Many clients are shocked when they learn that, on top of everything else, they must pay closing costs for their real estate transaction to close. Closing costs are no small fee either. Typically closing costs can range from 3-6% of the home’s purchase price.
So, what do closing costs cover, and who is responsible for paying them? Let’s break it down:
Who Pays What?
Both the buyer and seller have closing costs to pay before the transaction can close. Some closing costs can be negotiated. However, as a rule, these are some of the fees each party to the transaction covers:
Buyers:
- Escrow fees
- FHA mortgage insurance
- HOA transfer fees
- Homeowners insurance
- Lender’s fees
- Lender’s title insurance
- Private mortgage insurance
- Property taxes
- Other loan-specific fees
Seller:
- Escrow fees
- HOA fees
- Prorated property taxes
- Real estate commissions
- Recording and transfer fees
- Title insurance
As you can see, that’s a lot of fees! Now, let’s take a quick look at some of the larger fees included in the list.
Lender’s Fees
The bulk of a buyer’s closing costs will go to the lender. Your lender works hard throughout the transaction to get your loan approved, and without them, you wouldn’t be able to purchase a home.
At closing, you’ll be responsible for covering the cost of the appraisal, which was performed to verify the value of the property you are purchasing. You’ll also have to pay an application fee, underwriting fee, credit report fee, and loan origination fee.
The cost of each of these charges varies based on your lender. It doesn’t hurt to shop around to see since some lenders charge less than others. If you find a lender you like, ask if they’ll make a competitor’s fees – you never know unless you ask!
Escrow Fees
The escrow company does the vital task of verifying the location and title information of the property you are purchasing. Plus, they act as a neutral third party if the transaction hits any bumps in the road.
Title Insurance
Title insurance protects both parties from unexpected issues that could pop up related to the title of the home. Situations like a purchase after an illegal foreclosure sale or a contractor who said they performed work on the house, never received payment, and placed a lien on the property are covered under title insurance. The buyer’s mortgage lender will also require title insurance.
Typically, the buyer cover’s the lender’s title insurance, and the seller will cover the new title insurance policy that will be issued to the buyer once they take ownership.
What Are Seller Concessions?
As we mentioned, some of the closing costs are negotiable. If you’re the buyer, you can ask for seller concessions when you make your offer. This can either be requested in the form of a dollar amount or percentage.
Seller concessions will cover some of the buyer’s closing costs and can be a huge savings! Now that the market is shifting into more neutral territory, it will become more customary for a seller to help cover some of the buyer’s closing costs.
Depending on the buyer’s loan type, a seller can only cover up to a certain percentage of the closing costs. Make sure your Realtor and lender are in communication so that you aren’t expecting more assistance than is allowed.
Have more questions? We’re here to help!