Who Usually Pays Closing Costs, Buyer or Seller?

Closing costs are a collection of fees and expenses that arise during the final stages of a real estate transaction. These costs are distinct from the property’s purchase price or the down payment. Their general purpose is to cover the administrative, legal, and lending services required to transfer property ownership from a seller to a buyer. Both parties typically incur these expenses, which are settled on the closing day.

Buyer’s Typical Closing Costs

Buyers often face a range of closing costs, primarily associated with securing a mortgage and ensuring the property is sound. Loan origination fees compensate the lender for processing and underwriting the mortgage, frequently amounting to about 1% of the loan value. An appraisal fee, typically ranging from $500 to over $1,000, covers the cost of a licensed appraiser determining the home’s market value. Lenders also charge a credit report fee to assess creditworthiness.

Buyers may also encounter discount points, which are prepaid interest to reduce the mortgage interest rate. One discount point generally equals 1% of the loan amount and can lower the interest rate by 0.125% to 0.25%. Beyond loan-related expenses, buyers typically pay for property inspections, including home and pest inspections, to assess the property’s condition. Survey fees may also be necessary to verify property lines.

An initial escrow deposit is commonly required at closing to fund an escrow account for future property taxes and homeowner’s insurance premiums. This deposit typically covers two to three months’ worth of these expenses. Buyers are also usually responsible for the lender’s title insurance policy, which protects the lender against future title claims. This policy’s cost can range from 0.1% to 2% of the home’s purchase price. Recording fees, charged by local government agencies, are paid by the buyer to officially register the new deed and mortgage, often averaging around $125.

Seller’s Typical Closing Costs

Sellers also incur significant costs during a real estate transaction, with real estate agent commissions often being their largest expense. These commissions typically range from 5% to 6% of the home’s sale price and are usually paid by the seller, covering both their agent’s and the buyer’s agent’s compensation. While terms are negotiable, sellers often facilitate payment of the buyer’s agent fee to encourage sales.

Another common cost for sellers is transfer taxes, state or local taxes on property ownership transfer. The amount of these taxes can vary widely based on location. Sellers frequently pay for the owner’s title insurance policy, which protects the buyer from prior title defects. This policy typically costs a few hundred dollars or between 0.5% and 1% of the purchase price.

Escrow or closing agent fees are generally split between the buyer and seller for managing the transaction. Sellers are also responsible for prorated property taxes and homeowner association (HOA) dues up to the closing date. Any existing mortgage must be paid off at closing, which may involve fees for clearing the lien.

Negotiable Closing Costs

While some closing costs are traditionally assigned to either the buyer or the seller, many can be negotiated between the parties. The ability to negotiate often depends on current market conditions, like a buyer’s or seller’s market. In a buyer’s market, sellers may be more inclined to offer concessions to attract a buyer.

Seller concessions are when the seller pays a portion of the buyer’s closing costs. This can include contributions towards loan points, appraisal fees, or other fees. Sellers might offer a flat closing cost credit or a percentage of the purchase price, such as 1% to 2%. The cost of a home warranty, which covers home system and appliance repairs or replacements, is another item that can be negotiated between the parties.

If a home inspection reveals repairs, the cost of these repairs can be negotiated as a credit at closing instead of the seller completing the work before sale. These negotiations are typically outlined in the purchase agreement, allowing flexibility in financial responsibility distribution.

Factors Affecting Closing Cost Distribution

Several factors influence the total amount of closing costs and how they are distributed between buyers and sellers. The geographical location of the property plays a significant role, as state and local regulations dictate certain fees and their traditional allocation. Transfer taxes vary considerably by jurisdiction.

The type of loan a buyer secures also impacts closing costs. Different loan programs, such as FHA, VA, or conventional loans, may have specific rules regarding permissible fees and limits on seller contributions towards buyer costs. Market conditions heavily influence negotiations; a market favoring buyers might lead to more seller concessions, while a seller’s market could result in buyers covering more of their own expenses.

The purchase price of the home is another determining factor, as many closing costs are calculated as a percentage of either the loan amount or the overall sale price. This means a higher purchase price will naturally lead to higher total closing costs, affecting buyer and seller outlays.