UPDATED: Apr 15, 2024
As a home buyer or seller, it's important to be aware of the various expenses that come with a real estate transaction. One of these expenses is closing costs, which can be a significant amount of money.
In this article we will explore what closing costs are and discuss who covers them. We will also discuss how to estimate and reduce these costs for both buyers and sellers.
Closing costs are the fees and expenses that are associated with the purchase or sale of a home. These costs are paid at the closing of the transaction and typically include a variety of fees, such as lender fees, title insurance, property taxes and real estate agent commissions.
Although many fees are included in closing costs, down payments are not. Home buyers typically are responsible for both a down payment and closing costs when they’re in the process of buying a house. Depending on the loan type you borrow, you’ll generally need to pay 3% – 20% toward a down payment, and an additional 3% – 6% for closing costs.
So, who is responsible for paying these fees during the closing process? The simple answer is both buyers and sellers. Both parties are responsible for paying different types of closing fees.
In most cases, buyers will be responsible for paying their own closing costs. However, buyers might be able to negotiate for lesser closing costs (or to have them rolled into the loan). It generally depends on an array of factors, including whether you’re purchasing in a buyer’s or seller’s market.
When you purchase in a buyer’s market, your chances of paying less closing costs goes up tremendously. This is because the housing supply in this market type greatly outweighs the demand, meaning sellers might be more willing to make greater strides to ensure you purchase their home.
Unless there is high demand for the home you’re interested in, ask the seller if they would be willing to pay certain fees. For example, a seller may agree to pay for title insurance on your behalf. Title insurance helps protect you and your lender in case someone else tries to make a claim on the property after you have begun the buying process.
You could also ask your lender about a no-closing-cost mortgage. If your lender does not offer no-closing-cost mortgages, you could see if they would be willing to waive certain closing costs, including:
There are a few nonnegotiable closing costs as well, including appraisal fees, credit check fees and prepaid property taxes.
For help in figuring out your estimated closing costs, you can look at your loan estimate document. This is provided by your mortgage lender and shows your estimated interest rate, monthly payment and closing costs. This will give you some figures to work with, though the numbers won’t be set in stone until you get your closing disclosure a few days before closing. This document gives you those finalized loan terms, disclosures and closing costs.
While every situation is slightly different, the responsibility for paying closing costs may be negotiated between the seller and buyer. In some cases, a seller may agree to pay some or all of the closing costs in order to sweeten the deal and make their property more appealing to potential buyers.
Alternatively, a buyer may offer to take on more of the closing costs to secure a lower purchase price or other concessions from the seller. It is important to approach these negotiations with a clear understanding of what you are willing and able to pay, as well as any limits or requirements set by your loan program.
There are several factors that determine who pays closing costs. Below are just a few examples.
As a buyer, the type of loan you receive may determine whether you pay closing fees, and how much you should expect to pay. There are no-closing-cost mortgages that can help you avoid thousands in upfront costs. Consider asking your lender if you qualify for these types of loans.
Seller concessions are closing costs that the seller agrees to pay outside of their usual closing costs. These concessions are used as negotiation tools, especially in a buyer’s market, where buyers have more pull in negotiations because there are many more homes for sale than buyers to purchase them.
The state of the housing market in an area will play a key role in who might pay closing fees. In a buyer’s market, buyers have more negotiating power because sellers might be more eager to close on a sale. In a seller’s market, evidenced by stiff competition and bidding wars, home buyers have little to no bargaining power, as sellers are looking for the most uncomplicated bids for more attractive prices.
Let’s take a look at who is generally responsible for paying what.
Generally speaking, home buyers might be responsible for paying:
While it varies by situation, sellers are generally responsible for paying:
Still have questions about who pays closing costs? Here are a few commonly asked questions below.
Seller concessions are less common in a seller’s market, when there are many buyers for a lower number of homes. Conversely, sellers will generally pay concessions in a buyer’s market to appeal to buyers. Generally, the lesser of the sales price or the appraised value will determine how much the seller is allowed to provide in concessions.
Generally, sellers pay more in closing costs than buyers. Buyers can expect to pay 3% – 6% in fees, whereas sellers can expect to pay 6% – 10% (although these are fees that are not usually included in closing costs, such as real estate agent fees).
Property taxes and title transfer fees are generally split between buyers and sellers. However, every situation is unique and different.
Buyers typically pay cash for closing fees, whereas sellers may have the cost of closing deducted from the proceeds of the home sale.
In general, closing costs for home buyers are between 3% – 6% of the value of the home they are purchasing. However, every situation is different, and your closing costs may be higher or lower than average.
Closing costs are an unavoidable expense of buying real estate, especially if you’re financing the purchase of your home with a mortgage. However, you might be able to negotiate them away to the other party in the transaction or pursue options to lower them.
If you’re ready to take the first step toward homeownership, start the mortgage approval process today with Rocket Mortgage®.
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