who pays closing costs

Who Pays Closing Costs? (Buyer or Seller Explained)

More money changes hands when you buy or sell real estate than just the listed price. That money is collectively referred to as the “closing costs.” Closing costs are all the extra fees and taxes due when a real estate sale closes. 

But who pays for closing costs: buyers or sellers? That depends on the exact fees or taxes due, the details of the buyer’s offer, and other factors. 

Today, let’s briefly break down closing costs for real estate buyers and sellers.

Closing Costs Explained

Closing costs are any fees or expenses due at the closing of a real estate sale, aside from the property’s price. They usually account for around 10% of the purchase price (including buyer and seller costs). Each closing cost is between several hundred and several thousand dollars.

For example, if a house were to sell for $300,000, the average closing costs could total $30,000. Homebuyers, therefore, should keep this in mind when calculating how much of a down payment they can afford for a given property.  Also, sellers need to consider closing costs when estimating their net proceeds.

Closing costs comprise the various fees, taxes, and other payments to ensure all paperwork is filed and that the home sale goes through smoothly—both the buyer and seller share closing costs.  In most cases, the portion of closing costs a buyer pays is relatively close to a seller’s amount.  

real estate offer

What Affects Closing Costs?

Closing costs can be affected by various factors, including the type of loan the buyer takes out (assuming they don’t pay in cash), whether there are third parties involved, and more.

Loan Type

The type of mortgage chosen by the buyer may affect closing costs significantly, especially in mortgage insurance. Here are some common home mortgage types and how they affect closing costs:

  • FHA loans always require annual mortgage insurance, plus an additional upfront mortgage insurance premium, often abbreviated to UFMIP. UFMIP totals 1.5% of the loan estimate. However, note that FHA loan mortgage insurance is frequently rolled into the overall cost for the future homeowner’s loan rather than paid at closing.
  • VA loans – Loans from the VA don’t require annual mortgage insurance, but they incur funding fees that are due once at closing. The funding fee is usually around 2.3% of the total VA loan amount unless the buyer makes a down payment of at least 5%. In this case, the funding fee is lower.
  • USDA home loans – For any USDA loan, homeowners must pay an annual mortgage insurance fee plus an upfront mortgage insurance fee due at closing. The upfront closing fee is about 1% of the loan’s total. This fee can also be rolled into the mortgage loan to lower closing costs like the FHA loan.

Conventional home mortgages financed through banks, credit unions, and other lending institutions may have insurance fees or required expenses. Regardless, homebuyers should consider what fees they might be expected to pay on top of the additional closing costs detailed below before signing on the dotted line.

Realtors/Real Estate Agents

Next, the presence of realtors or real estate agents can affect closing costs. Most people who buy or sell homes do so with the assistance of at least one real estate agent. These agents take a commission, typically between 5% and 6% of the buyer’s loan’s value.

Of course, this isn’t necessary for some states. Some home buyers and sellers opt to go through with a transaction without an agent present. Not having an agent present lowers closing costs but puts the onus on the buyer and seller to get all the paperwork correct, pay all associated closing costs, and more. Furthermore, it’s harder to sell a house without a real estate agent for most homeowners. 

who pays closing costs

Seller Concessions

Sometimes, home sellers make concessions toward the closing costs by volunteering to pay for one or more of them. These sweeten the deal for buyers and enable home shoppers to purchase homes even if they can’t entirely cover the total cost of a down payment plus all the associated closing costs.

For example, sellers can opt to cover the appraisal fee or home inspection fees (see more below). That means the buyer has to come up with less cash to proceed with the deal. However, sellers are not obligated to make concessions. In seller’s markets, where there are more buyers than home sellers, concessions are less common because sellers are in better bargaining positions.

Buyer Closing Costs

Let’s break down the average closing costs you can expect as a buyer. As noted above, most of these fees are wrapped into buyers closing costs. They must add these expenses to the down payment they make to the seller/lender.

Origination Fees

Your mortgage lender charges origination fees for its services rendered. These include the cost to verify home transfer documents and process your loan application. Origination fees usually total 1% of the loan amount. For example, if you take out a loan for $300,000, your loan origination fee will be about $3000. 

home inspection

Home Inspection Fees

Buyers pay a home inspection fee to licensed home inspectors. They do thorough checks of a property you want to purchase and make sure there aren’t any significant problems with the foundations, the walls, the grounds, etc. While they can amount to several hundred dollars in total, these fees are well worth it to make sure you don’t buy a house with a lot of problems. 

Appraisal Fees

If you order an official home appraisal (and you should), the appraisal fee will cost you $500 and $1000. Home appraisals take place after property inspections. They make sure that a home’s asking price is fair compared to similar properties in the area. In other words, they make sure you don’t get cheated in a deal, so you shouldn’t skip them.

Title Search and Insurance Fees

Title search fees cover the cost of ensuring that your home’s title is clear and doesn’t have any potential claimants. They’re paid to a title company. Title insurance fees, meanwhile, protect your property against any undiscovered property claims that may affect it in the future. These are usually a few hundred dollars in total.

Mortgage Insurance Fees

Mortgage insurance fees are the costs described above. They can range from several hundred dollars to several thousand dollars or be a percentage of your loan’s total.

Some lenders do not charge mortgage insurance fees, while most government-backed loans have these fees included by default. Additionally, you can often roll the cost of a mortgage insurance fee into your loan total and pay it off over time to keep your closing costs down.

mortgage insurance fees

Discount Points

Depending on your loan, you might be able to take advantage of discount points. Discount points let you purchase a lower interest rate by paying a little extra money at the close. Each discount point is typically 1% of the loan total. However, not all lenders allow you to leverage discount points as part of your mortgage closing costs.

Recording Fees

Homebuyers often have to pay a recording fee at the close. These are paid directly to local governments to process property ownership records and document changes. They’re usually a few hundred dollars at most.

Credit Report Fees

Some mortgage lenders may charge a small credit report fee for the cost of pulling your FICO credit score. This fee may be as little as $50 or up to a few hundred dollars.

Attorney Fees

Depending on your state, you might need to pay fees to an attorney present when you close a home purchase. Attorneys look over the paperwork, make sure everyone has signed the essential documents, and sometimes deliver those documents to county clerk offices or similar locations.

Some states require attorneys to be present for a close to be legitimate – others don’t. If you do have to have an attorney present, keep in mind that some attorneys are cheaper than others. An attorney fee can be a flat rate, or they may base it on billable hours.

seller closing costs

Seller Closing Costs

While buyers take care of most closing costs, sellers are responsible for a handful of fees. Unlike buyers, sellers cannot typically convince buyers to cover some of their closing costs in exchange for other benefits. Ultimately, however, most closing costs are negotiable between both parties.

Agent Commission Fees and Seller Attorney Fees

Like homebuyers, home sellers must often pay agent commission fees or seller attorney fees. If you live in a state that requires an attorney to be present at transaction close, you can’t avoid these. However, you can find cheap attorneys that don’t clock many billable hours for a simple home sale.

If you work through a real estate agency to sell your house, you’ll need to pay them a real estate commission fee based on the total sale price. This commission fee comes out of the profits you make from the sale, but it’s often worthwhile to ensure that you find a willing buyer quickly and at your desired price range.

Transfer Tax Fees

Transfer taxes are included in closing costs since the local government has to update its records whenever a property changes hands. Sellers usually have to pay the transfer taxes to local state or county governments, but some states don’t require this. If you have to pay transfer taxes, expect them to be flat fees of anywhere between $50 and $200.

HOA Fees

If your home is part of a homeowner’s association, you’ll need to pay any fees listed in your contract. Some HOAs charge fees whenever you transfer your homeownership to another person. Depending on the HOA, these can be a few dollars or up to a few hundred dollars.

Prorated Property Taxes

Whenever you sell a house, you have to pay any property tax that continues to accumulate until the sale’s final date. You pay these prorated property taxes as part of the overall closing costs toward the home’s owner, such as the lender.

Once the sale concludes, the buyer takes over responsibility for property taxes.

closing costs

Other Credits for Closing Costs

Aside from these costs, sellers are expected to cover any additional closing credits. These are any of the above-mentioned seller concessions you may make to secure a buyer for your property or to make the property more affordable for a buyer’s limited budget.

Credits for additional closing costs are more common sellers’ fees in buyer’s markets or in areas where property competition is slow. In these markets, sellers have to attract buyers to them rather than the other way around. 

Who Pays Escrow Fees?

Escrow fees are unique compared to other typical closing costs. For most home transactions, escrow fees are paid equally by both parties.

When buyers want to purchase a home, they put some money in an escrow account. Escrow accounts are essentially protected savings accounts overseen by third parties like banks or credit unions. They hold the money for a real estate transaction until it closes, at which point the money is paid out to the seller/buyer as needed.

A given escrow fee can range from as little as a few hundred dollars to several thousand dollars. Other escrow account providers may charge fees at a percentage rate (e.g., 1% of the total purchase price for the house). In any case, buyers and sellers can negotiate to determine who pays all or most of the escrow fees or if they’ll pay 50% of the escrow fees each.

Wrap Up

Closing costs are necessary taxes and fees paid by buyers and sellers when they close a real estate sale. Most closing costs are paid by buyers, though sellers pay some. In addition, many closing costs are negotiable. Whether you’re a home buyer or seller, expect closing costs to account for between 3% and 5% of the total cost of a home purchase.

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