Who pays closing costs?

In any real estate transaction, it’s easy to focus on the immediate expenses, such as the purchase price for buyers and the costs of repairs and renovations for sellers. However, it’s crucial to remember the additional expenses that come into play before the deal is finalized—closing costs. Both buyers and sellers are responsible for certain closing costs, and these can vary based on factors like the home’s price, location, and the type of mortgage involved. While some costs are traditionally borne by one party or the other, many aspects can be negotiated.

Understanding Closing Costs

There is no fixed figure for closing costs, but as a general guideline, sellers typically cover 6% to 10% of the home’s purchase price, while buyers pay around 2% to 5%. To put this into perspective, for a home selling at the national median price of $410,200 in June 2023, a buyer’s closing costs might range from $8,204 to $20,500, while a seller’s costs could range from $24,612 to $41,020.

The Breakdown of Costs

Buyers and sellers each have their own set of closing costs. For buyers, these may include:

1. Attorney fees: Covering legal services related to reviewing documents and contracts.
2. Home inspection: Assessing the property’s condition.
3. Appraisal: Determining the home’s value for mortgage purposes.
4. Underwriting/credit reporting: Lender charges for loan processing.
5. Prepaid interest: Interest accruing from closing to the first mortgage payment.
6. Homeowners insurance: Usually required by lenders, with the first premium due at closing.
7. Title costs: Providing insurance against future title claims.

Sellers, on the other hand, may incur costs such as:

1. Realtor commissions: Covering both the seller’s and buyer’s agents.
2. Title fees: Associated with transferring the title to the new owner.
3. Homeowners association fees: If applicable, any outstanding dues.
4. Property taxes: Bringing unpaid taxes up to date.

Negotiating Closing Costs

While some costs are generally allocated to buyers or sellers, there can be exceptions based on location and market conditions. For example, in certain areas of Florida, sellers may cover the cost of an owner’s title insurance policy. In competitive markets, buyers might need to be more conservative with their concession requests.

Closing Costs and Loan Types

The type of mortgage you choose can also impact closing costs. For buyers with a conventional mortgage, costs typically range from 2% to 5% of the home’s purchase price. Buyers with smaller down payments might face additional charges to protect lenders.

Saving on Closing Costs

Both buyers and sellers have options for reducing closing costs. Buyers can negotiate for seller concessions and explore assistance programs. Sellers should consider negotiating their real estate agent’s commission, which can lead to significant savings.

Conclusion

Closing costs are a standard part of any real estate transaction. Understanding what they entail and how they can be managed is crucial for both buyers and sellers. By being aware of potential costs and exploring negotiation options, you can navigate the closing process with confidence. Remember, seeking guidance from a knowledgeable local real estate agent can provide invaluable support throughout the entire process.