Who Pays Closing Costs?

If you’re interested in buying a home, you’ve no doubt heard a lot about mortgages and down payments. Closing costs may get less attention, but they’re another factor that homebuyers need to be aware of and have a plan for. Understanding what closing costs are is fairly easy, but determining who pays closing costs can be tricky. What do you need to know about closing costs?

Who Pays Closing Costs?

What are closing costs? Who pays them? How much do they tend to run? Is there a way to avoid them? The answers to these questions depend on the area where you are buying property and the specifics of your situation.

What Are Closing Costs?

When you buy a home, the actual transfer of the property’s ownership takes place at a meeting called a closing. During this meeting, the purchase price is not the only money that will be changing hands. After all, a variety of professionals provided services needed to make the sale possible. As Home Closing 101 explains, closing costs are the charges and fees that are due when a home purchase is finalized at closing.

Who Pays Closing Costs?

The fees involved with real estate transactions vary depending on your location because different states and municipalities have different legal requirements. However, both buyers and sellers typically pay some closing costs. Who pays what? According to The Motley Fool, buyers may be required to pay the following costs:

• Appraisal fees
• Attorney fees
• Credit report fees
• Discount points
• Escrow deposits
• Inspection fees
• Lender’s title insurance
• Loan origination fees
• Recording fees
• Survey fees
• Title search fees
• Underwriting fees

What about sellers? The Motley Fool reports that they are generally responsible for the following closing costs:

• Commissions for both parties’ real estate agents
• Home warranty premiums
• Prorated taxes and homeowners’ association dues
• Recording fees
• Title insurance
• Transfer taxes

How Much Do Closing Costs Tend to Run?

When closing costs are traditionally split, a buyer can expect their closing costs to be somewhere around 3-5 percent of the property’s total purchase price, according to ValuePenguin. As for the seller, Realtor.com points out that their largest expense tends to be the real estate commissions, which generally come to around 6 percent of the property’s purchase price. Their remaining responsibilities typically add on about 1-3 percent.

Do Closing Costs Have to Be Paid?

As Money Crashers notes, closing costs do need to be paid, but there are ways that buyers can reduce their costs or avoid having to come up with the cash before closing:

• Get the seller to pay. Sellers will sometimes shoulder all or some of the buyer’s closing costs, especially if they are eager to sell. The initial negotiations should be part of the purchase offer.
• Negotiate fees. While some of the charges and fees due at closing are firm, others are negotiable. Talk with your lender to see where there might be some wiggle room.
• Close at the end of the month. Certain costs are prorated, so closing at the end of the month when there are fewer days remaining means a smaller fee will be due at the settlement table.
• Opt for a no-closing-cost loan. Sometimes called lender credit mortgages, these loans allow borrowers to skip out of paying closing costs at settlement and pay them over the course of their mortgage instead by accepting a loan with a higher interest rate.
• Roll closing costs into your mortgage. Adding your closing costs to the balance of your mortgage is another way to avoid paying them upfront. Here, the interest rate and terms generally remain the same, but the lender agrees to increase the loan’s principal to cover the closing costs.
• Use a VA loan. If you are eligible for a VA loan, using your housing benefit to purchase a home can help you save on closing costs because the U.S. Department of Veterans Affairs (VA) limits the closing costs on these loans.

_____

Although closing costs don’t make up a substantial portion of the total cost of buying a home, it’s important to keep them in mind as you determine how much you can afford to spend on a house.

If you have further questions or need help sorting through your options, the loan experts at PrimeLending Twin Cities are ready to assist you. We strive to deliver personalized service, professional guidance, and timely results as we help you find the right loan product to make your housing dreams a reality. Let us show you that the home loan process doesn’t have to be a hassle. Contact us today to learn more about our services or schedule a free consultation to discuss your financing needs.