Buyers and Sellers have to pay Closing Costs…who pays for what?
Closing Costs Defined
What are Closing Costs: the short answer is, this is money you have to bring with you to “close” your real estate transaction. On the day you’re signing your final “closing” documents, there will be an amount of money your Title officer will advise you to bring to closing. This money covers all of the fees and pre-paid items that are in addition to the price of the home.
Both seller and buyer will have closing costs to pay. Let’s look at what those typically are for both parties.
Common Buyer Closing Costs
- Credit report fees — to qualify for a mortgage, your lender will check your credit and may pass this expense on to you.
- Loan origination fees — this is a fee your lender charges for processing your loan’s paperwork.
- Loan discount fees or “points” — this is a fee paid up front to give you a lower interest rate for the life of your loan.
- Appraisal fees — an appraisal is required to verify that the sale price of the property is justified.
- Underwriting fees — these are the cost of evaluating your loan application.
TITLE & ESCROW FEES:
- Lender’s title insurance — sellers pay the majority of title insurance costs, but the policy that protects the lender is typically the buyer’s responsibility.
- Title search fees — a background check on the title is run to search for unpaid liens on the property.
- Escrow deposits — your lender will probably require you to pre-pay a few months of taxes and insurance to form a “cushion” in your loan’s escrow account.
- Recording fees — these are paid to your city or county for recording your purchase.
It’s important to note that these fees, as well as the buyer’s responsibility to pay them, can vary widely based on your location. For example, if you live in a state with high property taxes, your prepaid escrow deposit can be significantly higher than average. If you want an estimate for your situation, Bank of America provides a useful calculator that can help you estimate your closing costs based on location, down payment, and loan type. Many other lenders will offer similar tools
Common Seller Closing Costs
Sellers usually have fewer items to pay than buyers, but that doesn’t mean they get off easy. Remember that the sellers are responsible for paying BOTH sides of the real estate commissions. This amount can vary from 3% – 10% of the sales price. The commission expense alone is usually more than all of the buyer’s closing costs.
- Title insurance premiums — sellers usually pay for the owner’s title insurance, which protects the owner in the event that title issues are discovered.
- Transfer taxes and recording fees — these are taxes and fees that county or local governments impose for the official transfer of the property’s title.
- Prorated taxes and HOA dues — Sellers have to compensate buyers for the fees they’ll pay for the months before they took ownership.
- Home warranty premiums — it’s quite common for sellers to offer a home warranty, usually for one year, to give buyers peace of mind and increase interest in their property.
- Realtor Commissions – In Oregon, sellers usually pay for agents on both sides of the transaction.
- Loan Pay off – If the seller still has a mortgage or a home equity loan outstanding, they will have to use a big chunk of the sale proceeds to pay off that loan.
Why not ask the seller to pay some or all of your closing costs? Since they’re usually walking away with cash from selling their home, they may be willing to pay for some or all of the buyer’s closing costs. This is a strategy I usually recommend, especially for 1st-time Buyers.
However, if you’re short on cash and you want the seller to pitch in some of their profit to cover your closing costs, you need to make your offer as strong as possible (*ask your Realtor for help here). If you’re in a competitive buying market, where homes are moving quickly and have multiple offers, be careful about asking for too much as this may weaken your offer.
You can strengthen your offer by offering a shorter closing timeline, foregoing a few cosmetic repairs and having a strong lender approval letter.
Don’t let closing costs keep you from buying a home. However, be prepared as a buyer or seller to have money set aside to pay them.
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