Closing costs are one of the major transactions when buying a home, but it can be a high expense that often ends up straining budgets. It depends who pays closing costs based on the home’s sale. While buyers may usually pay for these costs, there are instances when sellers pay, or you may be able to find additional sources of funding to cover the expense.
For this article, we’ll look at who pays closing costs in more detail, including factors influencing who pays for them and the costs by loan type.
Closing Costs Overview
Before going into who pays closing costs, it’s crucial to understand the different types you may encounter and the average cost you’ll need to factor into your budget potentially.
Types of Closing Costs
Closing costs are fees and expenses incurred during the purchase or sale of a property. This includes appraisal fees, title search fees, attorney fees, and loan origination fees.
Appraisal fees include costs incurred to appraise the property. Title fees refer to the verification process needed, such as analyzing public records, to ensure the seller is legally entitled to sell the property. Real estate transfer taxes may also be part of the costs since they are due at closing. Any attorneys involved in the home purchase from the buyer's side to review and sign off the purchase agreement will also be part of the closing cost expense. Lastly, the loan origination fee refers to the lender’s charges to process the loan. Generally, the loan origination fee is a percentage of the loan amount or a flat fee, between 0.5% to 1% of the loan amount.
Closing costs can vary widely depending on the location, the type of property, and the lender. However, expenses such as a home inspection aren’t generally part of closing costs since it’s an optional add-on rather than the lender’s requirement.
Who Typically Pays Closing Costs
Typically, buyers are responsible for paying these costs as they are needed by both the seller and the mortgage lender to ensure a successful sale. But depending on the home and seller's circumstances, there may be seller concessions to incentivize buyers and move the transaction forward. In these instances, sellers pay closing costs, either in part or the whole amount, to speed up the purchase at the closing table.
Average Cost of Closing Costs
On average, closing costs can range from 2% to 5% of the purchase price. For example, if the sale price for a home is $250,000, the closing costs could be anywhere from $5,000 to $12,500.
In most cases, the buyer is responsible for closing costs, but this will vary depending on the agreement with the seller. That’s why it’s essential to factor the purchase price into closing costs, the home loan amount, and the other expenses when considering buying a home. However, before agreeing to closing costs, it’s always worth working with your real estate agent to see if there is room to negotiate from the seller's side before agreeing to the costs.
Sometimes, sellers may offer to pay some or all closing costs to sweeten the deal and move the transaction forward. Usually, there is some room to negotiate closing costs before the purchase agreement is signed - so if you’d like the seller to pay some or all of the closing costs, the time to do that is before the final agreements go through.
Other options for closing costs include applying to government assistance programs in your state or local area to fund them if you meet the requirements. Lenders may also offer options for them. You may also have options for closing costs if you are eligible for low low-costs such as FHA and VA loans.
Factors That Influence Who Pays Closing Costs
A few factors will influence who pays closing costs in a real estate transaction. The main factor is the buyer and seller negotiation, as that is when the likelihood is highest of reducing closing costs or getting the seller to pay.
During the purchase agreement negotiations, it’s between the buyer and seller to decide how the costs are split, if it is all, and who is responsible for what. Coming to an agreement on splitting the costs or having the seller pay could be a significant factor in the buyer’s decision to move forward, so there is some incentive on the seller's side - but it’s not a guarantee, and sellers may not agree.
Another factor is the type of mortgage loan being used. For example, with an FHA loan, the seller is allowed to contribute up to 6% of the purchase price toward the buyer's closing costs. Comparatively, a seller can only contribute up to 3% of the purchase price with a conventional loan.
How To Calculate Closing Costs
Calculating closing costs can be challenging. There are a few different expenses and fees involved. In addition, the costs can vary depending on the location, property type, and lender. To get a rough calculation, you’ll then add up the following:
- Appraisal fees
- Title search fees
- Attorney fees
- Loan origination fees
- Any fees charged by third-party service providers such as home inspectors and title insurance companies
When budgeting for a purchase, the general recommendation is to estimate between one percent and five percent of the home purchase price to go toward closing costs. Depending on the down payment you are putting down, you should also factor in private mortgage insurance (PMI) to your costs.
How To Reduce Closing Costs
Closing costs can be a significant expense when buying a home, so it is worth looking at ways to reduce transaction costs. One way to minimize these costs is to negotiate with lenders, as there may be a willingness to waive or reduce certain fees. Discount points are another factor; fees paid upfront to lower the mortgage’s interest rate could also help save on these costs. Additionally, buyers should shop for different service providers to compare costs and find an affordable option to save on closing costs.
Finally, government programs, such as FHA loans, USDA loans, and VA loans, may be an option as they offer assistance for closing costs to eligible buyers.
Closing Costs By Loan Type
Closing costs vary by loan type and can have an impact on the overall cost of the home purchase. Understanding the variables at play depending on the loan type will help you prepare and estimate the right budget early on to avoid any surprises at closing.
FHA loans are a type of mortgage backed by the Federal Housing Administration (FHA), which are available for buyers with a low credit score and/or a smaller down payment. Closing costs for FHA loans will depend on the property's location, the type of property, and the lender, but the FHA loans do have a maximum seller-paid closing cost limit of 6% of the purchase price. Sellers can contribute up to 6% of the purchase price toward the buyer's closing costs.
VA loans are an option for veterans, including a cap on closing costs. The VA limits the amount lenders can charge borrowers for these costs, which helps make VA loans more affordable. Additionally, the VA allows borrowers to finance some of these costs into their loan, which can help reduce the amount of cash the borrower needs to bring to closing.
USDA loans are a type of mortgage loan that the United States
Department of Agriculture backs. USDA loans are designed for low and moderate-income households in rural areas looking to purchase a home. USDA loans have low-interest rates and flexible credit requirements. The USDA loan does allow for seller concessions of up to 6% of the sales price, which enables sellers to pay part of the closing costs based on the negotiation.
Who Pays Closing Costs and How to Manage Them
Understanding closing costs is an essential aspect of the homebuying process. It's important to work with a mortgage company that can help you navigate these costs and ensure that you're getting the best deal possible. By taking the time to educate yourself on the different types of closing costs and factors influencing who pays for them can help you plan and budget for the homebuying process.
If you're in the market for a new home, work with a CCM loan officer that has your best interests in mind and can help guide you through the homebuying journey.
Seller concessions can help buyers save money on closing costs, repairs, and more. Learn how seller concessions work and how you can ask for them when buying a home.
USDA loans are a great option for borrowers who want to buy a home in a rural or suburban area. Learn more about how USDA loans work and if you qualify.
If you’re thinking about buying or refinancing a home, you may find yourself in unfamiliar territory. Use this quick guide to learn more about what to expect when buying or refinancing a home.
Here are some factors to consider, as well as some resources that can help you make a decision regarding the right time to buy.