Closing Costs: Who Gets Paid?

does home loan closing cost cover realtor and loan officer

Closing costs are the fees and charges paid on top of the property price when buying a home. These costs can include loan origination fees, appraisal fees, attorney fees, insurance premiums, taxes, and more. Both buyers and sellers are subject to closing costs, but buyers typically pay the majority of them. In some cases, buyers may be able to negotiate with the seller to help cover closing costs. It's important to note that closing costs can vary depending on location and property value, and they typically range from 2% to 7% of the home's purchase price.

Characteristics Values
Average closing costs 3% - 6% of the loan amount
Who pays closing costs? Both buyers and sellers
When are closing costs paid? When you close on your mortgage
What do closing costs cover? Appraisal fees, attorney fees, escrow funds, credit report fees, taxes, insurance, etc.
Can closing costs be negotiated? Yes, closing costs can sometimes be negotiated
Can closing costs be rolled into the mortgage? Yes, but this will result in higher interest payments over the life of the loan

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Closing costs for the buyer

  • Home inspection and appraisal costs
  • Property taxes for the year of sale
  • Mortgage-related fees, such as the loan origination fee, loan application fee, and credit fee
  • Escrow account funds
  • FHA mortgage insurance
  • Flood certification
  • Homeowners Association (HOA) Transfer Fee
  • Homeowners Insurance
  • Lead-Based Paint Inspection
  • Lender's Title Insurance
  • Loan Origination Fee
  • Owner's Title Insurance
  • Pest Inspection
  • Prepaid Daily Interest Charges
  • Private Mortgage Insurance (PMI)
  • Property Taxes
  • Recording Fee
  • Tax Monitoring and Tax Status Research Fees
  • Title Search Fee
  • Transfer Taxes
  • Underwriting Fee
  • VA Funding Fee
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Closing costs for the seller

  • Real estate agent commissions: Traditionally, the seller pays the commission for both the listing agent and the buyer's agent, which is typically around 6% of the home's selling price. However, new rules coming into effect in August 2024 will allow buyers to decide how much to pay their agents and whether to ask the seller to pay the buyer's agent commission at closing.
  • Title search and insurance: A title search is conducted to verify ownership of the property, and title insurance protects the lender or buyer in case any ownership claims arise later. The customs for who pays these fees vary by region.
  • Transfer taxes and fees: These are taxes and fees levied by the state or local government when the property title is transferred from the seller to the buyer. The seller will often be required to pay the property or deed transfer tax.
  • Property taxes and HOA fees: Property taxes and homeowners association fees are typically split between the buyer and seller, prorated based on the closing date.
  • Other taxes and fees: Other taxes and fees that the seller may be responsible for include recording fees, flood determination and monitoring fees, and tax monitoring and research fees.
  • Seller concessions: In a buyer's market or to make the deal more attractive, the seller may agree to pay some of the buyer's closing costs, such as necessary repairs found during the home inspection. The amount of seller concessions may be limited by the type of home loan the buyer is using.

In addition to closing costs, sellers should also be prepared to pay off their current mortgage, any liens or judgments against the property, and any prepayment penalties associated with their loan.

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How to avoid closing costs

Closing costs can be a significant expense, typically ranging from 2% to 6% of the loan amount. While it is challenging to avoid these costs entirely, there are several strategies to reduce the financial burden:

Negotiate with your lender and the seller

You can negotiate with your lender to reduce or waive certain fees such as origination and application fees. Additionally, you can negotiate with the seller to cover some or all of the closing costs, especially if their home is not attracting much attention from other buyers. However, in a seller's market, this option may be less feasible due to high competition among buyers.

Choose a no-closing-cost mortgage

A no-closing-cost mortgage rolls the closing costs into the loan principal, allowing you to repay them over time with interest. While this option increases the overall cost due to the interest, it can alleviate the immediate financial burden at the closing table.

Shop around for lenders and services

Different lenders offer varying fees, rates, and perks. By comparing multiple lenders, you may find one with lower closing costs or better terms. Additionally, you can shop around for home inspectors, real estate attorneys, and other service providers to find the most affordable options.

Take advantage of first-time homebuyer programs

Many first-time homebuyer programs offer grants, 0% loans, or forgivable loans to help cover closing costs. These programs usually have specific eligibility requirements, so be sure to review the details before applying.

Delay closing until the end of the month

Closing your loan at the end of the month can reduce your overall closing expenses since your lender charges interest daily. By closing towards the end of the month, you minimize the number of days you pay interest.

Reduce your down payment

Opting for a conventional mortgage allows for a minimum 3% down payment. Sticking to this minimum will free up cash that can be allocated towards closing costs. However, it's important to remember that a smaller down payment will result in a higher mortgage principal, leading to higher long-term costs.

Ask for help from friends or family

Most loan types allow you to use gift money from close friends or family members to cover closing costs. Be sure to inform your loan officer in advance if you intend to utilize this option.

Apply for grants and loans

Many down payment and closing cost assistance programs are available for first-time homebuyers. These programs vary by location and have different qualifying rules, so be sure to explore the options in your area.

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What does it mean to roll closing costs into your loan?

Closing costs can be an expensive part of buying a home. They can vary depending on where you live, but they're generally between 2% and 5% of the total loan amount. On a $250,000 loan, that could be between $5,000 and $12,500. So, it's something you need to plan for on top of your down payment.

Rolling closing costs into a mortgage means adding the closing costs to your new mortgage balance. This is also known as financing your closing costs or a "no-cost refinance". While it helps you bring less money to the closing table, it does not mean that you avoid paying those costs. It simply means that you don't have to pay them on the closing day.

Some lenders offer what is called a "no-closing-cost mortgage". These home loans come with a lender credit that covers closing costs. However, you can expect higher borrowing costs if you take out this type of mortgage.

Pros:

  • You won't have to deplete your cash reserves to buy a home, and you can use the funds to meet other financial needs and goals.
  • You can buy a home sooner without having to wait until you've saved for closing costs on top of the down payment.
  • You can keep more cash on hand, which can be beneficial if you prefer not to pay closing costs upfront or if you're refinancing and can't afford the upfront fees.

Cons:

  • You'll pay more in interest over the loan term since you have to take out a larger mortgage.
  • You could increase your loan-to-value (LTV) ratio and possibly have to pay mortgage insurance, which can add several hundred dollars to your monthly mortgage payment.
  • You'll start out with less equity in your home, potentially leading to issues if you want to sell your home soon or take out a home equity loan.
  • The cons of rolling closing costs into your loan may outweigh the pros if you're able to pay those costs in cash.

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Pros and cons of rolling closing costs into your mortgage

Pros of Rolling Closing Costs into Your Mortgage

  • You won't have to bring as much cash to the closing table, which can be beneficial if you're short on cash or have already spent a large portion of your savings on your down payment.
  • You can use the funds you would have used for closing costs to pay down debt, improve your debt-to-income ratio, and potentially increase your credit score to get a better rate on your home loan.
  • You can buy a home sooner without having to wait until you've saved enough for closing costs on top of the down payment.
  • You won't deplete your cash reserves, allowing you to meet other financial needs and goals.

Cons of Rolling Closing Costs into Your Mortgage

  • You will pay more in interest over the loan term since you have to borrow more.
  • You could increase your loan-to-value ratio, which may result in you having to pay mortgage insurance, adding several hundred dollars to your monthly mortgage payment.
  • You will start out with less equity in your home, which could lead to issues if you want to sell in the near future or need to take out a home equity loan.
  • You will pay much more for those costs than if you had paid them upfront.
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Frequently asked questions

Closing costs are the fees and charges in excess of the purchase price of the property due at the closing of a real estate transaction.

Both buyers and sellers pay closing costs, with the buyer usually paying most of them.

Closing costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.

Closing costs typically range from 3% to 6% of the loan amount.

Some closing costs may be negotiable. Buyers can also ask sellers to pay some of their closing costs, known as a seller concession.

Written by
  • Lara Beck
  • Lara Beck
    Author Home Renovation Professional
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