When you buy or sell a home, you naturally focus on the upfront costs like down payment and moving expenses. The seller considers repairs and preparing the house for showings. But there are more expenses to handle before the deal is done—enter closing costs.
So, who foots the bill for these closing costs? In short, both the seller and buyer have responsibilities, but the fees and amounts they pay differ.
If you’ve been through a real estate transaction, you might already be familiar with this. However, for first-time buyers, it can be a tad confusing.
That’s why we’ll delve deeper into closing costs, explaining who pays for what and addressing other questions you may have.
What are closing costs?
Closing costs encompass the fees involved in completing a home sale. The specific charges depend on the property’s location and type.
Now, let’s explore the typical closing costs linked to any real estate deal, along with who covers them. We’ll also clarify the methods of payment.
Buyers typically assume responsibility for various costs during the closing process, particularly those related to securing a home loan. It’s important to note that these closing costs are usually paid out of pocket by the buyers themselves.
Here are some common closing costs for buyers:
- Attorney costs: Real estate lawyers review contracts, titles, and assist in drafting closing documents. They usually charge hourly, but certain tasks may have a fixed fee.
- Home inspection fee: A buyer should always have a home inspection to assess the property’s condition. This will need to be paid for at closing.
- Appraisal fee: When obtaining a mortgage, the bank may require an appraisal to estimate the home’s value.
- Underwriting/credit reporting fees: The lender may impose fees for running a credit check and conducting other underwriting tasks.
- Prepaid interest: This covers the interest accumulated between the closing date and your first mortgage payment.
- Homeowners insurance: Lenders may demand a homeowners insurance policy, and the first premium payment is typically due at closing.
- Title search fee and insurance: Title insurance protects against future claims or issues with the property’s title. Lender’s title insurance is usually mandatory, while buyers can opt for owner’s title insurance for added protection.
When it comes to closing costs, sellers typically bear the responsibility for the following expenses. Unlike the buyer’s out-of-pocket costs, these are typically deducted from the home’s purchase price:
- Realtor commissions: Both the buyer’s and seller’s agents receive compensation for their involvement in the home sale. Sellers typically pay a percentage of the final purchase price to cover both commissions.
- Title fees: These costs pertain to the transfer of the property’s title from the seller to the buyer.
- Homeowners association fees: If the home is within a community with an HOA, any outstanding fees must be settled at closing.
- Property taxes: If there are any unpaid property taxes, the seller is responsible for bringing them up to date. They must pay the amount owed at the time of closing.
While the buyer’s list of fees may appear lengthier, they generally incur lower overall closing costs. However, it’s important to note that these closing costs exclude the down payment, which is a separate expense.
How much do closing costs add up to?
Closing costs can vary, and while there is no fixed amount, there is a general range for both buyers and sellers. Typically, sellers pay around 6% to 10% of the home’s purchase price at closing. Conversely, buyers typically pay between 2% and 5% of the sale price.
For instance, if you were purchasing a home for $250,000, your closing costs would likely range from $5,000 to $12,500. As the seller of the same property, you would probably face costs ranging from $15,000 to $25,000.
Unfortunately, buyers may not know the exact costs until a few days before closing. They should receive a closing or settlement statement about three business days prior to the closing date. This statement provides a detailed breakdown of all the costs. It gives buyers an idea of the total amount they’ll need to pay at the closing table.
Sellers, on the other hand, often have more advanced knowledge. Experienced agents will provide them with a seller net sheet, which itemizes the closing costs deducted from their gross profit. This allows sellers to have a fairly accurate estimate of the net proceeds they’ll receive from the sale.
The type of loan can affect the buyer’s costs
As mentioned earlier, buyers generally pay around 2% to 5% of a home’s purchase price in closing costs. However, this estimation is based on a conventional loan. The type of mortgage chosen by the buyer can significantly impact the closing costs.
When buyers make a small down payment on their new home, lenders may impose additional fees. This is used as a form of insurance against default or delinquency. These costs are typically due at closing.
Government-backed loans with low down payment requirements, such as VA and USDA loans, have one-time funding or upfront fees, respectively. FHA loans require borrowers to pay a mortgage insurance premium (MIP) equal to 1.75% of the total loan amount at closing. This is along with annual premiums in the future.
Buyers who borrow from a private lender with a down payment of less than 20% pay private mortgage insurance (PMI). Some lenders may require an upfront PMI payment at closing, where the entire year’s premium is paid as a lump sum.
Tips for buyers to save on closing costs
Closing costs can indeed accumulate rapidly, but there are strategies to reduce the overall amount buyers have to pay. Consider the following tips for saving on closing costs:
- Negotiate seller concessions: Buyers can discuss with sellers the possibility of having them pay some or all of the closing costs. This can be arranged instead of requesting home repairs or lowering the asking price. In certain states, sellers are typically responsible for providing title insurance policies for new owners. These concessions can be included in the initial purchase agreement or added later.
- Explore lender credits: Some lenders may be open to paying a portion or all of the buyer’s closing costs. In exchange, they might offer a slightly higher interest rate on the loan. While this can lead to increased costs over time, it can significantly reduce upfront expenses.
- Research closing cost assistance programs: There are programs available specifically designed for low-to-moderate income or first-time homebuyers. These programs provide grants or loans to assist in covering closing costs. It’s worth exploring such options to potentially alleviate the financial burden.
By employing these strategies, buyers can potentially minimize their closing costs and make the home purchasing process more affordable.
The bottom line
Regardless of whether you’re the buyer or seller, it’s important to anticipate and budget for closing costs. Both parties are typically responsible for a portion of these expenses, although the specific breakdown is negotiable.
Buyers should also consider the type of loan they choose, as it can impact the closing costs they’ll incur.
Understanding the significance of closing costs and implementing some strategic approaches can potentially help you save money during the home buying or selling journey.
If you’re looking to sell your home or purchase property in the Park City area, don’t hesitate to contact the Lawson Team. Our skilled team of real estate professionals is dedicated to assisting you throughout the entire process. Get in touch with us today and let’s work together to turn your real estate aspirations into reality!