Who ends up paying closing costs?

02 Dec

While buying a house can be exciting, it can also be complicated. Once you have found your perfect house, you will need to find financing and then navigate a minefield of inspections and paperwork. 

One part of the paperwork that can be confusing is closing costs. The offer you make on the home will spell out a number of closing cost line items and understanding who pays closing costs as well as where there might be room for negotiation is important to make sure you get the best deal possible. 

Here is a quick overview of various closing costs in a real estate transaction:

What are closing costs exactly?

Purchasing a home requires several steps and at various stages of the process you will need to bring in professionals to perform specific services, an inspection or appraisal would be an example. All of these pros need to be paid and these fees are called closing costs. The number of closing costs will vary by state and lender. 

Here are the most common closing costs:

  • Appraisal costs
  • Property taxes
  • Origination fee
  • Title transfer fees
  • Private mortgage insurance (PMI)

Some of these costs may be paid at closing while others may be incorporated into the loan.

Who ends up paying closing costs?

It almost always depends on your offer and who pays specific closing costs will vary depending on the transaction. It is not uncommon to ask the seller to cover some of your closing costs, this is referred to as seller contributions in the real estate world. The seller is free to accept the conditions of your offer and pay some of the closing costs, reject your request leaving you to pay them or make a counteroffer on closing costs. The final signed contract will spell out who is responsible for each specific cost. 

Common seller closing costs

In general, the seller will cover costs that are associated with the home, including costs that related to preparing the home for sale. The seller is usually responsible for realtor’s commission. These are common seller costs:

  • Prorated property taxes: If the property taxes have been paid for the year, the seller will usually receive a credit or refund on the prorated portion of the taxes. If they have not been paid for the year, the seller will have to cover those costs up to the date of sale.  
  • Homeowners association (HOA) fees: Any HOA fees that are due prior to the closing date should be paid by the seller. 
  • Title transfer fees: These fees cover the cost the county charges to transfer the home title from the seller to the buyer, in most cases the seller covers this cost. 
  • Realtor commissions: In most cases, both the seller’s agent and the buyer’s agent receive a commission for selling the home. The seller usually pays both. While commission rates vary, 6 to 10 percent of the sale price are common.

Common buyer closing costs

In most cases, the buyer will cover costs related to inspecting the home and making sure it is the right home for them as well as financing fees. The following are common closing costs that fall to the buyer:

  • Appraisal: An appraiser will come out to give a professional estimate of the value of the home. This is often necessary to reassure the mortgage lender that the home is worth what you are paying for the home. 
  • Inspection: A professional inspection may find issues with the home you were not aware of and that need to be fixed. 
  • Loan origination fee: Lenders charge a fee to process your loan. This fee will vary by lender but in most cases, it is a percentage of the loan. 
  • Credit report costs: Lenders will pull your credit report and they charge a fee for that, in most cases this is a pretty small fee. 
  • Homeowners insurance: Your lender will require that you carry homeowners insurance (you will want it as well) and your premiums for the year will need to be paid into your escrow account. 
  • Recording fee: This fee is paid to your city or county for recording the purchase of your home. 
  • Mortgage insurance: The size of your down payment will determine whether you need private mortgage insurance (PMI) or not. In most cases, you will need to put down at least 20 percent to avoid PMI.

Special considerations for certain loans

There are certain loan types that come with restrictions or other fees. Here are a few examples:

VA loans: VA loans are provided by the United States Department of Veterans Affairs and are government-backed loans for active or retired veterans. These loans allow 0 percent down on a home and do not require PMI as they are backed by the government. 

FHA loans: These loans are available to home buyers who meet the various requirements, not just first-time home buyers. These loans can push the down payment as low as 3.5 percent combined with a 1.75 percent upfront premium. 

Some closing costs are negotiable 

There are closing costs that are negotiable, ones that you may be able to transfer to the seller or lower by going with a different lender. Here are a few things to consider:

Seller pays: If you are in a buyer’s market, you can ask the seller to cover some or even all of your closing costs. If they are in a position to cover those costs and are anxious to sell their home, they may just agree.  

Shop lenders: Lender fees vary so it often pays to shop your loan around to see who comes up with the best fees for your specific loan. 

Lock in your mortgage rate: Mortgage rates go up and down depending on the market and other economic factors. If you think rates are headed up, you can lock in a mortgage rate for a specific amount of time for a small fee. This is an excellent idea if you think rates are going up.

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