Does A Buyer Or Seller Pay Closing Costs?

As a home buyer or seller, it's important to be aware of the various expenses that come with a real estate transaction. One of these expenses is closing costs, which can be a significant amount of money.

In this article we will explore what closing costs are and discuss who covers them. We will also discuss how to estimate and reduce these costs for both buyers and sellers.

What Are Closing Costs?

Closing costs are the fees and expenses that are associated with the purchase or sale of a home. These costs are paid at the closing of the transaction and typically include a variety of fees, such as lender fees, title insurance, property taxes and real estate agent commissions.

Although many fees are included in closing costs, down payments are not. Home buyers typically are responsible for both a down payment and closing costs when they’re in the process of buying a house. Depending on the loan type you borrow, you’ll generally need to pay 3% – 20% toward a down payment, and an additional 3% – 6% for closing costs.

Who Pays Closing Costs?

So, who is responsible for paying these fees during the closing process? The simple answer is both buyers and sellers. Both parties are responsible for paying different types of closing fees.

When Can Buyers Lower Their Closing Costs?

In most cases, buyers will be responsible for paying their own closing costs. However, buyers might be able to negotiate for lesser closing costs (or to have them rolled into the loan). It generally depends on an array of factors, including whether you’re purchasing in a buyer’s or seller’s market.

Asking The Seller To Pay Some Closing Costs

When you purchase in a buyer’s market, your chances of paying less closing costs goes up tremendously. This is because the housing supply in this market type greatly outweighs the demand, meaning sellers might be more willing to make greater strides to ensure you purchase their home.

Unless there is high demand for the home you’re interested in, ask the seller if they would be willing to pay certain fees. For example, a seller may agree to pay for title insurance on your behalf. Title insurance helps protect you and your lender in case someone else tries to make a claim on the property after you have begun the buying process.

Asking Your Lender To Lower Closing Costs

You could also ask your lender about a no-closing-cost mortgage. If your lender does not offer no-closing-cost mortgages, you could see if they would be willing to waive certain closing costs, including:

• Loan application fees: The loan application fee is a one-time fee your lender charges for evaluating your application. In some cases, you can negotiate this fee, especially if your lender has charged you several other similar fees.
• Loan origination fees: Origination fees cover the costs associated with underwriting your loan. This fee usually costs about 1% of the total loan amount, though the exact amount will vary. You should consider asking your lender to lower or remove these fees.
• Recording and processing fees: Lenders will sometimes charge a fee to cover the preparation and recording of documents that are part of the closing process.

There are a few nonnegotiable closing costs as well, including appraisal fees, credit check fees and prepaid property taxes.

For help in figuring out your estimated closing costs, you can look at your loan estimate document. This is provided by your mortgage lender and shows your estimated interest rate, monthly payment and closing costs. This will give you some figures to work with, though the numbers won’t be set in stone until you get your closing disclosure a few days before closing. This document gives you those finalized loan terms, disclosures and closing costs.

The Factors Affecting Who Pays Closing Costs

While every situation is slightly different, the responsibility for paying closing costs may be negotiated between the seller and buyer. In some cases, a seller may agree to pay some or all of the closing costs in order to sweeten the deal and make their property more appealing to potential buyers.

Alternatively, a buyer may offer to take on more of the closing costs to secure a lower purchase price or other concessions from the seller. It is important to approach these negotiations with a clear understanding of what you are willing and able to pay, as well as any limits or requirements set by your loan program.

There are several factors that determine who pays closing costs. Below are just a few examples.

Type Of Home Loan

As a buyer, the type of loan you receive may determine whether you pay closing fees, and how much you should expect to pay. There are no-closing-cost mortgages that can help you avoid thousands in upfront costs. Consider asking your lender if you qualify for these types of loans.

Seller Concessions

Seller concessions are closing costs that the seller agrees to pay outside of their usual closing costs. These concessions are used as negotiation tools, especially in a buyer’s market, where buyers have more pull in negotiations because there are many more homes for sale than buyers to purchase them.

The State Of The Housing Market

The state of the housing market in an area will play a key role in who might pay closing fees. In a buyer’s market, buyers have more negotiating power because sellers might be more eager to close on a sale. In a seller’s market, evidenced by stiff competition and bidding wars, home buyers have little to no bargaining power, as sellers are looking for the most uncomplicated bids for more attractive prices.

What Does The Home Buyer Or Seller Pay In Closing Costs?

Let’s take a look at who is generally responsible for paying what.

Buyer Closing Costs

Generally speaking, home buyers might be responsible for paying:

• Attorney fees: A real estate attorney is someone who is licensed to practice real estate law. You may have to hire an attorney to oversee the closing process, depending on your state. Attorney fees can be either a flat rate or an hourly rate. If your attorney charges an hourly rate, it might be around $150 – $350 per hour. If there’s a flat rate, you might be billed anywhere from $500 – $3,000.
• Courier fee: This covers the cost of sending your loan documents to different people or companies associated with the closing. It’s typically around $20.
• Credit report and monitoring: Your lender will need to pull your credit report to process your loan. This cost is usually about $30 – $50. In addition, they may also pay for a third-party verification to make sure your loan application information is correct. This credit supplement fee typically ranges from $25 – $100.
• Discount points: Mortgage discount points are upfront interest you pay at closing in exchange for a lower interest rate over the life of your loan. The cost of one discount point is equal to 1% of your loan amount.
• Origination fee: This fee covers the costs of processing and underwriting your mortgage. Your mortgage origination fee is typically 0.5% – 1% of the purchase price.
• Prepaid interest: This cost is the interest that accrues on your loan between the time you close on the loan and the date of your first mortgage payment.
• Private mortgage insurance: Private mortgage insurance (PMI) is for people with a conventional loan who put down less than 20%. It can be paid monthly as part of your mortgage payment, but you may also have the option to pay some or all of it upfront to lower your monthly payments.
• Rate lock fee: Mortgage rate lock fees are charges your lender might add to lock your interest rate to guarantee that rate at closing.
• Escrow fees: Escrow fees are charged by third parties involved in a real estate transaction. The fees generally cover the cost of distributing funds and other fees related to the real estate transaction, as well as handling paperwork. In general, you can expect to pay about 1% of the home sold price for escrow fees.
• HOA transfer fee: If you purchase a home with a homeowners association (HOA), you will probably have to pay HOA transfer fees to cover the costs associated with transferring homeownership records from the seller to you.
• USDA Guarantee Fee: Similar to mortgage insurance, the USDA Guarantee Fee protects the lender if you default on your loan payments. Borrowers with USDA loans will pay around 1% of their loan amount at closing for this fee.
• VA funding fee: With a few exceptions, VA loan borrowers pay a one-time funding fee as part of their closing costs. This is a percentage of the loan based on the loan amount, the amount put down and whether the VA loan benefit has been used by the borrower before.

Seller Closing Costs

While it varies by situation, sellers are generally responsible for paying:

• Real estate agent commissions: Real estate agent commissions are split between the seller’s listing agent and the buyer’s real estate agent. Commission is typically around 6% of the home’s purchase price, with half going to each agent.
• Title insurance: Title insurance protects the home buyer and lender from any damages, outstanding liens, claims and unpaid taxes on the property’s title. The buyer purchases the title insurance, but it’s often paid for as part of the seller’s closing costs.
• Credits for closing costs: The buyer can request closing credits from the seller to help them finance the loan or to negotiate for repairs after the inspection.
• Property taxes: Property taxes are generally split between buyer and seller, depending on the time of year the home is sold. The seller pays a percentage of the yearly property tax cost up to the sale date, and the buyer pays the percentage that covers the rest of the year.
• Transfer taxes: Transfer taxes cover the cost to transfer the property’s title to the buyer once closing happens. It can be paid for by either the buyer or the seller.

FAQs About Who Pays Closing Costs

Still have questions about who pays closing costs? Here are a few commonly asked questions below.

How do seller concessions affect who pays closing costs?

Seller concessions are less common in a seller’s market, when there are many buyers for a lower number of homes. Conversely, sellers will generally pay concessions in a buyer’s market to appeal to buyers. Generally, the lesser of the sales price or the appraised value will determine how much the seller is allowed to provide in concessions.

Who pays more in closing costs – the buyer or the seller?

Generally, sellers pay more in closing costs than buyers. Buyers can expect to pay 3% – 6% in fees, whereas sellers can expect to pay 6% – 10% (although these are fees that are not usually included in closing costs, such as real estate agent fees).

Which closing costs are split between the buyer and seller?

Property taxes and title transfer fees are generally split between buyers and sellers. However, every situation is unique and different.

Who pays closing costs in a cash sale?

Buyers typically pay cash for closing fees, whereas sellers may have the cost of closing deducted from the proceeds of the home sale.

How do you calculate closing costs?

In general, closing costs for home buyers are between 3% – 6% of the value of the home they are purchasing. However, every situation is different, and your closing costs may be higher or lower than average.

The Bottom Line: Market Conditions Determine Who Pays Closing Costs

Closing costs are an unavoidable expense of buying real estate, especially if you’re financing the purchase of your home with a mortgage. However, you might be able to negotiate them away to the other party in the transaction or pursue options to lower them.

If you’re ready to take the first step toward homeownership, start the mortgage approval process today with Rocket Mortgage^®.