Who Pays Closing Costs? [Q&A]
In a real estate transaction, people naturally focus on the immediate upfront costs: the home’s purchase price and down payment (if you’re a buyer); repairs, renovations, and improvements to make the home show-ready (if you’re a seller). But before a deal is finalized, there’s an additional fee — the infamous closing fee.
Buyers and sellers typically pay closing costs, and the amount they pay depends on several factors, including the price of the home, the type of mortgage the buyer has, the professionals involved, and where (state) the home is located. Also: the details of their respective deals. While certain closing costs are traditionally borne by one party or the other, when selling a home, like many contractual agreements, there are many things that can be negotiated.
What are the closing costs?
There is no fixed figure for closing costs. However, the general rule is that sellers pay 6% to 10% of the home’s total purchase price as closing costs, while buyers pay a little less—about 2% to 5% of the home’s sale price. While sellers’ closing costs are often deducted directly from the home sale proceeds, buyers typically pay their share out of pocket.
So if you’re buying a $250,000 home, your closing costs could range from $5,000 to $12,500. If you were to sell the same house, your cost could be between $15,000 and $25,000.
Unfortunately, you usually don’t know the final figure until you receive a final invoice or statement detailing all closing costs three business days before the closing date. However, sellers will often be warned in advance if their agent has prepared a seller’s balance sheet for them – a detailed breakdown of all closing costs and an estimate of how much actual or net proceeds they will receive after the final sale contract is signed estimate.
Seller’s Transaction Fees
The seller usually pays most of the costs associated with the actual home itself. In other words, what you need to do to prepare your home for sale. Additionally, they typically pay the buyer’s agent and the seller’s agent’s commission. Typical seller costs include:
- Prorated property tax: This depends on whether the property tax has been paid or not yet paid. Seller will receive a credit if property taxes have been paid. It is the seller’s responsibility to pay his or her due taxes prior to closing, if not already due.
- Home Owners Association (HOA) Fees: If applicable, seller must pay all HOA fees due prior to buyer moving in.
- Title Transfer Fees: These fees are paid to the county to transfer title from the seller to the buyer.
- Realtor Commission: Every realtor charges a commission on the sale of a home. Commissions are calculated as a percentage of the sale price. The seller usually bears the costs of the seller’s and buyer’s agent.
Because sellers typically pay brokerage commissions for both parties, their closing costs typically range from 6% to 10% of the home’s sale price.
Buyer closing costs
While the seller typically pays for the preparation and delivery of the home, the buyer bears the costs associated with making sure the home is the one they want to buy, as well as the costs associated with obtaining financing. This includes:
- Appraisal Costs: Appraisals are professional estimates of the value of a property.
- Inspection Fees: Not all lenders require a home inspection, but it is highly recommended. A home inspection can save you from unexpected repair and maintenance costs down the road.
- Loan origination fee: This is the fee charged by the lender to set up the loan. The cost varies by lender and is usually a percentage of the loan.
- Credit report fee: Your lender collects your credit report. This fee is charged per report and is relatively small.
- Homeowners Insurance: This can be deposited into your escrow account to pay for your insurance throughout the year.
- Registration Fee: This is the fee paid to the city or county to register the home purchase and mortgage.
- Prepaid Interest: This is the interest you owe between signing the loan and making your first payment. The earlier you close in the month, the higher these costs will be.
- Mortgage Insurance: Personal Mortgage Insurance (PMI) protects the bank if you don’t pay. Typically, PMI is not required if you make at least a 20% down payment.
While the buyer’s list may seem longer than the seller’s, many are available for minimal fees. Closing costs for the buyer are generally estimated at between 2% and 5% of the sale price
Closing costs vary by loan type
As a buyer with a conventional mortgage, your various fees (see above) typically range from 2% to 5% of the purchase price. However, different types of loans have different structures, which means closing costs may vary depending on the type of mortgage you get.
For buyers who pay a small down payment, a higher down payment is usually required. In such cases, lenders add extra fees to mortgages as a form of insurance to protect them if these high-risk buyers default or default on their payments. These are usually due when the property is completed.
Many federally backed loans that only require a 3.5% discount come with a one-time financing fee (VA loans) or an upfront payment (USDA loans). For FHA loans, you must pay a Mortgage Insurance Premium (MIP) equal to 1.75% of the loan amount at closing, and annual premiums thereafter.