Who Pays For Closing Costs? Buyer And Seller Breakdown
Carey Chesney5-Minute Read
November 30, 2020
Whether you’ve already found your next home, just started searching, or have decided to sell your current home, understanding the ins and outs of the home buying process is critical. One question you may be asking yourself, especially if you are considering making an offer on a house is “who pays closing costs?" There are a lot of factors and what you bring to the closing table varies greatly between the buyer and seller, so let's dive in to make sure you are well-informed as your closing draws near.
What Are The Closing Costs For The Buyer?
As a buyer, you can expect to pay between three and 6% of the home’s purchase price in closing costs. The most critical calculation is making sure you can afford the cost of the home’s down payment and estimated closing costs before moving forward with the home buying process. Talk to your lender about the various down payment options available as well as the other costs associated with closing (more on that coming) and make sure your bank account can absorb the hit.
One great way to budget for your anticipated closing costs is by consulting your loan estimate document, which you will get from your lender that will cover your estimated interest rate, monthly payment, closing costs and more. The Loan Estimate Document is a little different than the closing disclosure, which provides important information regarding the final details of your home loan. This will include finalized loan terms, disclosures and closing costs.
Both of these documents can be useful resources for factoring closing costs into your financial plan. The loan estimate documents can make sure you are in the financial ballpark you want to be in and the closing disclosure is used to ensure the finalized loan doesn’t hold any surprises.
Now let’s take a closer look at some of the components of your loan, starting with loan fees:
Buyer Attorney Fees: Depending on what state you reside in, an attorney may have to oversee the closing process. A real estate attorney who charges an hourly rate may charge $150 – $350 per hour or it can be billed as a flat rate in the $500 to $1,500 range.
Credit Report And Monitoring: For roughly $30 a lender can collect your credit report from all three credit bureaus. In addition, they may also charge a credit supplement fee (anywhere from $25 to $100) to pay for a third party company to verify the information on your loan application.
Discount Points: Sometimes your lender will give you the option to purchase discount points to bring down your interest rate. The cost of one discount point is equal to 1% of your loan amount.
Origination Fee: This covers the cost of processing and underwriting your loan.
Prepaid Interest: Sometimes you will be asked to pay for the interest that has accrued on your loan between the time that you close on the loan and the date of your first mortgage payment.
Rate Lock Fee: Your lender may charge a fee to lock in your rate from when the loan closes until home closing.
USDA Guarantee Fee: Akin to mortgage insurance, USDA loan borrowers will pay 1% of their loan amount at closing.
VA Funding Fee: With a few possible exemptions, VA loan borrowers must pay a funding fee as part of their closing costs.
Now let's take a look at some of the fees you might encounter at the closing table specifically related to your mortgage:
Courier Fee: This is typically around $20 and covers the cost of sending your loan documents to different parties associated with the closing.
Mortgage Insurance: Designed to protect the buyer, mortgage insurance allows you to get a loan with a lower down payment.
Private Mortgage Insurance (PMI): To lower the risk for the lender, borrowers who pay less than 20% for their down payment need to carry private mortgage insurance on their loan.
Now let’s take a look at the fees directly related to your new home:
Appraisal Fee: This covers the cost that your lender pays for a third party appraiser to evaluate the property and determine its market value.
Flood Certification Fee: This fee is to certify the flood zone status of your new home if you’re buying in an area that is at-risk for flooding.
Survey Fee: In some cases, a survey will need to be done to define the property’s boundaries and you will pay for that at closing.
Transfer Tax: Another bill for you to pay at closing, this covers the cost to transfer the title of the property to you once the deal is done. This can also be paid for by the seller, depending on what you negotiate during the deal.
Taxes And Annual Fees
Now let’s dive into some other costs for the buyer related to taxes and insurance:
Homeowners Insurance: In almost every case, your lender will require that you carry insurance on the mortgaged property. At closing, you may be required to pay your annual or semiannual premium upfront.
Property Taxes: Often held in an escrow account (more on those later) until they are due to the municipality the home is located in, your lender may require that you pay a certain portion of your property taxes up front.
What Are The Closing Costs For The Seller?
Seller closing costs can vary greatly depending on the terms that the buyer and seller have agreed upon during negotiations. While the seller typically pays a fewer number of closing fees, they are responsible for the more expensive ones like the sales commissions for the estate agents on both sides of the deal. The seller pays these expenses out of the profits of the sale of the home.
Let's get into the details of the closing fees the seller is responsible for:
Buyer’s And Seller’s Real Estate Agent Commission: Though it can vary, the seller of the home typically pays 6% of the purchase price, with half of that going to their agent (the listing agent) and half going to the agent representing the buyer.
Buyer’s Title Insurance Policy: The buyer purchases title insurance but it’s often paid for as part of the seller’s closing costs. Title insurance is required by the buyer’s lender.
Credits Toward Closing Costs: The buyer can request closing credits from the seller at a number of intervals during the process including upfront to help them finance the loan or during inspection as they negotiate for repairs.
Property Taxes: This is usually split between the buyer and seller with the percentages depending on the time of year the home is sold.
Seller’s Attorney Fees: Similar to the buyer attorney fees previously mentioned, the seller is responsible for their attorney fees as well.
Transfer Tax: As previously mentioned, this covers the cost to transfer the title of the property and can be paid for by the seller or the buyer.
Who Pays Escrow Fees?
First off, what is escrow? This term refers to the withholding of money by a neutral third party until a transaction can be finalized. Escrow accounts are often used in real estate transactions and the fees associated with them can be factored into home buying and selling negotiations. They are typically split evenly between parties, but buyers and sellers should talk with their real estate agents to devise a strategy for negotiating the terms of payments.
Prepare To Seal The Deal
For both buyers and sellers, it’s critical to factor closing costs into their budgets to avoid surprises at the closing table. The best first step is to talk with your real estate agent about how to estimate closing costs. In addition, review our Home Closing Process Explained to gain a better understanding of the final steps of the home buying process.
Table of Contents
What Are Closing Costs?
Getting a mortgage means so much more than just getting approved. Learn how to prepare for the closing costs you will have to pay on closing day.