Closing Costs: An Overview Of What Are They And Who Pays Them

Who pays closing costs and what are they, exactly?

You may know a "fuzzy" definition of closing costs when you start the home buying journey, but you’ll want concrete answers when your home search starts getting more serious. It's a smart move – you want to fully understand your all-in costs before you sign on the dotted line.

We've got you covered. We'll walk through a general overview of closing costs and how much you might owe on closing day.

What Are Closing Costs?

What are closing costs as part of the home closing process, exactly? Closing costs are the fees that both buyers and sellers pay prior to wrapping up a real estate transaction. These fees, which are paid on closing day, will add to the property purchase price.

Closing costs are made up of a bunch of smaller fees such as appraisal fees, title insurance and origination fees.

How Much Are Closing Costs Typically?

Closing costs typically range from 3% – 6% of the loan amount. As the buyer, you'll receive a Closing Disclosure which will list the anticipated costs and fees due at closing. Home buyers and sellers may pay closing costs, but the seller faces limitations on the percentage of the mortgage they can pay, depending on loan type, occupancy and down payment.

The most common type of home loan, conventional loans are those not backed by the federal government. Sellers can contribute a certain amount up to the amount of down payment paid for primary residences. Here are the maximum seller concession amounts for conventional loans:

• 25% (or more) down: 9%
• 10% – 24.99% down: 6%
• Less than 10% down: 3%

For secondary residences, here are the percentages sellers can pay in seller concessions:

• 25% or more down: 9%
• 10% – 24.99% down: 6%

For investment properties:

• Any down payment: 2%

FHA loans are government loans backed by the Federal Housing Administration (FHA), under the Department of Housing and Urban Development (HUD). They are great if you want to buy a house with a lower credit score or lower financial qualifications. Seller concessions max out at 6% based on the lesser of the appraised value and purchase price.

VA loans are government loans backed by the U.S. Department of Veterans Affairs. Up to 4% of the appraised value or purchase price (based on the lower amount) can go toward escrow accounts, which are prepaid taxes and homeowners insurance. The seller can contribute up to 4% toward the VA funding fee. However, an unlimited amount of money can go toward the following:

• Discount points
• Origination fees
• Survey costs
• Appraisal fees
• Credit report fees

How To Calculate Closing Costs

You can get a barebones estimate of your closing costs by multiplying the loan amount by 3 – 6%. For example, let's say your loan amount is $240,000. In this case, you'll change both percentages to a decimal and multiply the loan amount by each:

$240,000 x 0.03 = $7,200

$240,000 x 0.06 = $14,400

In other words, the closing costs will land somewhere between $7,200 and $14,400.

You may find a closing cost calculator online that may ask for more comprehensive details, such as the Freddie Mac closing costs calculator. This may get you closer to your actual closing costs before you get access to your Closing Disclosure, which lists the costs exactly.

Closing Costs At A Glance

Let's take a look at a quick overview of your closing costs and who typically pays for them.

Types Of Fees Included In Closing Costs

Let's take a look at the definition of some common closing costs so you know what to expect at the closing table.

Application Fee

The application fee is the fee that lenders charge to process your loan request. You must pay this fee no matter what, even if you are not granted the loan for which you apply.

Appraisal

The appraisal fee covers the cost for a third-party appraiser to evaluate the property and determine its fair market value.

Attorney Fees

Attorney fees are required in some states. This fee will pay for the attorney to be present at closing.

Closing Fee

The closing fee goes to the escrow company or attorney who conducts your closing meeting. The costs may be higher if an attorney is required to attend the closing meeting based on your state laws.

Courier Fee

When you need to transport mortgage documents, you'll pay a courier fee to handle it.

Credit Report Fee

The credit report fee in closing costs pays for the lender pulling your credit report. The lender uses your credit report to determine your eligibility for a home loan.

Discount Points

Mortgage discount points reduce the interest rate on a mortgage loan. You can "buy" points to save money. Each point costs 1% of the loan amount.

Escrow Funds

Escrow funds are funds held by a neutral third party in the process of purchasing a home purchase process. An escrow account might hold a buyer's earnest money deposit until a home sale finalizes or it might hold your property insurance and taxes throughout the year.

FHA Mortgage Insurance Premium

The FHA mortgage insurance premium (MIP) fee is paid in closing costs for FHA loans. You must make an upfront MIP of 1.75% of your loan amount and then make continuous payments for the life of the loan. They range from 0.15% – 0.75% of the loan principal and are part of your monthly mortgage payment.

Homeowners Association Transfer Fee

The homeowners association transfer fee pays for the transfer of ownership records from the seller to a buyer. The transfer fee is usually the seller's responsibility to pay.

Homeowners Insurance

Homeowners insurance pays for protecting your home in case it gets damaged. Many lenders require you to pay for a year of homeowners insurance fees at closing.

Origination Fee

The loan origination fee pays for processing and underwriting your loan – the part that the lender does behind the scenes.

Lender’s Title Insurance

Lender’s title insurance protects the lender (not the buyer) from a claim on the property. In other words, if it turns out that a lien is uncovered on the property, the lender's investment is protected.

Owner’s Title Insurance

Owner’s title insurance protects the buyer if a lien or claim is found on the property later on. If you don't have owner's title insurance, you could lose your investment and still owe money on the mortgage. It lasts as long as you own the home.

Home Inspection Fees

Home inspection fees pay for the home inspection, which checks the home for soundness. It can help circumvent any problems ahead of time. Take a look at home inspection costs to get a breakdown of all the different types of home inspections and costs.

Prepaid Interest

Some lenders require you to prepay the interest on your loan that accrues between the time that you close on your loan and the first date of your mortgage payment. The cost will vary depending on your particular situation.

Private Mortgage Insurance

You must pay private mortgage insurance (PMI) if you don't make at least a 20% down payment on your loan. The cost of PMI gets rolled into your monthly mortgage payments.

Property Tax

You pay property taxes to your town or municipality to pay for things like roads, schools and street repair. The cost of property taxes depends on the value of your home and your area. Your lender may require you to pay up to a year's worth of property taxes at closing.

Rate Lock Fee

A mortgage rate lock locks the interest rate on your loan while you go through the home buying process. Borrowers usually pay a rate lock fee. Typically, a rate lock lasts from 30 to 60 days but can go up to 120 days.

Real Estate Commissions

Real estate commissions typically cost a small percentage of the home sale price or a flat fee and go to the real estate agent who helps the buyer and seller through the home buying process.

Recording Fee

The recording fee goes to your local municipality to update land ownership fees. The cost depends on the fees in your local area.

Survey Fee

Sometimes you have to pay for a land survey, which means that a professional maps the shape and boundaries of the land you plan to build on. The survey fee varies depending on your local area.

Tax Monitoring And Tax Status Research Fees

Tax monitoring and tax status research fees cover the costs of checking to see whether the property taxes levied to you are correct. Costs vary depending on your local area.

Title Search Fee

Title searches look for claims on a particular property you plan to purchase. For example, you may find that someone has already laid claim to a property, such as a distant relative of the person who is selling the property.

Transfer Tax

Transfer taxes update and transfer your home's title to you, the buyer.

Underwriting Fees

The underwriting fee pays for mortgage underwriting – the legwork that the lender does to look at all of your application materials. The underwriting team typically does the final work to approve you for a mortgage loan.

FHA, VA, USDA Funding Fees

You'll pay FHA, USDA or VA funding fees if you get these types of loans. The funding fees vary depending on the type of loan you get and the amount of down payment you put down.

Tips To Lower Closing Costs On A House

Did you know that borrowers can lower closing costs using tactics such as a no-closing cost mortgage and seller concessions?

A no-closing cost mortgage is a type of mortgage that reduces the amount you will pay at closing. In exchange, the closing costs get rolled into your loan amount. Keep in mind that this will inflate your overall loan amount and require you to pay more for your loan over time.

Seller concessions can also lower your closing costs, as we learned from earlier in the article. They can pay for a portion of the overall closing costs but aren't limited just to those. They can also pay for repairs, title insurance, home inspection or appraisal and more.

Closing Costs FAQs

Let's take a look at a few frequently asked questions about closing costs in the next section.

Who pays closing costs?

You may wonder who pays closing costs when you start the home buying process. In short, both the buyer and the seller pay closing costs (called seller concessions). However, it may depend on the type of market that the home buyer and home seller are in. For example, in a buyer's market, the buyer may try to get a seller to pay closing costs, whereas in a seller's market, the reverse is true.

When are closing costs paid?

Just like it sounds, you pay closing costs on the day the home closes. Your Closing Disclosure, which you will receive at least three days before you attend your closing meeting, will disclose the full amount of closing costs you will pay.

Are closing costs necessary?

Yes, closing costs are necessary because they pay for the miscellaneous costs that the lender incurs as a result of lending to you. A lot of outside entities (such as the appraiser, home inspector, surveyor and more) require payment for their services – the lender doesn't do all of these itself.

Are closing costs tax deductible?

No, not many closing costs are tax deductible. However, points are deductible and so are property taxes that you pay in advance, when you close on your loan.

The Bottom Line

It's worth taking a look at each individual closing cost fee, but more importantly, keep in mind that closing costs will generally run you between 3% – 6% of your loan amount. If you want to know the exact figure, your Closing Disclosure will tell you.

You may consider a no-closing cost mortgage or seller concessions, but remember that with a no-closing cost mortgage, those fees get rolled up into your monthly mortgage payments.

Ready to buy a house? Get started on the mortgage approval process.