Who Typically Pays Closing Costs: Buyer or Seller?

Real estate transactions involve more than just the property’s purchase price. Additional fees, known as closing costs, are due at the conclusion of the sale. These costs are a significant financial consideration for both the buyer and the seller, impacting the total funds exchanged to complete the transfer of property ownership. Understanding these expenses is important for anyone involved in a real estate deal.

Understanding Closing Costs

Closing costs are fees and charges necessary to finalize a real estate transaction and legally transfer property ownership. These expenses are paid to various parties involved in the process. General categories of closing costs include lender fees, title fees, government fees, and real estate agent commissions. These costs facilitate steps such as securing financing, verifying property ownership, and officially recording the transaction.

The specific amount of closing costs can vary widely, ranging from 2% to 5% of the total loan amount for buyers, and often higher for sellers. Factors influencing these costs include the property’s location, its value, and the type of loan involved. Both buyers and sellers receive a detailed disclosure of these costs, often three days before closing, providing transparency in the financial aspects of the transaction.

Buyer’s Typical Closing Costs

Buyers bear a substantial portion of closing costs, primarily those associated with securing a mortgage loan. Loan origination fees, which compensate the lender for processing the loan, range from 0.5% to 1.5% of the total loan amount. An appraisal fee, between $300 and $700, is paid for a licensed appraiser to determine the home’s market value, a requirement for most lenders. Buyers also pay a credit report fee, $30 to $70, for their credit history.

Lender’s title insurance, which protects the mortgage lender from claims against the property’s title, is another buyer expense. This policy’s cost can range from 0.1% to 2% of the home’s purchase price, varying by state and loan amount. Recording fees, paid to a local government agency to register the real estate transaction, are a smaller expense, often around $125. Buyers also pay prepaid expenses, such as initial deposits for property taxes and homeowner’s insurance premiums held in an escrow account.

Seller’s Typical Closing Costs

Sellers incur various closing costs, often deducted directly from the sale proceeds. The largest expense for sellers is real estate agent commissions, ranging from 5% to 6% of the home’s sale price. This commission is split between the listing agent and the buyer’s agent. Sellers may also pay for the owner’s title insurance policy, which protects the buyer from title defects. This cost falls between 0.5% and 1% of the home’s sale price.

Transfer taxes, charged by state or local governments for the transfer of property ownership, are another seller cost. These taxes vary significantly by location and can be a percentage of the sale price. Attorney fees, if used, range from $500 to $2,000 for residential transactions, covering legal document preparation and closing representation. Any outstanding property taxes or homeowners association (HOA) dues are prorated and settled by the seller at closing.

Negotiating Closing Costs

While certain closing costs are assigned to either the buyer or the seller, many are open to negotiation. The ability to negotiate these costs is influenced by current real estate market conditions. In a buyer’s market, with more homes for sale than interested buyers, buyers have more leverage to request that the seller cover a portion of their closing costs. Conversely, in a seller’s market, where demand is high, sellers are less inclined to offer concessions.

Common negotiation points include the seller contributing a flat amount or a percentage towards the buyer’s closing costs. These contributions are reflected as seller credits on the closing disclosure. Loan programs, such as FHA, VA, and conventional loans, have limits on how much a seller can contribute, ranging from 3% to 6% of the purchase price, depending on the loan type and down payment amount. Buyers can also shop around for service providers, such as title companies or appraisers, to find more competitive rates for negotiable fees.