When Are Closing Costs Due and How Are They Paid?

When buying or selling real estate, various fees and expenses arise beyond the property’s purchase price. These additional charges, known as closing costs, are an integral part of finalizing the transaction. Understanding when these costs are due and how they are paid is important for navigating the home buying or selling process. This clarity helps individuals prepare financially and ensures a smoother transition of property ownership.

What Are Closing Costs?

Closing costs are fees incurred by both buyers and sellers to complete a real estate transaction. They cover services and expenses necessary to transfer property ownership and finalize a mortgage loan. These costs are distinct from the home’s purchase price. For buyers, these costs typically range from 2% to 5% of the loan amount. For sellers, closing costs can range from 6% to 10% of the sale price, largely due to real estate agent commissions.

These costs include fees related to the lender, such as loan origination and underwriting, and third-party services like appraisals, home inspections, and credit reports. Other common costs cover title services, government recording fees, and legal fees depending on the jurisdiction. These expenses ensure all legal and financial requirements are met before the property formally changes hands.

When Are Closing Costs Due?

The timing for paying closing costs is not uniform, with some expenses due early in the process and the majority settled on the closing day. This phased payment structure requires careful financial planning from both buyers and sellers. Key documents like the Loan Estimate and Closing Disclosure provide crucial information regarding these timelines.

Upfront Costs

Some costs are typically paid upfront, before the actual closing appointment.
Earnest money deposits, demonstrating a buyer’s serious intent, are usually due within three days of signing the purchase contract. This deposit, often 1% to 10% of the sales price, is held in an escrow account and applied towards the down payment or closing costs.
Home inspection fees are commonly paid directly to the service provider at the time of inspection, typically within a week of an offer’s acceptance.
Appraisal fees, ranging from $350 to $1,800, are generally paid upfront to the lender’s third-party appraisal company, as the appraisal is a prerequisite for loan approval.
Loan application fees and credit report fees are also often collected by the lender early in the process.

Costs Due at Closing

The bulk of closing costs are due on the closing day itself when the property’s title is transferred. These costs are itemized for buyers on the Closing Disclosure, a five-page document provided by the lender at least three business days before closing. This document outlines final loan terms, estimated taxes, insurance, and all closing costs for buyer review, such as lender origination fees, title insurance premiums, escrow fees, recording fees, and attorney fees. Prorated property taxes and homeowners insurance premiums, which cover expenses for upcoming periods, are also collected at closing and often placed into an escrow account. Buyers typically bring these funds, while sellers usually have their costs, such as real estate commissions and transfer taxes, deducted directly from the sale proceeds.

How Closing Costs Are Paid

The practical methods for paying closing costs depend on whether they are due upfront or at the final closing. For costs incurred before closing day, such as home inspection or appraisal fees, payment methods are generally straightforward. These fees are often paid directly to the service provider using personal checks, credit cards, or direct bank transfers.

For the substantial sum of money due at closing, particularly for buyers, secure and certified funds are required. Cash is typically not accepted for security reasons. Instead, buyers commonly use a wire transfer or a certified/cashier’s check. A wire transfer electronically sends funds directly from the buyer’s bank to the escrow company or closing attorney’s account, offering speed and security. Cashier’s checks, guaranteed by the issuing bank, are another common option, though some title companies may have limits on the amount or prefer wire transfers for larger sums.

The escrow agent, title company, or closing attorney plays a central role in facilitating these payments. This neutral third party holds funds and documents until all conditions of the real estate transaction are met. They collect funds from the buyer, receive sale proceeds, and disburse payments to all parties owed, including lenders, title companies, and other service providers. For sellers, their closing costs, including real estate agent commissions and certain taxes, are typically deducted from the sale proceeds by the closing agent, meaning the seller receives the net amount after these deductions.