Who Pays Closing Costs? | BiggerPockets Blog

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Closing costs are a crucial aspect of any real estate transaction, but they can vary widely, build up quickly, and be confusing to understand. Buyers tend to focus on the upfront expenses like the purchase price and down payment. Sellers often consider the repairs and renovations needed to make the home presentable for showing. 

But before the real estate deal’s done, buyers and sellers must pay closing costs. You can avoid unwanted surprises during the home buying or selling process by understanding the common closing costs and what you can expect to pay as a buyer and seller.

Educating yourself about who pays closing costs can pave the way for a smoother buying experience or property sale. This will help you confidently navigate the process and make informed decisions that work best for your financial situation.

What are Closing Costs? 

Closing costs are fees and expenses associated with a property ownership transfer. These costs are typically paid at the closing of a real estate transaction and cover many expenses, including lender fees, property taxes, private mortgage insurance, and other services related to the property’s sale. 

How Much are Closing Costs, Typically? 

Closing costs can vary depending on several factors, such as the property’s location, sales price, and loan type (e.g., conventional, FHA, or VA loans). Generally, closing costs for sellers can be between 6% and 10% of the home’s total purchase price, while average closing costs can range from 2% to 5% of the home’s sales price for buyers.   

Closing costs are separate from the home’s down payment. Closing costs are additional fees associated with the real estate transaction, while the down payment is a percentage of the purchase price.

What Closing Costs Mean for Sellers

When it comes to selling a property, closing costs play a significant role in the financial aspects of the real estate deal. Understanding the implications of closing costs is crucial for sellers to accurately calculate their net proceeds from the sale and make informed decisions throughout the process.

What are seller closing costs?

Seller closing costs refer to the various fees and expenses that sellers typically pay after a real estate transaction.

Typical seller closing costs

You may pay some of these closing costs when selling a property:

• Real estate commission: The agent’s commission is among the highest seller costs. This is typically a percentage of the sale price negotiated between the seller and the listing agent.
• Transfer taxes: Some states require transfer taxes on a property’s sale. These taxes are usually based on the sale price and vary depending on location.
• Title insurance: Sellers often pay for the owner’s title insurance policy. This protects the buyer from any potential issues with the title.
• Attorney fees: Sellers may have to hire an attorney to handle the legal aspects of the transaction in some regions. 
• Prorated property taxes: Sellers may need to reimburse the buyer for the taxes that cover the period after the sale if property taxes have been paid in advance.  

Other considerations for closing costs

When sellers pay closing costs, these other potential expenses may be added based on the specific details of the sale. 

• Home repairs: Depending on the sale’s terms, sellers may have to complete any agreed-upon repairs before closing. 
• Home warranty: Sellers may offer a home warranty to the buyer as an incentive. The cost of the home warranty is usually the responsibility of the seller. 
• Homeowners association fees (HOA): Sellers may need to pay any outstanding HOA fees or transfer fees if the property is part of a homeowners association. For example, typical closing costs for a cash purchase of a condo usually include title insurance, escrow fees, attorney fees, property taxes, recording fees, and any applicable condo association fees. 
• Outstanding liens or judgments: Sellers must resolve any liens or judgments on the property before closing. 

What Closing Costs Mean for Buyers

Buyers also have their share of closing costs to consider. Understanding your estimated closing costs is essential for preparing for the financial obligations of purchasing a property. Awareness of closing costs allows buyers to budget appropriately, negotiate with the seller, and ensure sufficient funds are available for the closing process. 

What are buyer closing costs? 

Closing costs refer to the fees and expenses buyers must pay at the closing date of a property’s purchase. 

Typical buyer closing costs

Here are some of the average closing costs that buyers may pay:

• Loan origination fees: Lenders may charge loan origination fees to cover the cost of processing the loan application.
• Appraisal fee: Lenders typically require an appraisal to determine the property’s value before approving a mortgage home loan. The buyer has to cover the appraisal fee.
• Home inspection fee: Buyers often hire a home inspector to assess the property’s condition. The buyer typically pays for the cost of the home inspection.
• Title search and insurance: The cost of a title search is the buyer’s responsibility to ensure the property’s title is clear. Buyers must also purchase a lender’s title insurance policy to protect the lender’s interest in the property.
• Escrow fees: An escrow company facilitates the closing process and charges a fee for its services. The buyer is responsible for covering the fees to escrow account funds.

Common buyer third-party closing costs

When buying a property, buyers should be aware of common closing costs from third parties that they may encounter. These costs are separate from the actual home’s purchase price and are incurred for services provided by various outside professionals involved in the real estate deal. Understanding these other closing costs upfront allows buyers to plan their budget effectively, save money, and avoid surprises during closing. 

• Homeowners insurance: Buyers are usually required to purchase homeowners insurance to protect their investment in the property. Depending on the location and coverage options, the cost of homeowners insurance premiums can vary widely. According to Bankrate, the average cost of this insurance in the U.S. is $1,428 annually for a policy with $250,000 in dwelling coverage.
• Prepaid property taxes and insurance: Buyers may need to prepay a portion of the property tax and the upfront mortgage insurance premium during closing.
• Recording fees: The local government charges these fees to record the deed and other legal documents. 
• Survey fee: Buyers must cover a property survey cost if needed.

Other considerations for closing costs

Considering these additional factors alongside the common third-party closing costs can give buyers a comprehensive understanding of the financial obligations they may face when purchasing a property. Being well-informed allows buyers to plan accordingly, explore negotiation options, and potentially take advantage of available assistance programs to effectively manage their closing costs.

• Down payment: Because these are separate costs, having enough funds to cover the down payment and closing costs is important.
• Negotiation: Buyers can negotiate with the seller to have them contribute towards the closing costs. This is known as seller concessions.
• No-closing-cost mortgages: The lender covers some or all of the buyer’s closing costs in exchange for a higher interest rate or loan amount. It’s essential to carefully evaluate these types of mortgages’ terms and long-term costs. 
• Homebuyer assistance programs: Depending on the location and buyer’s eligibility, government or local programs may offer financial assistance or grants to help provide closing cost assistance for qualified buyers.

When Do Closing Costs Get Paid?

Closing costs are usually paid at the closing of a real estate transaction. At the closing meeting, the buyer, seller, and their representative agents, attorneys, and lenders gather to finalize the sale. During the closing, the buyer receives a Closing Disclosure outlining the final costs and expenses they must pay. A certified or cashier’s check is usually required from the buyer for their closing costs.

Non-recurring Fees

Non-recurring fees are closing costs that are paid once and are not expected to have to be paid again in the future. These fees include mortgage loan origination, appraisal, and title fees. The buyer typically pays non-recurring fees, although some may be negotiable or shared with the seller. 

Typical Fees From Lenders

Lenders may charge various fees during the closing process. These fees include loan origination, discount points, appraisal, credit report, and underwriting fees. 

The costliest fees for buyers are usually the lender fees. Buyers must review the Loan Estimate provided by the lender, which details the estimated loan costs associated with the loan amount. Lender fees can range from 0-2% of the purchase price, and with rate buydowns can inflate as high as 3-4%. 

What Are Recurring or Prorated Fees?

Recurring or prorated fees are ongoing expenses associated with homeownership that are typically paid regularly. These fees include property taxes, homeowners insurance, and mortgage insurance. At closing, buyers may be required to prepay a portion of these expenses, which will be held in an escrow account and used to cover future payments.

Closing Costs FAQs

Here are some common questions about projected closing costs buyers and sellers may expect to pay.

Legal fees: Who pays them?

Legal fees can vary depending on the region and the complexity of the transaction. Sometimes, the buyer and the seller may hire attorneys to represent their interests. But it’s important to note that legal fees are typically not considered part of paying closing costs. Depending on their individual needs, they are separate expenses paid by the buyer or seller.

Is there such a thing as no-closing-cost mortgages?

Some lenders offer No-Closing-Cost Mortgages. These mortgages allow buyers to finance their closing costs into the loan or have the lender cover the closing costs in exchange for a higher interest rate or loan amount. It’s essential to carefully evaluate the terms and long-term costs of these types of mortgages to determine if they are the best option for your needs. 

With this type of mortgage, the lender covers the closing costs, but remember that it may result in a higher interest rate or loan amount. To refinance in the future, you would need to assess the financial feasibility, considering the potential costs of refinancing and the duration you plan to stay in the property. 

How do seller concessions interfere?

Seller concessions refer to when the seller pays or contributes towards the buyer’s closing costs or other expenses as part of the negotiation process. These concessions can help reduce some of the financial burden of the final purchase price on the buyer. But it’s essential to remember that there may be limits on the number of seller concessions allowed by lenders or loan programs.

Sellers aren’t required to cover the buyer’s closing costs, but it can be negotiated as part of the overall real estate deal. In some cases, sellers may proactively offer to cover a portion or all of the buyer’s closing costs to make their listing more attractive. But whether to wait for the buyer to ask for closing costs to be covered or offer it upfront depends on the specific circumstances, market conditions, and the seller’s motivation to close the deal quickly or attract more potential buyers.

Can you negotiate closing costs?

Buyers and sellers can negotiate certain closing costs. In some cases, buyers may ask the seller to contribute towards their closing costs, while sellers may negotiate to have the buyer cover certain expenses traditionally paid by the seller. It’s important to communicate openly and work with your real estate agent to determine what is negotiable and reasonable.

Are seller concessions capped?

Seller concessions are often subject to caps or limits imposed by lenders or loan programs. These caps are designed to ensure the transaction remains within certain financial parameters and to prevent excessive seller contributions that could impact the appraisal value or the buyer’s ability to afford the property. Consult with your real estate agent or lender to understand any restrictions on seller concessions that may apply to your situation.

How does homeowner insurance impact closing costs?

Homeowner insurance is an essential part of protecting your investment in a property. Homeowner insurance costs are typically factored into the closing costs and prepaid at the time of closing. Lenders require buyers to have homeowner insurance to ensure the property is adequately protected against potential damage or loss. 

The exact cost of homeowner insurance depends on the location of the property, the coverage amount, and the insurance provider. You can gather quotes from multiple insurance companies to ensure you get the best coverage at a competitive price.

Conclusion

Closing costs are one of a real estate transaction’s most critical but confusing parts. Both buyers and sellers have their share of expenses associated with closing a sale. Buyers typically pay for home loan-related fees, inspections, and other similar costs. At the same time, sellers are responsible for items such as real estate agent commissions, transfer taxes, and prorated property taxes. 

Both buyers and sellers must understand the typical closing costs in their area and be prepared to pay this expense when buying or selling a home. Working with a local real estate agent can help you avoid any surprises about fees and costs and successfully navigate the closing process. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.