHA has certain rules that affect the charges that can be levied on a buyer. These restrictions can result in eliminating certain charges from FHA sales, shifting the charge from the buyer to the seller, or simply renaming the charge. In the next study, HUD will consider whether samples of non-FHA loans could be drawn as well.
   
   
3. The discussion that follows reports on national means and medians for various settlement costs. Because local customs and State laws determine the nature and level of settlement costs, there is great variation across localities, and national averages may not be representative of any particular area. The larger HUD study will look at State-by-State variation in closing costs.

Despite these limitations, U.S. Housing Market Conditions decided to report these preliminary results because there is little recent information on closing costs.

Total Closing Costs

The sales recorded in the FHA sample involved purchases with a mean price of $87,794 and a median price of $85,000. Closing costs, including real estate agent commissions, represented between 11 and 12 percent of sales price. Excluding commissions, they represented between 7.5 and 8 percent of sales price. Sometimes a buyer or seller will pay a fee prior to closing such as a charge for a credit report. Without these paid outside of closing (POC) items, the mean closing cost was $10,100 or 11.5 percent of the sales price with commission and $6,413 or 7.3 percent of sales price without commission.

The mean costs paid by borrowers at closing were $4,385 or 5.0 percent of the sales price. Sellers paid $5,825 at closing or 6.6 percent of the sales price with commissions and $2,067 or 2.4 percent of sales price without commissions.³ Items paid outside of closing averaged $471 or 0.5 percent of the sales price.⁴

Table 1. Total Closing Costs

Closing Costs by Major Category

The HUD-1 classifies settlement costs into 7 categories and assigns line numbers to category head-ings ending in double zeros from 700 (Sales/Broker Commissions) to 1300 (Additional Settlement Charges). Tables 2-6 contain the means and medians for these categories for buyers, sellers, and buyers and sellers combined.⁵ These tables also report the number of HUD-1 forms (from the sample of 212) that reported a particular cost. The means and medians are calculated only for those HUD-1 forms reporting costs.

Table 2. Closing Costs for 700 and 800 Series

Only 165 of 212 HUD-1 forms report sales commissions; these commissions averaged $4,875 or 5.6 percent of sales price. In all 165 cases, only the seller paid the sales commission.⁶ The 800 series includes origination fees, discount points, and fees for appraisals, credit reports, tax services, and flood certificates. These fees were approximately 2 percent of the sales price for FHA mortgages, with buyers and sellers each paying roughly half of the total costs.

The 900 series includes the upfront component of the FHA mortgage insurance premium, advance payment of hazard insurance, advance payment of flood insurance, and similar fees that assure the lender that its collateral is protected but are not related directly to the terms of the loan. These costs typically are approximately 2.7 percent of the sales price. Generally, the buyer pays these costs; in only 42 of the 212 cases did the seller contribute. In those cases, the sellers most often contributed to the advance payment of hazard insurance and the costs were approximately 0.5 percent of the sales price.

Table 3. Closing Costs for 900 Series

The 1000 series lists all the escrow deposits required at closing. In the sample cases, escrow deposits were approximately 0.5 percent of the sales price. The seller contributed to the escrow account in 32 of the 212 cases. The 1100 series records payments to attorneys and charges related to title insurance. These costs represent approximately 1.25 percent of the sales price. Both buyers and sellers incurred costs charged to this category and paid roughly equal amounts.

Table 4. Closing Costs for 1000 and 1100 Series

In the 1200 series, the HUD-1 lists government recording and transfer charges. The mean sum of these charges is $466 or 0.5 percent of sales price while the median sum is $245 or 0.3 percent of sales price. The relatively large spread between mean and median costs suggests a substantial amount of variation in these charges across States. An examination of the spread between the first and third quartiles confirms the existence of large variation.⁷ Twenty-five percent of the charges in this category total $121 or less while another 25 percent equal or exceed $620. Buyers and sellers both pay fees recorded in this category, but the fees paid by sellers are substantially larger.

Table 5. Closing Costs for 1200 Series

The 1300 series records any settlement charges that do not belong in the other 6 categories. HUD edited the data heavily before reporting results in this category. Its catchall nature results in its capturing many payments that would not be considered typical closing costs. For example, if part of the proceeds of the sales is being used to pay off a nonmortgage debt, the payment to the debtor often is listed in this category. It proved relatively easy to eliminate payments of this nature. Other, smaller payments required more judgment. Typically they were left in the series if they appeared to be related to expenses that might occur in a reasonable percentage of transactions. These miscellaneous costs, after editing, were less than 0.5 percent of the sales price and occurred for either the buyer or the seller in 185 of the 212 cases.

Table 6. Closing Costs for 1300 Series

Selected Individual Closing Costs

The HUD-1 identifies 31 settlement costs by name and assigns them specific line numbers. However, many of these costs are related to other settlement costs, including both costs named on the HUD-1 and costs that are not named. For example, line 801 is used for the loan origination fee. Whether a particular transaction involves a loan origination fee often depends on whether there is a loan discount fee (line 802). The size of any loan origination fee may depend on whether the buyer is charged separately for specific activities associated with the loan origination. These separate charges would be listed on blank lines within the 800 series.

Table 7 lists individual expenses that can be identified on the HUD-1, occurred in a sufficient number of cases in the sample, and are considered independent of other expenses. This table includes the first and third quartiles as well as the mean and median for each expense. The first and third quartiles mark off the middle 50 percent of the distribution of any variable (see endnote 7). The quartiles are included to provide a sense of whether the fee is related to the size of the loan. The first quartile for sales price is $63,200 and the third quartile is $111,500. The ratio of the two quartiles is 176 percent, so one would expect costs related to the sales price to have third quartiles approximately 1.75 times as large as their first quartiles.

Table 7. Selected Individual Closing Costs

On 125 of the 165 HUD-1 forms with broker commissions, the commissions were calculated explicitly as a percentage of the sales price. The mean of the listed percentages was 5.80 percent and both the first quartile and the median were 6.00 percent. In those cases in which the sales commission is based on the sale price, 6 percent is the typical rate but not the only rate. Twenty-five percent of the cases had rates as high as or higher than 6.25 percent.

The quartile values indicate that the listed expenses in the 800 series—appraisal, credit report, tax service, and flood certificate fees—generally are a dollar charge rather than a percentage charge. Appraisals typically were between $250 and $300 per case, credit reports $50 to $66 per case, tax service fees $65 to $78 per case, and flood insurance certificates $18 to $25 per case.

Unlike the 800 series, the listed expenses in the 900 series appear to be related closely to the sales price. The FHA upfront premium, of course, is 2.25 percent of the loan amount.⁸ Using the quartile values of both the variable and the sales price, advance payment of hazard insurance costs approximately 0.4 percent of the sales price, whereas advance payment of flood insurance ranges from approximately 0.4 percent to 0.6 percent.

Survey costs are recorded in the 1300 series. Although one would expect survey costs generally to be unrelated to the sales price, this does not appear to be the case. Using the quartile values of both survey costs and the sales price, survey fees were approximately 0.2 percent of the sales price.

Summary

Abstracting from the large State-to-State variation in certain fees, closing costs typically average 12 percent of sales price for FHA-insured loans. At closing, buyers pay approximately 5 percent and sellers 6.5 percent.⁹ The seller contribution is approximately 2.5 percent after paying the real estate agent commission. Six percent is the typical but not universal real estate commission rate.

Though the sample size is small, the preliminary HUD work reported here provides rough estimates of the dollar value of some fees that are unrelated to the sales price and of the percentage charge for fees that appear to be related to the sales price. HUD plans future work involving much larger sample sizes that will provide more precise estimates at the national level and separate State-by-State estimates.

Notes

1. The Urban Institute performed the exploratory work under contract to HUD. Harold Katsura was the principal investigator at The Urban Institute.

2. The FHA loan limit varies by locality but could not exceed $160,950 in June 1997.

3. The difference between total costs to sellers as a percentage of sales price and costs minus sales commission as a percentage is less than the typical 6 percentage points because only 165 of 212 sellers paid sales commissions.

4. Items paid outside of closing are not recorded in the columns labeled borrower or seller on the HUD-1 but instead are listed parenthetically in the column identifying the type of closing costs. For this reason, it is sometimes impossible to determine whether the buyer or the seller incurred the cost. Of the 212 HUD-1 forms in the sample, 89 contained POC items without specifying the payee.

5. The total line will be bigger than the sum of the buyer and seller lines because it includes items paid outside of closing.

6. There were two POC items ($400 and $443) listed as sales commission for which it was unclear whether the buyer or the seller had paid the charge. Since there were no instances of buyers paying the sales commission, it was assumed that these were seller paid.

7. Quartiles are similar to the median. The median separates the sample into a bottom half and a top half. For any variable, the first quartile is defined as the amount equal to or greater than the lowest 25 percent of the values of the variable, the second quartile (median) is defined as the amount equal to or greater than the lowest 50 percent of the values of the variable, and the third quartile is defined as the amount equal to or greater than the lowest 75 percent of the values of the variable. The spread between the first and third quartile captures the middle 50 percent of the values of the variable.

8. Discounts are allowed for first-time homebuyers who receive counseling.

9. The other 0.5 percent represents fees paid outside of closing.