Understanding Closing Costs:
Who Pays for What?
Closing on a home is an exciting yet complex process that involves several financial aspects, including closing costs. These costs are incurred by both the buyer and the seller, but who pays for what? In this blog, we’ll break down the common expenses associated with closing a home and explain which party typically covers them.
Common Closing Costs for Buyers
Down Payment: The down payment is the buyer’s responsibility and is usually the most substantial upfront cost. It’s a percentage of the home’s purchase price, typically ranging from 3% to 20% or more, depending on the type of mortgage and the lender’s requirements.
Loan Origination Fees: Buyers often pay loan origination fees to the lender for processing and underwriting the mortgage. These fees can vary but generally amount to around 1% of the loan amount.
Appraisal and Home Inspection Fees: Buyers usually pay for the home appraisal to ensure the property’s value matches the agreed-upon purchase price. Home inspection fees, which assess the property’s condition, are also typically borne by the buyer.
Credit Report Fees: Buyers may need to pay for a credit report to qualify for a mortgage.
Title Search and Title Insurance: The buyer typically pays for a title search to ensure there are no existing liens or issues with the property’s title. The buyer may also purchase title insurance to protect against future title disputes.
Escrow and Prepaid Items: Buyers often set up an escrow account to cover property taxes and homeowners insurance. They may also prepay some of these expenses at closing.
Recording Fees: Buyers are usually responsible for the recording fees to register the deed and other legal documents with the appropriate government office.
Attorney Fees: In some regions, buyers may hire an attorney to oversee the closing process, and this expense falls on the buyer.
Common Closing Costs for Sellers
Real Estate Agent Commissions: The seller typically pays the real estate agent commissions, which are typically around 5-6% of the final sale price. This cost is split between the listing agent and the buyer’s agent.
Title Transfer Fees: Sellers often pay for the title transfer fees to legally transfer ownership of the property to the buyer.
Outstanding Mortgage Balance: If the seller has an existing mortgage on the property, they will need to pay off the remaining balance, including any prepayment penalties if applicable, before transferring ownership.
Property Taxes: Sellers may owe prorated property taxes up to the closing date, which they will need to settle with the buyer.
Attorney Fees: In some cases, sellers may hire an attorney to help with the closing process, and this cost is their responsibility.
Home Warranty or Repairs: In some cases, sellers may offer a home warranty or make necessary repairs as part of the negotiation, although this isn’t a standard cost.
Escrow and Prepaid Items: If the seller has prepaid property taxes or homeowners insurance, they may receive a refund for the unused portion.
Homeowners Association Fees: If applicable, sellers need to settle any outstanding homeowners association fees or assessments.
It’s important to note that these costs can vary depending on the location, the specific transaction, and negotiations between the buyer and seller. Buyers and sellers can negotiate who pays for certain expenses as part of the purchase agreement.
In some cases, buyers may request that sellers contribute towards their closing costs, which can help reduce the upfront expenses for the buyer. This arrangement can be particularly common in buyers’ markets or when sellers are motivated to close the deal quickly.
In conclusion, understanding who pays for what in a home closing is crucial for both buyers and sellers. While there are common conventions, these costs can vary, and negotiations can impact the final distribution of expenses. Working with a knowledgeable real estate agent and consulting with a legal professional can help ensure a smooth closing process for all parties involved. Reach out to us today!