Who Pays Closing Costs on a New Construction Home?
Understand who pays closing costs on new construction homes. Learn about typical responsibilities and how to navigate negotiations.
When purchasing a new construction home, understanding closing costs is a financial consideration beyond the agreed-upon purchase price. These are various fees and expenses that buyers and sellers pay to finalize a real estate transaction. While similar to those for existing homes, new construction properties can involve unique costs and different allocation between parties. These costs typically range from 2% to 6% of the home’s purchase price.
Buyer’s Closing Costs
Buyers of new construction homes incur a range of closing costs, many associated with the mortgage loan process. Loan origination fees are charged by lenders for processing the loan application, underwriting, and preparing documents, ranging from 0.5% to 1% of the loan amount. An appraisal fee is paid by the buyer to determine the home’s value for the lender, costing generally between $300 and $800. A credit report fee, between $15 and $100, covers the cost for the lender to obtain the buyer’s credit history.
Title-related expenses are also buyer responsibilities. This includes the cost for a title search, which ensures the property is free from ownership disputes or liens, costing between $200 and $400. Lender’s title insurance, which protects the lender’s investment, is required, and buyers often purchase an owner’s title insurance policy to protect their equity against future claims. Recording fees are charged by local government agencies to officially register the transfer of ownership and mortgage documents, ranging from a few dollars to several hundred.
Other potential buyer costs include survey fees, which verify property lines and range from $300 to $6,500 depending on complexity. Prepaid expenses are also common, such as initial deposits for property taxes and homeowner’s insurance premiums, often covering several months to a year. In some jurisdictions, attorney fees for legal review of contracts and closing procedures are required, ranging from $750 to $1,250 for residential transactions.
Builder’s Closing Costs
While buyers bear many closing costs, builders also have financial responsibilities at closing. Builders cover their own legal fees associated with the transaction, including drafting sales contracts and ensuring compliance. These fees are part of the builder’s operational expenses and are not usually passed directly to the buyer as a separate closing cost line item.
Certain transfer taxes, imposed by state or local governments on property transfer, may be paid by the builder, though allocation can sometimes be negotiated. Builders might also absorb impact or development fees. These are charges levied by local governments to help fund infrastructure and services required due to new construction, such as roads, schools, and utilities.
Negotiating Closing Costs and Builder Incentives
Negotiating closing costs in new construction offers buyers ways to reduce out-of-pocket expenses. Builders often provide incentives to attract buyers, especially in competitive markets or when trying to meet sales targets. A common incentive is a direct contribution towards the buyer’s closing costs, which can significantly lower the amount of cash needed at closing. This assistance can amount to 2% to 6% of the purchase price.
These incentives can take various forms beyond cash credits for closing costs. Builders might offer design center credits, allowing buyers to select upgrades like flooring, countertops, or appliances at a reduced cost or even free. Another incentive is a mortgage rate buydown, where the builder pays an upfront fee to temporarily or permanently lower the buyer’s interest rate, resulting in lower monthly mortgage payments.
The availability and extent of these negotiations depend on several factors, including current market conditions, the builder’s inventory levels, and whether the buyer uses the builder’s preferred lender or title company. Builders are more willing to negotiate on homes that are already constructed or approaching the end of their financial year. Buyers should review the builder’s purchase agreement carefully, as some contracts may require using preferred vendors to qualify for certain credits.