Who Pays Closing Costs When Buying a House?

Closing costs represent a collection of various fees and expenses incurred during the final stages of a real estate transaction, extending beyond the agreed-upon purchase price of the property. These charges cover the services provided by numerous professionals and entities involved in facilitating the transfer of property ownership. Understanding these costs and their typical distribution between buyers and sellers is important for budgeting and avoiding unexpected expenses.

Buyer’s Typical Closing Costs

Buyers typically incur a range of closing costs, primarily associated with securing a mortgage and ensuring the property’s legal and physical integrity. These include the loan origination fee, charged by lenders for processing the mortgage, often 0.5% to 1.5% of the loan amount. An appraisal fee, usually $350 to $600, is paid to an independent appraiser to determine the home’s fair market value. A credit report fee covers the cost of pulling the buyer’s credit history.

Buyers also pay for a home inspection, which evaluates the property’s condition and identifies potential issues, usually costing between $300 and $500. A survey fee, ranging from $300 to $700, may be required by the lender to confirm property boundaries. Lender’s title insurance protects the lender against claims to the property’s title, often approximating 0.5% of the loan amount. Recording fees are paid to the local government to officially record the change in property ownership, commonly $50 to $250 depending on the jurisdiction.

Attorney fees are applicable in some regions where legal representation is required or chosen for the buyer, varying significantly by location and complexity of the transaction. Additionally, buyers often pre-pay several months of property taxes and homeowner’s insurance premiums into an escrow account at closing. This ensures funds are available for future payments. These prepaid expenses can add thousands to the buyer’s upfront costs.

Seller’s Typical Closing Costs

Sellers also bear a distinct set of closing costs, predominantly related to the sale process and transfer of ownership. The most significant expense is typically the real estate agent commission, which compensates both the buyer’s and seller’s agents. This commission usually ranges from 5% to 6% of the home’s sale price and is generally deducted from the sale proceeds at closing.

Another common seller cost involves transfer taxes or documentary stamp taxes, levied by state or local governments on the transfer of real property. These taxes vary widely by jurisdiction, often calculated as a percentage of the sales price or a fixed amount per $1,000 of value. Owner’s title insurance, which protects the buyer from future claims against the property’s title, is frequently paid by the seller in many regions, typically costing between 0.5% and 1% of the sale price.

Sellers may also incur attorney fees, particularly in states where legal professionals are required to oversee the transaction or prepare closing documents. These fees depend on the attorney’s rates and the complexity of the sale. Outstanding property taxes and homeowners association (HOA) dues are prorated up to the closing date. Any existing mortgage liens on the property must also be paid off at closing, with the remaining balance deducted from the sale proceeds.

Factors Influencing Cost Allocation

While there are customary allocations for closing costs, the actual distribution can be significantly influenced by several dynamic factors. Negotiation between the buyer and seller plays a substantial role in determining who ultimately pays for certain fees. Buyers can request seller concessions, where the seller agrees to cover a portion of the buyer’s closing costs. These concessions are often capped at a certain percentage of the loan amount, varying by loan type and down payment amount.

Market conditions also exert considerable influence on cost allocation. In a buyer’s market, where there are more homes for sale than interested buyers, sellers may be more inclined to offer concessions or pay a larger share of closing costs to attract buyers and facilitate a quicker sale. Conversely, in a seller’s market, characterized by high demand and limited inventory, sellers have greater leverage and are less likely to contribute to the buyer’s closing costs.

The type of loan a buyer obtains can also dictate who pays certain costs. For instance, some government-backed loans, like VA loans, have specific rules regarding which fees the buyer is permitted to pay, potentially shifting more responsibility to the seller or lender. Conventional loans also have limits on seller contributions to closing costs, typically ranging from 3% to 9% of the purchase price, depending on the buyer’s down payment percentage.

State and local customs also contribute to the variability of closing cost allocation. Practices regarding who pays for items like owner’s title insurance, specific escrow fees, or transfer taxes can differ significantly by region. Additionally, lenders may offer lender credits to buyers, which reduce upfront closing costs in exchange for a slightly higher interest rate over the life of the loan.