Who pays closing costs — the buyer or the seller?

In a real estate transaction, people naturally focus on the immediate, upfront expenses. If you’re the buyer, that means the home’s purchase price and the down payment; for sellers, it might be repairs, renovations and improvements to get the home show-ready. But before the deal can be finalized, there are additional expenses to cover: closing costs.

Both buyers and sellers typically pay closing costs, and the amount can vary depending on several factors, including the price of the home, the sort of mortgage the buyer gets, which state the home is located in and more. Closing costs for sellers are often deducted directly from the home-sale proceeds, while buyers typically pay their portion out-of-pocket. Many aspects are open to negotiation, while others traditionally fall to either one party or the other. Here’s a breakdown of who pays which closing costs.

Do buyers pay closing costs?

Yes. Many of the fees homebuyers pay at closing are connected to obtaining a home loan. Typical closing costs for buyers can include:

• Lender fees: A mortgage lender will usually charge the borrower for its expenses in originating and drawing up the loan and processing the application, including running a credit check and other underwriting steps.
• Home appraisal: Lenders will also require a home appraisal, which is an independent professional’s estimate of the home’s fair market value. This reduces their risk by confirming that the home is worth (at least) the amount of the loan.
• Home inspection: If you choose to have a home inspection to assess the property’s condition — which is not mandatory but is incredibly useful — you’ll pay the inspector’s tab at the closing table. If any problems are found, you may be able to use them as a negotiation point.
• Homeowners insurance: Buyers will likely be required to take out a home insurance policy as well, with the first premium payment (or sometimes more) due at closing. If several months of payments must be prepaid, which is common, the funds will be held in escrow and disbursed on your behalf as needed.
• Title costs: Title insurance protects against any future claims against or problems with the home’s title. Lender’s title insurance, which covers the mortgage issuer, is usually mandated; buyers can also cover themselves with owner’s title insurance (in some states, this is paid for by the seller). A title search is also usually run by the lender to ensure there are no ownership issues.

Buyers’ costs vary depending on loan type

Different loan types have different structures, and closing costs can vary depending on the type of mortgage you get. A higher amount usually comes into play for buyers who are making a smaller down payment. In such cases, lenders often affix extra charges to the mortgage, as a sort of insurance to protect themselves in case these higher-risk buyers are delinquent or default on their payments.

If you’re putting down less than a 20 percent down payment, you will likely have to pay an extra monthly fee for private mortgage insurance. Some lenders might require you to make an upfront payment at closing.

Do sellers pay closing costs?

Yes, but sellers incur different types of closing costs than buyers. Generally, these expenses will be deducted “off the top” of the home’s purchase price, unless you specifically ask to pay them separately. If you’re selling your house, you may be required to pay the following costs:

• Title costs: In some cases, the seller will pay title-related fees as well as, or instead of, the buyer. For instance, in most of Florida, sellers cover the cost of an owner’s title insurance policy. But the opposite is true in four of the state’s 67 counties.
• Transfer taxes: This common tax, sometimes also called a documentary stamp tax, covers the transfer of ownership from the seller to the new owner.
• Property taxes: The seller is on the hook for paying any applicable property taxes on the home up until closing day.
• HOA fees: Similarly, if the home is in a community run by a homeowners association, HOA fees will also need to be paid up-to-date as of closing day.
• Concessions: Many sellers agree to pay a portion of the buyer’s costs to sweeten the deal — for example, a seller may cover the cost of a needed repair discovered in the home inspection. If you’ve offered any seller concessions, these funds are also due at closing.
• Mortgage payoff: If the home being sold still has a mortgage on it, which is also common, the remainder of that loan will need to be paid off in full (typically out of the sale proceeds) before the transaction can be finalized.

Costs both parties might pay

• Attorney fees: Real estate attorneys are often hired by either or both parties to review contracts and closing documents — in fact, in some states, the transaction cannot legally close without one. They typically charge by the hour, though there may be set fees for certain tasks.
• Realtor commissions: The real estate agents involved in the transaction will be owed a commission fee at closing. This typically comes to somewhere between 2.5 and 3 percent of the home’s sale price, per agent. (So, on a $350,000 home, that would be between $8,750 and $10,500 each.) In some cases, the buyer and the seller will each pay their own agent directly, while in others, the seller may agree to pay both commissions — this will need to be spelled out clearly in your contract before you close.

How much are closing costs?

There’s no set number when it comes to closing costs. Typically, homebuyers can expect to pay around 2 to 5 percent of the home’s sale price in closing fees, according to Fannie Mae. On a $350,000 house, 2 percent would come to $7,000 and 5 percent would be $17,500.

Unfortunately, you often won’t know your final closing-cost tally until roughly three business days before closing day, when you receive what’s called a closing statement or settlement statement. This document outlines all the closing costs in detail. Sellers might get a heads-up earlier, if their agent has prepared a seller’s net sheet for them — an itemized breakdown of all of the closing costs, plus an estimate of the sum they will actually receive, or net, after the final purchase contract is signed.

Saving money on closing costs

While closing costs are normal for every real estate transaction, there may be some steps you can take to reduce the total amount you’ll pay.

Buyers can ask for seller concessions, negotiating for the seller to cover some of their costs. They can also see if they qualify for any local, state or federal assistance programs that can help cover both down payments and closing costs. Many programs are geared specifically toward low-to-moderate income earners or first-time homebuyers.

Sellers should also remember to negotiate — particularly regarding agent commissions if they’re covering both. Even a small discount can save you thousands of dollars. That’s particularly true on more expensive homes, as the commission is a percentage of the sale price.

Next steps

A knowledgeable local real estate agent can offer valuable expertise throughout the entire buying or selling process. Your agent can help you understand and potentially negotiate your closing costs, taking much of the work (and stress) off your plate as you finalize the deal.

FAQs

• Who typically pays closing costs?

  Both buyers and sellers usually have closing costs to pay, though the types of costs vary. For instance, buyers typically pay fees related to their mortgage, while sellers often pay transfer taxes, concessions and more. Who traditionally pays what often varies depending on what state you’re in.

• Do I still pay closing costs if I’m paying cash?

  Yes, you’ll still incur some closing costs if you’re purchasing with cash, rather than financing — but the amount will be much less, because there won’t be any lender or mortgage fees.

• Are down payments a part of closing costs?

  As a buyer, your down payment is not part of your closing costs. However, the size of your down payment can affect how much you pay in closing costs: If you put down less than 20 percent, for example, you’ll likely have to pay for private mortgage insurance, and that may be due at closing.