Who Pays for Closing Costs?

You already know that you’ll need some money saved up for a down payment for most loan programs. While you can minimize that to as low as 3.5% with FHA loans and down to 3% with some conventional loans, it’s not the only expense you’ll need to plan for to close your loan. You’ll also need to plan to have cash on hand for closing costs.

Closing costs include a variety of fees for services that are needed to get your loan executed. Both buyers and sellers pay for closing costs when you’re purchasing a home, but the amount each party pays will depend on several factors. These range from the location of the sale, your loan program, and sometimes even because of the current market conditions.

We will help you make sense of what to expect when it comes to your closing costs, look at fee estimates based on common loan programs, and the breakdown of costs between buyers and sellers. Let’s take a look at who pays for what.

What Fees Make Up Closing Costs?

Before discussing how closing costs are split between buyers and sellers, it helps to understand what you’re paying for.

These fees cover various services required to finalize your loan. They fall into these basic categories:

• Loan-related fees:
  Application fee, mortgage discount points, prepaid interest, attorney fees, and loan origination fees.

• Property-related fees:
  Appraisals, survey costs, and home inspections.

• Tax closing costs:
  Fees paid to state and local governments, fees to establish and transfer ownership of the property, property taxes, and escrow funds.

• Insurance closing costs:
  Homeowner’s insurance policies, private mortgage insurance, and title insurance.

Check out our complete list of closing costs for a more in-depth breakdown.

How Much Are Closing Costs?

With all the services and fees included in the list above, closing costs can sound expensive. They will wind up totaling 3 to 5 percent of your loan amount in most cases.

Most of the costs associated with closing your loan are standard across all loan programs. These include appraisals, homeowner’s insurance, recording fees, and loan origination costs.

But some loan programs require additional services. For example, FHA mortgages with a down payment of less than 20 percent require you to obtain private mortgage insurance (PMI), which will drive up your closing costs. Another example of a loan-specific cost is the VA funding fee on Veterans Affairs loans. This fee goes towards administrative costs for the program and varies depending on your down payment amount.

You don’t have to guess about any fees that will accompany your preferred loan program, though. Your loan estimate will outline the closing costs associated with your specific loan type and situation.

Which Closing Costs Do Buyers Usually Pay?

While both buyers and sellers pay closing costs to finalize the sale, a greater portion of the fees typically fall to the buyer. While you can negotiate with the seller to cover some closing costs, known as seller concessions, this is less common in a seller’s market. There are also seller concession limits, which vary based on the loan program you’re using.

In general, the closing costs paid by the buyer are all fees associated with the new loan and with the property going forward after the sale is complete. This includes all the categories of closing costs we reviewed earlier:

• Loan-related fees
• Property-related fees
• Tax closing costs
• Insurance closing costs

How Much Are Closing Costs for A Seller?

While sellers typically have fewer fees required to complete the transaction, they are still responsible for some closing costs.

Some common fees for sellers are:

• Attorney fees
• Escrow fees
• HOA fees until the date of closing
• Prorated property taxes, up to the date of sale
• Real estate agent commission
• Recording fees and transfer taxes
• Title insurance

Buyers can also negotiate seller concessions, which are credits paid by the seller of a property to cover some of the buyer’s closing costs. This usually happens during a buyer’s market, when it’s harder to sell a home quickly. If seller concessions are negotiated in your transaction, they will be listed in the sale agreement.

It’s important to know what to expect throughout the mortgage process so you can avoid any unpleasant surprises that may leave you feeling stressed. Now that you’ve got an overview of closing costs, you’ll be prepared to plan more accurately for how much money you’ll need to bring to the settlement table. Make sure to review your loan estimate, which will outline the closing costs associated with your loan, and the total cash you’ll need to close.

Ready to kick off your homeownership journey? Get started with one of our loan officers today.