Who Pays Loan Closing Costs: Buyer or Seller?

When buying or selling a home, understanding the financial obligations beyond the purchase price is important. Loan-related closing costs are fees and expenses incurred during the real estate transaction, tied to securing or paying off a mortgage. These costs are a standard part of the process, ensuring the legal and financial transfer of property ownership. While divided between the buyer and seller, their allocation is subject to negotiation. Understanding these expenses helps both parties anticipate financial requirements and avoid unexpected charges at closing.

Buyer’s Loan-Related Closing Costs

Buyers bear the majority of loan-related closing costs, as these fees are associated with obtaining a mortgage. A loan origination fee is charged by the lender to cover administrative costs of processing, underwriting, and funding the loan. This fee ranges from 0.5% to 1.5% of the total loan amount. For a $300,000 loan, this could translate to $1,500 to $4,500.

The appraisal fee covers the cost of a professional home valuation to ensure its market value supports the loan amount. Appraisal fees range from $300 to $600. Lenders also charge a credit report fee to assess the buyer’s eligibility and determine the interest rate. This fee costs between $35 and $100.

Lender’s title insurance is a required cost for buyers, protecting the mortgage lender’s investment if a title dispute arises after closing. Buyers may also pay discount points, which are optional fees paid to the lender at closing to reduce the mortgage interest rate. Each discount point costs 1% of the loan amount and can lower the interest rate by 0.125% to 0.25%.

Prepaid interest covers the interest that accrues on the loan from the closing date until the end of the month. For example, if closing occurs mid-month, the buyer pays interest for the remaining days of that month. Buyers fund an escrow account at closing, setting aside initial deposits for future property taxes and homeowners insurance premiums.

Other fees buyers encounter include a flood certification fee and an underwriting fee. The underwriting fee covers the lender’s cost of evaluating the loan application and assessing the borrower’s creditworthiness. This fee can range from $300 to $900, or 0.5% to 2% of the loan amount.

Seller’s Loan-Related Closing Costs

Sellers incur loan-related closing costs associated with paying off their existing mortgage and transferring property. The most significant cost for a seller is the mortgage payoff, which includes the remaining principal balance and any accrued interest up to the closing date. This ensures a clear title is passed to the buyer, as the seller’s prior loan is satisfied.

A seller may face prepayment penalties on their existing mortgage, depending on loan agreement terms. These penalties compensate the lender for lost interest income if the loan is paid off early. Sellers are also responsible for recording fees to document the release or satisfaction of their old mortgage.

Fees related to a homeowners association (HOA) or other property liens are also the seller’s responsibility at closing. This includes any outstanding HOA dues or special assessments that must be settled before ownership transfer. Transfer taxes are levied on the seller by state or local governments.

Negotiating Loan-Related Closing Costs

While standard allocations exist for closing costs, many loan-related expenses are negotiable between the buyer and seller. Buyers seek seller concessions, also known as seller credits, to help cover some of their closing costs. This can reduce the amount of cash buyers need at closing.

Lenders impose limits on the amount sellers can contribute, which vary by loan type and buyer’s down payment. For conventional loans, seller contributions range from 3% to 9% of the purchase price, with higher percentages for larger down payments. FHA and USDA loans permit seller contributions up to 6% of the sales price, while VA loans allow up to 4% in concessions, plus specific closing costs.

Sellers may agree to cover buyer costs to make their property more appealing or to facilitate a quicker sale, especially in a buyer’s market. In a seller’s market, buyers may have less leverage for such concessions. Any agreement on cost allocation must be written into the purchase agreement to be legally binding.

Understanding the Closing Disclosure

The Closing Disclosure (CD) is a five-page document provided by the lender that details all final transaction costs, including loan-related expenses, for both the buyer and seller. It outlines the loan terms, projected payments, and the specific closing costs involved in the transaction.

Buyers should pay close attention to the “Loan Costs” and “Other Costs” sections on the CD, which itemize fees such as origination charges, appraisal fees, and title insurance. The CD also provides a detailed breakdown of prepaid items, like property taxes and homeowner’s insurance premiums.

Buyers should compare the Closing Disclosure with the initial Loan Estimate (LE) received earlier. The LE provides an estimate of costs, while the CD contains the final, confirmed figures. Significant discrepancies warrant immediate inquiry with the lender. The law mandates a three-business-day review period for the buyer before the scheduled closing date.

This mandatory review period allows buyers to examine every line item, ask questions, and ensure accuracy. The lender is responsible for providing the CD to the buyer. Reviewing this document ensures a transparent and successful real estate closing.