Closings Costs - Who Pays for What?

Melanie 

Ortiz Reyes

Content Specialist

When buying or selling a home, closing costs are a critical aspect of the transaction that can significantly affect your financial planning. Understanding who pays for what in closing costs can help both buyers and sellers navigate the process more smoothly. 

What Are Closing Costs?
 

Closing costs are the fees and expenses associated with finalizing a real estate transaction. These costs can include loan origination fees, appraisal fees, title insurance, taxes, and more. On average, closing costs range from 2% to 5% of the home's purchase price. It's important to budget for these costs to avoid any last-minute surprises.

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Breakdown of Common Closing Costs
 

Here’s a detailed look at the most common closing costs and who typically pays for them:
 

1.      Loan Origination Fees

• What It Is: Charged by the lender for processing the mortgage application.
• Who Pays: Buyer
• Details: This fee usually amounts to about 1% of the loan amount and covers the lender’s administrative costs.
   

2.      Appraisal Fees
 

• What It Is: Payment for a professional appraisal to determine the home's market value.
• Who Pays: Buyer
• Details: Appraisal fees typically range from $300 to $500. Lenders require appraisals to ensure the loan amount does not exceed the property’s value.
   

3.      Title Insurance and Title Search Fees
 

• What It Is: Title insurance protects against potential disputes over property ownership, while the title search verifies the property's legal ownership.
• Who Pays: Both (buyer typically pays for lender’s title insurance, seller for owner’s title insurance)
• Details: Title insurance costs can range from $500 to $1,000, depending on the home’s value and location. The seller usually pays for the title search and the owner’s title insurance policy.
   

4.      Home Inspection Fees
 

• What It Is: Fee for a professional inspection of the home's condition.
• Who Pays: Buyer
• Details: This cost ranges from $300 to $500. Home inspections help buyers identify any potential issues with the property before purchase.
   

5.      Property Taxes
 

• What It Is: Taxes levied by local governments based on the property’s value.
• Who Pays: Both (pro-rated based on closing date)
• Details: Sellers pay property taxes up to the closing date, and buyers cover the taxes for the remainder of the year.
   

6.      Homeowners Insurance
 

• What It Is: Insurance that covers damage to the home and protects against liability claims.
• Who Pays: Buyer
• Details: Lenders require buyers to prepay the first year’s homeowners insurance premium at closing.
   

7.      Private Mortgage Insurance (PMI)
 

• What It Is: Insurance required if the buyer’s down payment is less than 20%.
• Who Pays: Buyer
• Details: PMI premiums can be included in the monthly mortgage payment or paid upfront at closing.
   

8.      Recording Fees
 

• What It Is: Fees charged by the local government to record the sale of the property.
• Who Pays: Both (but often the buyer)
• Details: These fees vary by location and typically range from $25 to $250.
   

9.      Transfer Taxes
 

• What It Is: Taxes imposed by the state, county, or municipality on the transfer of property.
• Who Pays: Both (but often the seller)
• Details: The amount varies widely depending on the location and can range from a few hundred to several thousand dollars.
   

10.  Attorney Fees
 

• What It Is: Fees for legal services provided during the transaction.
• Who Pays: Both (depends on local customs and agreements)
• Details: In some states, attorney involvement is mandatory, and fees can range from $500 to $1,500.
   

11.  Escrow Fees
 

• What It Is: Fees paid to the escrow company for handling the closing.
• Who Pays: Both (split between buyer and seller)
• Details: Escrow fees typically range from $500 to $2,000, depending on the complexity of the transaction.

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Negotiating Closing Costs
 

Closing costs are not set in stone, and there are ways to negotiate who pays for what. Here are some strategies:
 

1.      Seller Concessions: In a buyer’s market, you can ask the seller to cover some or all of the closing costs. Sellers might agree to this to make their property more attractive to potential buyers.

2.      Lender Credits: Some lenders offer credits to cover closing costs in exchange for a higher interest rate on the loan. This can reduce your upfront costs, though it will increase your monthly mortgage payments.

3.      Shop Around for Services: Comparing fees for services like appraisals, inspections, and title insurance can save you money. Choose providers that offer the best value.

4.      Include in the Purchase Agreement: Negotiate the division of closing costs in the purchase agreement. Clearly outlining who is responsible for each cost can prevent disputes at closing.

5.      Closing Cost Assistance Programs: Look for local or state programs that offer assistance with closing costs. These programs can provide grants or low-interest loans to help cover expenses.
 

Understanding who pays for what in closing costs is crucial for both buyers and sellers. By familiarizing yourself with the typical expenses and negotiating where possible, you can better manage the financial aspects of your real estate transaction. Planning and budgeting for closing costs will help ensure a smoother and more predictable home buying or selling experience.
 

Closing costs, while sometimes daunting, are a necessary part of the home buying and selling process. By knowing what to expect and who is typically responsible for each cost, you can approach your transaction with confidence and clarity.
 

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