Closing Costs: Who Pays What?

Closing Costs: Who Pays What?

Closing costs are the expenses and fees incurred during the finalization of a real estate transaction. Both buyers and sellers share responsibility for these costs, but the specific breakdown depends on local customs, negotiation, and the terms of the purchase agreement. Here’s a detailed guide to understanding who pays what in closing costs.

1. What Are Closing Costs?

Closing costs cover various fees related to the transfer of ownership, financing, and documentation. They typically range between 2%–6% of the purchase price and include charges from lenders, title companies, attorneys, and other service providers.

2. Buyer’s Closing Costs

Buyers generally cover costs associated with securing a mortgage, title insurance, and inspections. Here’s a breakdown of common buyer expenses:

1. Loan-Related Costs

  • Loan Origination Fee: Charged by the lender for processing the mortgage (usually 0.5%–1% of the loan amount).
  • Appraisal Fee: Covers the cost of assessing the property’s market value.
  • Credit Report Fee: Charged for pulling the buyer’s credit report.
  • Prepaid Interest: Covers interest accrued between the closing date and the first mortgage payment.
  • Mortgage Insurance Premium (if applicable): Required if the down payment is less than 20% on some loans.

2. Title and Escrow Fees

  • Title Insurance (Lender’s Policy): Protects the lender in case of title disputes.
  • Escrow Fees: Covers third-party services to manage the transaction (split in some regions).
  • Recording Fees: Paid to the county for registering the deed and mortgage documents.

3. Home-Related Costs

  • Home Inspection Fee: Paid to a licensed inspector for evaluating the property’s condition.
  • Property Taxes (Prorated): Buyers may pay their share of property taxes from the closing date to the end of the tax year.
  • Homeowners Insurance: Buyers often pay the first year’s premium at closing.
  • HOA Fees (if applicable): Covers prorated homeowners’ association fees if the property is part of an HOA.

4. Optional Buyer Costs

  • Discount Points: Paid upfront to lower the mortgage interest rate.
  • Owner’s Title Insurance (optional in some regions): Protects the buyer’s ownership rights.

3. Seller’s Closing Costs

Sellers typically cover costs associated with transferring the property and paying real estate commissions. Here’s a list of common seller expenses:

1. Real Estate Agent Commissions

  • Commission Fees: Usually 5%–6% of the sale price, split between the buyer’s and seller’s agents. This is the seller’s most significant closing cost.

2. Title and Escrow Fees

  • Title Insurance (Owner’s Policy): Protects the buyer against title disputes; often paid by the seller.
  • Escrow Fees: In some areas, sellers share this cost with buyers or cover it entirely.

3. Transfer Taxes

  • State and Local Transfer Taxes: Fees for transferring the property title, often calculated as a percentage of the sale price.

4. Prorated Costs

  • Property Taxes: Sellers pay their portion of property taxes up to the closing date.
  • HOA Fees: Sellers may owe a prorated amount of HOA fees up to the day of closing.

5. Mortgage Payoff

  • Outstanding Loan Balance: Sellers are responsible for paying off their existing mortgage(s) at closing.
  • Prepayment Penalty (if applicable): Some lenders charge a fee for paying off a loan early.

6. Repairs and Credits

  • Agreed-Upon Repairs: Costs for repairs negotiated during the transaction.
  • Seller Concessions: Credits offered to buyers to cover some of their closing costs, often used to make the deal more attractive.

4. Negotiable Closing Costs

While some costs are traditionally assigned to buyers or sellers, many are negotiable. Commonly negotiated items include:

  • Seller Concessions: Sellers may agree to pay part of the buyer’s closing costs to make their offer more appealing.
  • Title Insurance: Depending on local customs, either party may cover the cost of owner’s title insurance.
  • Escrow Fees: Often split between the buyer and seller, though practices vary by region.

5. Closing Costs: Regional Differences

Local customs heavily influence who pays for what. For example:

  • In some states, sellers typically pay for title insurance.
  • In others, buyers may cover a larger share of closing costs.
  • Always consult your real estate agent or attorney to understand your area’s norms.

6. Tips for Buyers and Sellers

For Buyers

  • Budget Carefully: Estimate your closing costs early to avoid surprises. Aim for 2%–5% of the purchase price.
  • Ask for Seller Concessions: In a buyer’s market, sellers may agree to cover part of your closing costs.
  • Shop for Services: Compare rates for title insurance, inspections, and other services to save money.

For Sellers

  • Account for Commissions: Factor agent commissions into your net proceeds calculation.
  • Negotiate Smartly: Be prepared to offer concessions if it helps close the deal, but don’t overextend.
  • Handle Repairs Proactively: Address potential repair requests before listing to avoid credits or last-minute costs.

7. Sample Closing Costs Breakdown

Example: Home Sale for $400,000

  • Buyer’s Costs (Approx. $12,000–$20,000)
    • Loan Origination Fee: $4,000
    • Title Insurance (Lender’s Policy): $1,000
    • Prepaid Property Taxes: $1,500
    • Home Inspection: $500
    • Appraisal Fee: $600
    • Escrow Fee: $800
  • Seller’s Costs (Approx. $30,000–$35,000)
    • Agent Commissions: $24,000 (6%)
    • Title Insurance (Owner’s Policy): $1,200
    • Transfer Taxes: $2,000
    • Property Taxes (Prorated): $1,800
    • Repairs and Credits: $3,000

8. Reducing Closing Costs

Both buyers and sellers can take steps to minimize closing costs:

  • Negotiate Fees: Ask lenders, title companies, and real estate professionals to reduce or waive fees.
  • Compare Lenders: For buyers, shopping around for mortgage rates can lead to lower origination fees.
  • Roll Costs Into the Loan: Buyers may be able to roll certain closing costs into their mortgage, reducing upfront expenses.

Understanding who pays what in closing costs is critical for navigating the home-buying or selling process smoothly. While some expenses are fixed, others can be negotiated to align with your financial goals. Working closely with a real estate agent and attorney ensures you’re prepared to handle these costs effectively and complete your transaction successfully.