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Sealing the Deal: Who Pays Closing Costs?

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Sealing the Deal: Who Pays Closing Costs?


Buying a home is an exciting yet detail-oriented process. To ensure you find the perfect house, you'll need to pay close attention to all the aspects of the buying process. House size, neighborhood, school district, lot size, and budget are all essential things to keep in mind when house buying.

When you've found a home that checks off all of your must-have features, it's time to start deciding who pays closing costs on the house. The closing costs for the home-buying process vary depending on each individual sale. 

If you've never been through this process before, then it's possible for things to get a bit confusing. In most instances, the buyer will cover these costs, in others, the seller will, and in some, each party will be responsible for certain closing cost fees.

To get a better understanding of closing costs and what to expect when it's time for you to buy your dream home, continue reading below. Here's everything you need to know about closing costs and who pays for them!

Closing Costs Explained 

Closing costs are the expenses that are due at the closing of a house. These costs consist of a variety of fees and the taxes on the house as well. Most closing costs are tied to financing on the house. 

These aren't the only fees that make up closing costs, however. Real estate commissions are also included in closing costs along with a few other fees. 

Because both the buyer and the seller have responsibility for the closing costs, it's important that both parties come to an understanding and conclusion about who will be paying the costs before it's time to close on the sale. 

Extra Closing Costs to Consider

As mentioned before, each individual case as its own fees included in the closing costs. The number of fees is dependent on the different decisions that you make throughout the process. Here are some extra closing costs to keep in mind before starting the process. 

Title Insurance

Title insurance is not mandatory, but it's suggested as a way to save yourself in a not-so-great situation. For example, if there are any liens on the home that weren't disclosed, then this insurance will come in handy. 

Any other issues with the home's title such as heirs or forged documents are also covered with your title insurance. When taking out a mortgage on a home, the lender will have its own policy, but it's up to you, as the buyer, whether you want homeowner's policy or not. 

Transfer Fees

Just like when buying a car from someone, you can expect to pay transfer fees on the house as well. There will be document recording fee as well. The buyer is responsible for the transfer fees on a new mortgage, but the seller is responsible for the fees associated with the deed. 

Homeowner's Hazard Insurance

If you're purchasing your home with the help of a lender, this type of insurance is mandatory. The location of your new home could have an impact on other mandatory insurance policies as well including flood, earthquake, and wind coverage. 

The cost of these policies varies depending on who you decide to get coverage from, so be sure to shop around first. All policies go into effect on the day of closing, but if you'd like, you can pay for them ahead of time. 

Good Faith Estimate Explained

A good faith estimate is an estimate based on the total price for the house, including all closing costs. Although this number might not be exact to the penny, it should be as close as possible so that you can budget for the house accordingly. 

After signing your loan application, your lender should give you a good faith estimate within 3 days. This is due to the Real Estate Settlement Procedures Act and lenders will need to abide by it. 

Estimates typically arrive 30 days before the closing date. If more time is needed for you to plan for your budget and home-buying process, you can always consider getting pre-approved for a loan first. 

Buyer's Closing Costs Explained

As mentioned before, not all home-buying processes are the same. There are times when one party or the other will cover all closing costs and there are times when both parties pay a portion of the closing costs. 

On average, however, you (as the buyer) can expect to pay around 2-5% in closing costs. The percentage is based on the cost of the house itself. As the buyer, you should expect to pay for the following:

  • Loan fees-processed by the lender for taking out the loan
  • Lender's title insurance- the policy required by a lender
  • Escrow deposits- fees required by the lender to create a cushion on the loan (a few month's worths of taxes on the new house)
  • Inspection fees- some lenders require you to have an inspection done before lending to you
  • Appraisal fees- to ensure the price of the house is fair, an appraisal is required
  • Attorney fees- these fees normally fall on both the seller and the buyer

These closing costs depend on many factors including location and the lender. There are some tools online that can help give you an estimate before sitting down with a lender. Take advantage of this to get a better idea of what you can expect. 

Seller's Closing Costs Explained

Although most of the closing costs tend to fall on the buyer, there are a few closing costs that are the sole responsibility of the seller. Sellers even have to pay for sale commissions for both real estate agents. 

The following are some other closing costs that the seller can expect to pay for:

  • Prorated HOA fees and taxes- any taxes and HOA fees for the months before the buyer purchased the home are the seller's responsibility
  • Home warranty premiums- in some cases, the seller will offer a warranty on the house to give buyers some peace of mind

Sellers can also be responsible for the title insurance and transfer fees, depending on the situation. 

Avoiding Closing Costs Explained

Although it's not always possible to avoid closing costs on a house as the buyer, it is sometimes possible. As the buyer, you can always ask the seller to cover the closing costs. 

You can negotiate with the seller by arranging for the costs to be included in the total price of the loan. For example, if the closing costs make up 3% of the house price, then you can ask the seller to reduce the price of the house by 3% and then cover the closing costs yourself. 

These are all techniques that you can discuss with your real estate agent. 

Reducing Closing Costs Explained

If you can't get the seller to agree to cover the costs by reducing the price of the house, then you can consider finding other ways to reduce the closing costs themselves. Here's what you should know.

Close at End of Month

Closing at the end of the month will save you from having to pay the per diem interest for nearly an entire month. If you close on the second to last day of the month, then you'll only need to pay for one day.

Include Costs in Loan

The closing cost for the house can be included in the loan if this is something you and your lender discuss. Another option you have is to take out a no-closing-costs mortgage. The lender will be the one covering the closing costs when choosing this option, but you'll be left with a higher interest rate. 

Consider a Loyalty Program

If you choose to borrow from a bank that you're a member of, then you might have a loyalty program available to you. Not all, but some banks will offer their preferred members reduced fees for being a loyal member with them. This is something to consider when deciding who to borrow money from. 

Apply for an FHA Loan

An FHA loan is a federal housing administration loan. Those will low income can apply. This loan is backed by the government and doesn't require as high of a credit score to qualify. 

It'll also offer help in regards to some of those closing costs. 

Learn Who Pays Closing Costs Before Buying a Home!

Before you jump into the home-buying process, be sure to have a solid understanding of who pays closing costs. Remember that each situation is different so these terms and factors listed above are all things to consider.

When you're ready to start the home-buying process, click here to find an agent and begin your home search today!