Who Pays for Closing Costs When Buying a House?

Closing costs are fees and expenses incurred by both buyers and sellers during a real estate transaction. These charges are separate from the property’s purchase price and must be settled at closing. Understanding these financial obligations is important, as they represent a significant additional expense that impacts the transaction.

Buyer’s Typical Closing Costs

When purchasing a home, buyers encounter a range of closing costs, many associated with obtaining a mortgage. These expenses are paid to various third parties for services rendered during the loan application and property transfer processes.

Lender-related fees are a significant portion of a buyer’s closing expenses. A loan origination fee, often 0.5% to 1% of the loan amount, covers the lender’s administrative costs for processing the mortgage. Underwriting fees, sometimes included in the origination fee, compensate the lender for evaluating the borrower’s creditworthiness. Buyers might also pay discount points, where one point equals 1% of the loan amount, to reduce their interest rate.

Additional lender costs include credit report fees, typically $30 to $150. An appraisal fee, usually $300 to $700, ensures the property’s value supports the loan amount, protecting the lender’s investment. These fees are generally due at or before closing.

Title and escrow fees are components of a buyer’s closing costs. Lender’s title insurance, a mandatory policy protecting the lender against claims to the property’s title, usually costs between 0.1% and 2% of the home purchase price or loan amount. Owner’s title insurance is optional for the buyer but protects the buyer’s equity; its cost is often negotiated, with buyers typically paying a portion, around 0.4% to 1% of the purchase price.

Escrow fees, which compensate the escrow agent for managing the closing process and distributing funds, typically range from 0.2% to 2% of the home’s sale price. These fees can be split between the buyer and seller, depending on local custom and negotiation. Recording fees, generally $50 to $250, are paid to the local government to record the transfer of property ownership and the mortgage lien.

Buyers incur expenses for various inspections. A home inspection typically costs $300 to $500 to assess the property’s condition. A pest inspection, often $50 to $200, checks for infestations. A survey fee, ranging from $400 to $2,300, may be required by the lender to verify property lines and ensure no encroachments exist.

Prepaid expenses are another category of buyer closing costs, involving payments for future obligations. Prorated property taxes cover the buyer’s share from the closing date through the end of the current tax period. The first year’s homeowner’s insurance premium, typically $1,000 to $2,000 annually, is often paid upfront. If the property is part of a homeowners association (HOA), prorated HOA dues for the current period are also collected at closing. These items establish an escrow account for ongoing property-related expenses.

Seller’s Typical Closing Costs

Selling a home involves its own set of financial obligations for the seller, distinct from the buyer’s expenses. These costs are often deducted from the sale proceeds at closing, reducing the net amount the seller receives.

Real estate agent commissions frequently represent the largest single expense for a seller, typically ranging from 5% to 6% of the home’s sale price. This commission is generally split between the buyer’s agent and the seller’s agent, compensating them for marketing the property and facilitating the sale.

Transfer taxes, also known as stamp or deed taxes, are another common seller expense. These taxes are levied by state or local governments on the transfer of real property ownership and can vary significantly by jurisdiction. For instance, some areas might charge a few dollars per $100, $500, or $1,000 of the property’s value. While negotiable, they are traditionally a seller’s cost.

Title and escrow fees also apply to sellers, though their portion differs from the buyer’s. In many regions, the seller is responsible for the owner’s title insurance policy, which protects the buyer from future claims against the property’s title. This cost typically ranges from 0.5% to 1% of the sales price. Sellers also pay a portion of the escrow fees, often 0.2% to 0.5% of the sales price, for the escrow agent’s services.

A significant financial consideration for sellers is the outstanding mortgage payoff. This involves paying off the remaining balance of any existing mortgages or home equity lines of credit on the property. The payoff includes the principal balance, accrued interest up to the closing date, and any potential prepayment penalties the lender might impose. While less common today, such penalties could be 1% to 2% of the remaining loan balance, or a certain number of months’ interest.

Sellers are responsible for prorated property taxes and homeowners association (HOA) dues up to the closing date. Proration ensures each party pays for expenses only for the period they owned the property. If property taxes or HOA dues have been paid in advance by the seller for a period extending beyond closing, the buyer typically reimburses the seller. Conversely, if these items are outstanding, the seller’s share is deducted from the sale proceeds.

Strategies for Allocating Closing Costs

While certain closing costs are typically assigned to either the buyer or the seller, these allocations are not always fixed and can be subject to negotiation as part of the purchase agreement. Market conditions frequently influence the leverage each party has, with a buyer’s market often allowing buyers to request more concessions, and a seller’s market favoring sellers.

Seller concessions are a common strategy where a seller agrees to pay a portion of the buyer’s closing costs. This can be a fixed dollar amount or a percentage of the loan amount, with limits varying by loan type and buyer’s down payment. For instance, conventional loans may allow 3% to 9% in concessions depending on the down payment, FHA loans cap them at 6% of the purchase price, and VA loans allow up to 4% in specific concessions. Sellers might offer concessions to make a property more attractive, facilitate a quicker sale, or address minor repair issues without directly reducing the sales price.

Lender credits offer another way for buyers to reduce upfront closing costs. Instead of paying discount points to lower their interest rate, a buyer can opt for a slightly higher interest rate in exchange for a credit from the lender towards closing expenses. This strategy can significantly reduce the cash needed at closing, though it results in higher monthly mortgage payments and greater total interest paid over the loan’s life. Buyers must weigh immediate savings against long-term cost implications.

The terms of who pays what closing costs are established within the purchase agreement. This legally binding document outlines all negotiated aspects of the transaction, including any agreed-upon seller concessions or specific fee allocations. Both parties must review these details carefully before signing, as altering these financial responsibilities becomes much more challenging once the agreement is executed.

Negotiation leverage plays a significant role in determining the final allocation of closing costs. In a competitive seller’s market, buyers may be less likely to secure seller concessions. In a buyer’s market, sellers might be more willing to contribute to closing costs to entice offers. Real estate agents often guide clients through these negotiations, advising on reasonable requests based on local market trends and property specifics.

Some real estate agents may offer a portion of their commission back to their client, known as an agent rebate, which can be applied towards closing costs. The legality and specific rules governing agent rebates vary by state, with most states allowing them, but a handful prohibiting them. If permitted, these rebates can provide an additional source of funds to offset closing expenses, reducing the financial burden on the buyer.