Who Pays Closing Costs When Buying a House?

When acquiring a home, individuals encounter various financial obligations beyond the purchase price. These additional expenses, known as closing costs, represent the fees and charges due at the culmination of a real estate transaction.

Understanding Closing Costs

Closing costs encompass a range of expenses associated with finalizing a mortgage loan and transferring property ownership. These fees are collected by various parties involved in the transaction, including lenders, title companies, and government entities.

Common categories of closing costs include lender fees, which are charges for processing the loan. There are also title and escrow fees, covering services related to ensuring clear property ownership and managing the transaction funds. Government recording fees are collected for officially documenting the change in ownership, and prepaid expenses cover initial property-related outlays.

Lender fees include loan origination fees for processing the mortgage, appraisal fees for valuing the property, credit report fees, and underwriting fees for assessing the loan application. Title and escrow fees involve expenses such as title insurance premiums, which protect against future claims on the property’s title, and escrow fees for managing documents and funds.

Government recording fees are paid to the local county or city to record the new deed and mortgage. Prepaid expenses cover future ongoing costs of homeownership, such as initial deposits for property taxes and homeowner’s insurance premiums, placed into an escrow account for future payments.

Buyer’s Typical Closing Cost Responsibilities

Buyers typically bear responsibility for a substantial portion of the closing costs, particularly those related to securing a mortgage loan. These costs generally range from 2% to 5% of the home’s purchase price. For instance, on a $300,000 home, these costs could range from $6,000 to $15,000.

Loan origination fees, which can be around 0.5% to 2% of the loan amount, are commonly paid by the buyer to cover the lender’s administrative costs. Appraisal fees, typically ranging from $400 to $700, are also a buyer’s expense to determine the home’s market value. Additionally, buyers usually pay for their credit report, which costs between $30 and $70.

Other costs frequently assigned to the buyer include survey fees, which verify property lines and can be between $300 and $600. Home inspection fees, averaging around $343 but ranging from $200 to $500, are also a buyer’s responsibility and cover an assessment of the home’s condition. Lender’s title insurance, which protects the mortgage lender from title defects, is a required expense for buyers taking out a loan.

Buyers are also responsible for recording fees. Prepaid expenses, such as homeowner’s insurance for the first year and several months of property taxes, are also commonly paid by the buyer at closing.

Seller’s Typical Closing Cost Responsibilities

Sellers also incur various closing costs, often higher than those for buyers. The largest component of a seller’s costs often comes from real estate agent commissions.

Real estate agent commissions, typically between 5% and 6% of the home’s sale price, are traditionally paid by the seller. This amount is usually split between the listing agent and the buyer’s agent.

Owner’s title insurance, which protects the buyer’s equity against title defects, is another common seller expense. Transfer taxes, also known as documentary stamp taxes or excise stamps, are fees imposed by state or local governments on the transfer of real property. These taxes can vary, with some areas charging around 0.1% to 2% of the sale price.

Sellers may also pay attorney fees if they choose to hire legal representation for the transaction, with costs typically ranging from $500 to $1,800. Additionally, sellers are responsible for prorated property taxes up to the closing date. Any outstanding homeowner’s association (HOA) fees or estoppel letter fees, which can range from $100 to $500, are also typically settled by the seller.

Influencing and Negotiating Payment

The allocation of closing costs between buyers and sellers is not always fixed and can be influenced by several factors, including prevailing market conditions. In a buyer’s market, where there are more homes for sale than active buyers, buyers often have greater leverage to negotiate for the seller to cover some of their closing costs. Conversely, in a seller’s market, where demand outstrips supply, sellers are less inclined to offer such concessions.

The type of loan a buyer secures also impacts how closing costs can be negotiated. For Federal Housing Administration (FHA) loans, sellers can contribute up to 6% of the sales price toward the buyer’s closing costs and prepaid expenses. With Veterans Affairs (VA) loans, sellers can pay all of the buyer’s loan-related closing costs, and additional seller concessions are limited to 4% of the loan amount, which can cover items like the VA funding fee or prepaid taxes.

Conventional loans also have specific limits on seller contributions, depending on the buyer’s down payment amount. For down payments less than 10%, sellers can contribute up to 3% of the purchase price. If the down payment is between 10% and 24%, the limit increases to 6%, and for down payments of 25% or more, sellers may contribute up to 9%.

Negotiating closing costs is a common strategy within the purchase agreement. Buyers might request seller concessions, where the seller agrees to pay a specific dollar amount or percentage of the buyer’s closing costs. Alternatively, buyers may negotiate a lower sales price in exchange for covering their own closing costs, or they might request that the seller address certain repairs instead of offering a financial concession.