Who Pays Closing Costs: The Buyer or The Seller?

Closing costs are an unavoidable part of real estate transactions, representing fees and expenses incurred during property ownership transfer. They cover administrative and legal aspects beyond the purchase price or down payment. Both buyers and sellers typically incur these charges, settled on closing day.

Understanding Closing Costs

Closing costs are fees charged by various entities in a real estate transaction, including lenders, title companies, attorneys, and government bodies. They compensate for services, taxes, and insurance premiums to finalize the sale. Common categories include loan-related fees, title fees, government fees, and prepaid items. On average, closing costs for a home purchase can range from 2% to 5% of the total loan amount, though this can vary significantly by location and property value.

Buyer’s Typical Closing Costs

Buyers typically bear a substantial portion of closing costs, particularly those related to securing a mortgage. The loan origination fee, charged by the lender for processing the loan application, often ranges from 0.5% to 1% of the loan amount, covering administrative tasks like underwriting and preparing loan documents. Another common expense is the appraisal fee, paid to a licensed appraiser to determine the home’s market value, usually costing $300 to $600. This fee can be higher for government-backed loans or in certain states.

Buyers also pay for a credit report fee, typically around $35, which lenders use to assess creditworthiness and determine interest rates. Home inspection fees, another buyer expense, average $300 to $600, assessing the property’s condition before purchase. Lender’s title insurance, which protects the lender against future title defects, is also a buyer’s responsibility, often costing about 0.50% of the mortgage amount.

Additional costs for buyers include recording fees, paid to local government agencies to record the property transaction, around $125. Buyers also typically prepay items such as property taxes and homeowner’s insurance premiums. These prepaid amounts often involve setting up an escrow account to cover future tax and insurance payments.

Seller’s Typical Closing Costs

Sellers also incur various closing costs, with real estate agent commissions often being the most significant expense. Historically, sellers covered commissions for both their listing agent and the buyer’s agent, typically ranging from 5% to 6% of the home’s sale price. However, recent legal settlements in August 2024 have shifted this dynamic, with sellers now primarily responsible for their own agent’s fees, and buyers negotiating commissions directly with their agents.

Transfer taxes are another common seller expense. These are one-time taxes levied by state or local governments on the transfer of property ownership, with rates varying widely; some states have no transfer tax, while others might charge a percentage of the sale price. In some areas, this tax may be split between the buyer and seller.

Seller’s closing costs can also include owner’s title insurance, which protects the buyer from future claims against the property’s title. This cost, typically around 0.5% of the home’s sale price, is customary for sellers in many markets. Attorney fees, if required, are also paid by sellers, often ranging from $1,500 to $2,500 for a typical residential sale, covering tasks like drafting the deed and reviewing the contract. Sellers are also responsible for outstanding property taxes and homeowners association (HOA) dues prorated up to the closing date.

Negotiating Closing Cost Responsibilities

While there are typical allocations for closing costs between buyers and sellers, many expenses are negotiable. The specific terms of the purchase agreement dictate how these costs are ultimately divided. Buyers can negotiate with sellers to cover some of their closing costs, a practice known as “seller concessions.” This is particularly feasible in a buyer’s market where sellers may be more motivated to offer incentives.

Seller concessions can be limited by the type of loan the buyer obtains. For instance, conventional loans may allow concessions up to 9% of the purchase price or appraised value, while FHA and USDA loans typically cap concessions at 6%, and VA loans at 4%. Buyers might also request credits for necessary repairs, effectively reducing their out-of-pocket expenses. Market conditions significantly influence these negotiations; in a seller’s market, concessions are less likely, whereas in a buyer’s market, there is more room for negotiation.