Closing Costs and Who Pays Them
Buying or selling a home involves a lot of costs. The big expenses like down payments and repairs may be the more obvious ones. However, there are other expenses that need to be taken care of before the deal is done. These costs are known as closing costs, and they can be a bit confusing, especially for first-time home buyers.
So, who pays for these closing costs? The answer is both the buyer and the seller, but the specific fees and amounts they pay will vary.
With that in mind, we’ll explain who pays for what when it comes to closing costs. Additionally, we’ll answer a few more questions along the way.
What are closing costs?
Closing costs are the expenses linked to the conclusion of a real estate transaction. The types of fees can differ based on the property's location and type.
Let's delve into the usual closing costs associated with any home sale, who typically pays them, and how they're paid.
Buyers are usually responsible for paying the following expenses at closing, many of which are related to obtaining a home loan. It's essential to note that these costs are typically paid out of pocket.
Here are some of the most common buyer costs associated with closing a home sale:
- Attorney costs: Real estate attorneys can help with reviewing contracts, titles, and closing documents. They usually charge by the hour, but some tasks may have a set fee.
- Home inspection fee: As a buyer, you should always have a home inspection to evaluate the property's condition. You'll be responsible for paying the inspector's fee at closing.
- Appraisal fee: If you're applying for a mortgage, the bank will require an appraisal to estimate the property's value.
- Underwriting/credit reporting fees: The lender may charge fees for running a credit check and other tasks associated with your loan.
- Prepaid interest: This is the interest accumulated between the closing date and the first mortgage payment.
- Homeowners insurance: Lenders may require a homeowners insurance policy with the first premium payment due at closing.
- Title search fee and insurance: Title insurance covers any future claims or issues with the property title. Lender's title insurance is typically mandatory, but buyers can also opt for owner's title insurance for additional protection.
The seller is usually responsible for paying the following closing costs, which are typically deducted from sale of the home:
- Realtor commissions: Both the buyer's and seller's agents are paid a commission for their role in the home sale. Typically, sellers pay a percentage of the final purchase price for both commissions.
- Title fees: These fees are associated with transferring the home's title from the seller to the new buyer.
- Homeowners association fees: If the home is in a community with an HOA, any outstanding HOA fees are paid at closing.
- Property taxes: If there are any unpaid property taxes, they are paid at closing to bring them current.
Although the list of fees that buyers pay may seem longer, they usually pay less in closing costs overall. It's important to note that these are strictly the closing costs and don't include any down payment, which is separate.
How much are closing costs?
Closing costs for a home sale can vary depending on the location and type of property being sold. Generally, sellers can expect to pay anywhere from 6% to 10% of the home's purchase price at closing. For buyers, they can expect to pay between 2% to 5% of the sale price.
For example, if a property is being sold for $250,000, a buyer's closing costs would likely range from $5,000 to $12,500. Sellers can expect to pay anywhere from $15,000 to $25,000.
Unfortunately, buyers often don't receive a clear picture of their closing costs until just a few days before closing. Sellers may have a more advanced understanding of their costs through a seller's net sheet.
The loan type makes a difference for buyers
As previously mentioned, closing costs for a buyer are typically around 2% to 5% of a home’s purchase price. However, this is assuming they’re obtaining a conventional loan. The type of mortgage a buyer chooses can significantly impact the closing costs they will incur.
In cases where buyers make a small down payment, lenders may require additional fees in case of default or delinquency. These fees are usually paid at closing.
For government-backed loans, like VA and USDA loans, borrowers may have to pay one-time funding or upfront fees, respectively. FHA loans, on the other hand, come with a mortgage insurance premium (MIP). This equals 1.75% of the total loan amount due at closing, as well as annual premiums going forward.
If borrowing from a private lender with less than 20% down, they’ll be responsible for private mortgage insurance (PMI). Some lenders may ask for an upfront payment for PMI at closing. In this case, it requires the entire year’s premium to be paid in one lump sum.
Tips for saving on closing costs
As you may have noticed, closing costs can quickly add up. Luckily, there are some strategies that can help reduce the total amount that buyers have to pay. Here are some tips for saving on closing costs:
- Negotiate seller concessions: Buyers can negotiate with sellers to pay some or all of their closing costs. This can be in place of making home repairs or lowering the asking price. For example, in some states, sellers are expected to pay for title insurance policies for new owners. These seller concessions are usually included in the initial purchase agreement but can be added later.
- Consider lender credits: Lenders may be willing to pay a portion or all of the buyer’s closing costs. This is in exchange for a higher interest rate on the loan. While it may mean paying more over time, it can save a lot of upfront costs.
- Look into closing cost assistance programs: There are programs available for low-to-moderate income or first-time homebuyers. They provide grants or loans to help cover closing costs. These programs can vary by state, so it's best to do some research and see if you qualify.
No matter whether you're the buyer or the seller, it's important to be aware of closing costs and budget accordingly. Keep in mind that the division of these costs is negotiable between both parties. Additionally, buyers should consider the type of loan they choose, as it can impact the closing costs they'll pay.
Closing costs are a necessary aspect of the home buying or selling journey, but there are ways to save money. By following the tips we’ve outlined, you can potentially reduce your closing costs and keep more money in your pocket.
If you're looking to sell a property, buy a home in Granbury, or are interested in Stephenville homes, we’re here to help. At Elevate Realty Group, our experienced local experts can guide you through the entire process.