Buying or selling a home can be a complex process full of twists and turns. Just when you think you are in the final swing of things, there is a whole host of seemingly new costs that arise: the closing costs.
But these costs don’t have to catch you unprepared. By having a good understanding who is responsible for what can help you budget for what to expect in closing, so there are no surprises when you’re ready to breathe a sigh of relief.
Closing costs are not always cut and dry. They vary quite a bit depending on location, lenders, and mortgages. For buyers though, you can generally expect these costs to run between 2-5% of the purchase price of a home. For sellers, these costs usually look more like 8-10%.
While in most cases, both the buyer and the seller are responsible for some portion of the closing costs, who exactly is responsible for what is often up for negotiation. Knowing what is generally considered the responsibility of a seller or buyer can also help to give you some insight into this final stretch of the investment process.
Here are a few things you’ll want to keep in mind when it comes to navigating the closing costs on a property.
Closing Costs for Buyers
Generally, anything related to the loan, property, or insurance is the buyer’s responsibility. Buyer’s closing costs are often estimated to be between 2% and 5% of the sale price.
Let’s break these down now:
- Mortgage Fees
Fees associated with the mortgage are the responsibility of the buyer. Keep an eye out for a closing disclosure form a few days before closing to see what all this entails. This disclosure form will outline the final terms and costs associated with the mortgage. Be sure to read it carefully to ensure you fully understand it. If you don’t agree with the fees outlined, it is important to act quickly as you generally have three days to dispute it.
- Property Fees
Property fees such as appraisals, home inspections, and survey fees are also usually the responsibility of the buyer. In addition, any unpaid property taxes the responsibility of the buyer. If you are purchasing a home towards the end of the year, taxes are prorated, which means you only pay for what is left in the year - be sure to ask the sellers what this cost will look like.
- Mortgage Insurance
While it’s a closing cost per se, mortgage insurance (PMI) is a big cost of purchasing a property. The cost of your mortgage insurance will depend on how much of a down payment you are making and the mortgage type. The smaller the down payment, the larger the risk and the higher the insurance will be. You can avoid this expense altogether if you’re able to make a larger down payment of 20%.
Looking to lower your costs by making a larger down payment? Here are some Creative Ideas for Down Payments.
Closing Costs for Sellers
Sellers aren’t completely off the hook for closing fees either. Closing costs for sellers are often estimated to be between 8% and 10% of the sale price. Here are some things that the seller is generally responsible for when it comes to closing costs.
- Title Insurance Premiums
Before selling, a title search must be conducted to verify ownership. This title policy protects everyone against ownership claims. In most cases, the seller is responsible for the costs and fees involved with the search and disputes, if any arise. Title insurance is a one-time payment that protects from issues that could arise at the buying point or in the future. If you have lived in your home for less than ten years, it is possible to ask for a reduced rate.
- Transfer Taxes and Fees
Also known as a title fee, this is the tax that you pay when the title of your home is transferred. In most cases, the seller picks up this cost. The cost for this varies depending on your state.
- Real Estate Commission
Generally, the seller will pay both the buyer and seller’s portion of the real estate commission. Typically, real estate commissions are between 4% and 6% of the final sale price. The seller generally covers the buyer’s portion of the commission as well.
However, it is possible to negotiate a lower commission or take steps to reduce or eliminate this cost. Here are a couple of options to consider:
Ask For a Reduced Commission – The percentage of commission is not a set price. If the real estate agent is representing both seller and buyer, there is a good chance that they will consider accepting a reduced commission.
For Sale By Owner – As a seller, one way to eliminate the commission fee completely is to list your own home. This will save you the commission fees associated with hiring a real estate agent to list and represent your property. You should still keep in mind, however, that you may still be responsible for covering the buyer’s agent’s commission costs (often 2-3% of the sale value of the home).
Other fees that you’ll want to be aware of as well include:
- Recording Fees
- Underwriting Fees
- Attorney Fees
- Escrow Fees
- Bank Processing Fee
- Credit Report Fee
- Homeowners Association Transfer Fee
Note: You should also consider any ongoinghomeowner’s association (HOA) fees if you are in a community that requires them. These fees are often overlooked or forgotten but will add to the cost of your investment every year.
Closing costs are due at closing when the buyer’s funds become available. All costs are deducted from the proceeds of the sale.
Tips for Saving on Closing Costs
Now that you know who is generally responsible for what when it comes to closing costs, you might be wondering how to save. Is there any wiggle room? Is it always cut and dry? The answer is: it depends! There are a few things you might want to consider in order to help lower the costs or transfer the costs or responsibility to the seller or buyer.
- Negotiate for Seller to Pay
One of the quickest ways to save a little money as a buyer, is to negotiate that the seller pays for certain closing costs. While there is always the option for the seller to decline, you’ll never know if you don’t ask. If a property has been on the market for a while, or there are certain incentives to motivate the seller to move the property quickly, they might be more inclined to accept your proposal. Often, a seller will be more willing to pay closing costs than to do costly repairs. It is also recommended to ask for a specific dollar amount to be paid, rather than ask for certain fees or services to be covered.
- Shop Around
Knowing what costs you can shop around for can potentially save you big as well. For instance, closing costs such as title insurance, home inspections, and home surveys can be purchased through a variety of different institutions and shopping around could help you land a better deal.
The biggest thing that you should shop around for though, is the mortgage. The rates you’ll qualify for will vary considerably from lending institutions, so don’t settle for the first option you’re given. Rather, consider going to a few different lenders and then comparing interest rates.
Note: Since shopping for a loan can be time-consuming, you’ll want to start this process before you make an offer on a home. This way, when something comes on the market you’ll be ready to move quickly to make an offer.
- Understand Seller Concessions
Seller concessions is when the seller agrees to pay for some of the closing costs and can help lower the price for a buyer. Sellers can agree to help with specific costs that will lower the price and help move the property faster. Depending on what kind of market you are selling or buying in, the seller may or may not be willing to negotiate. Just because a seller can pay for some costs, doesn’t mean that they will. Understanding the market will help you be better prepared to make an offer.
- Seller’s Market Vs. Buyer’s Market
Determining if it is a seller’s or buyer’s market can help you consider who has the leverage and what costs could potentially be shifted. Understand the market to help give you the advantage as both a seller or a buyer.
Buyer’s Market – In a buyer’s market, there are a high number of investment properties and a low number of buyers. The market is overloaded with properties that aren’t moving very quickly and sellers are looking to offload and are generally more willing to pay for closing costs.
Seller’s Market – In a seller’s market, the tables are flipped and there aren’t as many investment properties available. Buyers are looking for investment properties and sellers are generally less willing to be flexible with closing costs. Sellers are more willing to hold out since they often are getting multiple offers. As a buyer trying to buy in a seller’s market, offering to pay all closing costs can be one way to stand out among the competition.
Understanding what market you’re in can help you determine if now is a good time to make an investment or a good time to sell, depending on what side you are on and what you are looking for. This will also help better your chances of making a good investment - and negotiating your closing costs as well.
Curious about timing the market? Read “Timing the Market – Is It a Good Idea?”
Understanding who pays what when it comes to closing costs is a great way to both save money and budget accurately. Regardless of if you are a buyer or seller, there are costs associated on both ends. Knowing how these are divided up can help you get a more accurate idea about your returns that you can expect on a potential property. It can also give you a pretty good idea about whether a property’s worth pursuing, or if you’d be better off looking for something else.
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