Who Pays the Closing Costs When Buying a Home?

Beyond the down payment, closing costs are significant financial expenses incurred at the end of a real estate transaction. These various fees can accumulate to a substantial amount, typically ranging between 2% and 5% of the home’s purchase price for buyers. Understanding these costs is important for budgeting and navigating the homebuying process.

Understanding Common Closing Costs

Closing costs cover services provided by various professionals involved in the transaction. An appraisal fee is charged by a licensed appraiser to determine the fair market value of the property, which is often required by lenders to assess the home’s value for the loan.

Inspection fees cover the cost of evaluating the property’s physical condition. This can include a general home inspection to check structural integrity, electrical, and plumbing systems, or specialized inspections for issues like termites or environmental hazards. These assessments help identify potential problems before the sale is finalized.

Loan origination fees are charged by the lender for processing the mortgage application, underwriting, and preparing necessary documents. These fees compensate the lender for creating the loan. They are a common part of the costs associated with securing financing.

Title insurance protects against financial loss from defects in the property’s title, such as unknown liens, encumbrances, or ownership disputes that existed before the purchase. There are two main types: an owner’s policy, which protects the homeowner, and a lender’s policy, which protects the lender’s interest in the property.

Escrow fees are paid to a neutral third party, often an escrow company, title company, or real estate attorney, who holds funds and documents until all conditions of the sale are met. Recording fees are charges imposed by a government agency, typically at the county level, to officially register the real estate transaction and make it a public record.

Attorney fees may be incurred for legal services related to the transaction, such as drafting or reviewing contracts, conducting title searches, or handling disputes. While some states may require an attorney for real estate closings, in others, hiring one is optional. Property taxes are often prorated at closing, meaning the buyer and seller each pay their share of the annual property taxes for the period they owned the home during the current tax year. Homeowner’s insurance, covering the first year’s premium, is also typically paid at closing.

Buyer’s Typical Responsibilities

Buyers typically assume responsibility for a significant portion of the closing costs, particularly those associated with securing their mortgage. One such expense is the appraisal fee, which buyers usually pay to ensure the home’s value supports the loan amount. This fee covers the professional assessment of the property’s market worth.

Loan origination fees are another common buyer expense, paid to the lender for processing the mortgage. Buyers also often cover the cost of the lender’s title insurance policy, which protects the financial institution’s investment in the property. Additionally, buyers frequently pay for various inspections, such as a general home inspection, to assess the property’s condition before finalizing the purchase.

Recording fees, which formalize the transfer of ownership with the local government, are commonly paid by the buyer. Buyers are also generally responsible for prepaid expenses like the first year’s premium for homeowner’s insurance. Prorated property taxes are also typically settled by the buyer at closing.

Seller’s Typical Responsibilities

Sellers also incur various closing costs, primarily associated with the sale and transfer of ownership. The largest expense for sellers often involves real estate agent commissions, which typically range from 5.5% to 6% of the home’s sale price and are paid to both the seller’s and buyer’s agents.

Transfer taxes, also known as documentary stamp taxes or deed taxes, are another expense commonly borne by sellers in many jurisdictions. These taxes are levied by state or local governments for the transfer of property ownership. Additionally, sellers frequently pay for the owner’s title insurance policy, which protects the buyer from any title defects that existed prior to the sale.

Escrow fees are often split between the buyer and seller, though customs can vary by location. Sellers might also be responsible for prorated property taxes up to the closing date. Costs related to satisfying any existing liens or judgments against the property, as well as outstanding homeowners association dues, are also the seller’s responsibility.

Negotiating Closing Cost Allocation

The allocation of closing costs between buyers and sellers is not always fixed and can be subject to negotiation. In certain market conditions, such as a buyer’s market where there are more homes for sale than interested buyers, buyers may have more leverage to request seller concessions.

Seller credits towards closing costs can be a valuable tool for buyers, especially if they have limited cash available beyond the down payment. Lenders may have limits on the amount of seller contributions allowed, often expressed as a percentage of the sales price, which can vary based on the loan type and the buyer’s down payment amount. For instance, for conventional loans, seller concessions can range from 3% to 9% depending on the down payment.

Conversely, in a seller’s market, sellers may be less inclined to offer concessions, as they have more interested buyers. The specific terms of who pays what are outlined in the purchase agreement. Both parties should clearly communicate their expectations and negotiate these terms to reach a mutually agreeable arrangement.

Tools for Estimating Closing Costs

Buyers receive key documents that provide detailed breakdowns of these expenses. The Loan Estimate (LE) is a standardized three-page form provided by lenders within three business days of a mortgage application. This document outlines the estimated interest rate, monthly payment, and total closing costs.

Later in the process, typically at least three business days before closing, buyers receive the Closing Disclosure (CD). This document provides the final, actual costs of the mortgage loan and other transaction expenses. It mirrors the format of the Loan Estimate.

Beyond these official documents, prospective buyers can utilize various resources for preliminary estimates. Real estate agents and lenders can provide general guidance based on local market practices. Online closing cost calculators also offer a way to get an initial estimate.