Closing Costs Explained
Who pays closing costs?
Both buyer and seller have to pay for some expenses associated with a sale or a purchase of the real estate. Some fees are usually paid by the seller, or the buyer, some are negotiable, and in some situations the lender requires for the certain fees to be paid by the buyer or the seller.
It is very important to understand that in most situations all the expenses are paid out of proceeds of the sale. That means that the buyer ultimately pays for everything, and the seller has his expenses covered from the sale proceeds. Customary both buyer and seller are usually paying for their own expenses associated with the property ownership, but not related to the transfer of the property. Also, the buyer usually is required by the lender to cover most of the costs connected to obtaining a purchase loan, but lenders allow for the seller to cover up to 3% of purchase price out of the sale proceeds. The escrow fees, transfer taxes, recording fees, costs of inspections, and other charges related to the transactions are usually negotiable, but it is best for both parties to realize several important ideas when negotiating the terms of the contract:
- The sellers should be mostly concerned with their net proceeds from the sale. The breakdown of who pays for what on paper should not be important, as soon as the bottom line is acceptable.
- All the seller closing costs are ultimately covered out of sale proceeds. Unless this is a short sale, the seller is not required to bring any money to the table, so ultimately the buyer pays for everything, bringing cash to the table and obtaining a loan.
- The buyer is usually required by a lender to pay a certain down-payment in order to obtain a loan. Buyer’s closing costs together with down-payment is a significant amount and the buyer may prefer to have some closing costs to be paid by the seller to reduce their cash-to-close obligation.
- If the buyer obtains a purchase loan, any fees and charges negotiated in contract as “paid by the seller” are in reality covered by the buyer from the loan funds. The only concern of the buyer and the seller should be to make sure that the lender approves the contract terms based on the program guidelines for the deal to move forward and close.
How much are closing costs for a buyer?
Not every Buyer will pay the same amount in closing costs. Three major types of the costs paid by the buyers are: cost of obtaining the financing, escrow fees, government transfer taxes and recording fees, required prepaid items and some other fees and charges which may be optional, depending on the situation.
What you’ll need to pay for your home financing loan depends on your specific lender and type of the loan program. Transfer taxes and recording fees may vary a bit in different states, or counties. Escrow fees are often paid by the Seller, but are negotiable and very often are shared between Seller and the Buyer.
If you are obtaining a loan when purchasing a home, at least 3 business days before you attend your closing meeting, your lender will give you a document called Closing Disclosure. This document will list out all the closing costs you need to. Even if you do not have financing, the closing costs estimate may be provided to you by the escrow officer, or your real estate agent ahead of the transaction closing.
We have a very detailed closing costs calculator you can use free of charge to get an idea of what your costs will be when you buy a real estate property. Most of the items included in the calculator have a link with information explaining the charge.
Also, you can contact a local loan officer, or real estate agent to ask questions about the charges and fees specific to your locality. Press here to ask a local professional to help.
Below are some of the closing costs you will probably see on your closing costs statement.
Lender’s charges:
Appraisal
When you use a mortgage loan to purchase a home your lender will order an appraisal to determine how much your property is worth. Appraisals help the bank to set the amount of the purchase loan and confirm the LTV (loan-to-value) ratio of your loan program. Appraisal fees usually range between $500 and $600.
Tip: Do not order appraisal of the property before you talk to your lender. Even if you are the one paying for appraisal it must be ordered by your mortgage lender and usually is not transferable from lender to lender.
Flood certification
Flood certification is one of the closing costs everybody sees on their closing statement. The fee is usually from $10 to $2. This fee Federal Emergency Management Agency charges for giving a report on the property in relation to the flood map. If the report shows that the property is located in the certain flood zones you may require to obtain flood insurance from FEMA.
Underwriting fee
This fee is usually charged by the wholesale lender for the loan underwriting and is part of almost every loan costs. Underwriting fee is usually a set amount which is charged disregarding the loan amount. It may vary from bank to bank, but on average it is about $1000.
Loan origination fee
Loan origination fees are usually charged by the mortgage broker company for processing your loan. Expect to pay from 1.25% to 2% of your loan's value in origination fees. Along with mortgage discount points, this will show up under Origination Charges on your Loan Estimate.
Tip: Sometimes lenders offer you a program which does not have a loan origination fee charged to you. Those programs instead have origination fees paid to the mortgage broker by the wholesale lender in exchange for the higher interest rate. If you do not mind paying 1 – 1.5 % for loan origination you may be better off asking the lender to quote you a program based on the borrower’s paid originator compensation instead of lender’s pad originator’s compensation. If you pay origination fee yourself your mortgage interest rate should be about 0.5% less compared to a program with no origination fee.
Discount points
Lenders allow you to pay money upfront on your loan to reduce your interest rate by buying discount points (essentially, buying down your rate to save interest over the life of the loan). One discount point equals 1% of your loan amount.
For example, if you take out a mortgage for $100,000, one point will cost you $1,000. For a $200,000 loan, a point costs $2,000. Unlike other fees, discount points aren’t mandatory. Discount points will appear on your Loan Estimate under origination charges.
Tip: When quoted an interest rate always ask for par rate to be quoted and compare it to the rate and payment quoted with discount points. The bottom line is – the discount points are just an interest paid in advance, so if you absolutely do not have to lower your monthly payment to qualify for a loan there is no reason to pay interest upfront for 20 or so years, specially if you plan to live at the house for 5 – 7 year and sell it.
Rate lock fee
Some lenders might charge you a fee to lock in your interest rate between the mortgage pre approval and closing. The rate lock fee is usually charged for locking the rate for a period of time over 60 days. The charge is usually from 0.25 % to 0.50% of your loan value when you lock in your rate for 90, 120 days or longer. However, many lenders offer this service for free depending on the length of the rate lock, so it always makes sense to shop around for a better deal.
Lender’s title insurance
Lender’s title insurance repays the bank if you lose your home to a title claim. Unlike other types of insurance, you only need to pay for lender’s title insurance once at closing. However, you will pay for lender’s title insurance every time you refinance your loan. Lender’s title insurance is separate from owner’s title insurance. Lender’s title insurance might cost from $700 to $1,950 depending on the loan amount.
Owner’s title insurance
Owner's title insurance is a very important coverage every homeowner should have. It is optional insurance. It covers you in case of different title claims. A title insurance company will cover you in case of a title rights lawsuit against you after you purchase your property. You can only obtain this coverage when you purchase the property and it is in force indefinitely while you have the property.
Courier fee
Courier fees cover the cost of transporting loan and escrow documents. Expect to pay around $30 in courier fees if your lender charges them. Courier fee may be charged separately by the lender and by the escrow company.
Credit reporting fee
Credit reporting fees cover the cost of pulling your credit report and looking at your credit score. Most of the time the credit reporting fees are around $35 per credit report. That amount is usually reimbursed to your mortgage broker by you at closing based on the original paid invoice.
FHA mortgage insurance premium
If you take out an FHA loan, you’ll have to pay a mortgage insurance premium. It is paid at closing. The current MIP rate varies and maybe from 1.75% to 2% of your base loan amount. It is set by the Federal Housing Administration (FHA).
If you borrow $100,000 to buy your home, your MIP charged at 2%, you will pay $2,000 for this loan insurance. This upfront premium payment is paid in addition to the monthly MIP, which ranges from 0.25% to 1.5% of your loan value in monthly installments.
Prepaid charges:
At closing you are expected to prepay for several items. You have to purchase your fire insurance, pre-pay interest for the rest of the current month, and fund your impound account, if you have one.
Homeowners hazard insurance
Homeowners insurance is a coverage you buy to make sure your house will be rebuilt in case of fire or other covered disaster. Most mortgage lenders require you to have at least an amount of homeowners insurance equal to the amount of the loan. You have the option of also getting protection for the contents within your home and adding liability coverage to cover possible losses if someone gets injured on your property.
Prepaid escrow account (aka impound account) funds
Sometimes referred to as reserve fees or prepaids, escrow funds hold reserved money for property taxes, premiums, homeowners’ insurance and mortgage insurance. Your lender keeps your escrow funds in a special account. The lender then uses the escrow funds to make payments on your behalf as part of your regular mortgage payment.
At closing, your lender might require you to put a certain number of months’ worth of expenses into an escrow account. The minimum of 2 month of hazard insurance and 3 month of property tax payments are required, however, sometimes the initial property taxes funding amount can be more if your property tax bill is coming soon.
Prepaid daily interest charges
Usually, every mortgage payment becomes due on the first of the month, and you pay interest every month after the month ends. In order for your mortgage payment to be due on the 1st of every month during the life of the loan, your lender will ask you to pay any interest that accrues on your loan between closing and the last date of the current month. The amount of interest you’ll accrue depends on your loan amount and interest rate as well as your closing date.
Private mortgage insurance (PMI)
Your lender will require you to pay private mortgage insurance (PMI) if you put less than 20% down at closing on a conventional loan. PMI protects the lender if you default on your loan. The monthly PMI payments are paid with your regular mortgage payment, and if you are required to have an impound (escrow) account for your monthly payments, you will probably have to prepay the amount of 2 – 3 month of PMI payment portion when funding it.
Property tax prorations
Property taxes are paid to your local government in exchange for public services. The amount you’ll pay in property taxes depends on where you live and your home’s value.
You may be required to pay up to a year’s worth of property tax upfront at closing. You can estimate your property taxes using public records and your appraisal value.
Property taxes are different in every state and in addition to base tax can also have county, city and local assessments and bonds added to the total annual bill. Your real estate agent will help you to find out and estimate the property tax bill you will have.
Recording fees, transfer taxes, and transfer charges:
Recording fee
A recording fee is paid to your local city or county government to update public land ownership records. Expect to pay from $125 to $225 in recording fees depending on your county requirements.
Property transfer tax
Transfer taxes go to your local government in exchange for updating your home’s title and transferring it to you. Like most types of other local taxes, this fee will vary depending on where you live.
New note stamp tax
This is a government tax associated with the recording of your new mortgage loan. Some states require this tax for every new mortgage taken on a real property.
Homeowners’ association transfer fee
Your homeowner’s association transfer fee covers the cost of moving the burden of HOA fees from the seller to the buyer. It ensures that the seller is up to date on their HOA dues. It also provides you with a copy of the association’s payment and due schedule as well as their financials.
Most of the time, the seller covers this cost. However, you might need to pay for your own transfer fee if you’re buying in a very competitive market, or if you agree to cover all closing costs.
The amount you’ll pay for your transfer depends on your HOA’s policies. If you live in an area without an HOA, you won’t pay this fee at all.
Inspections
Pest inspection fee
In some states, you’re required to get a pest inspection before you close on your loan. Pest inspections are also sometimes required if you’re buying a home with a VA loan. It may be required for other loans as well if the appraiser thinks there is a problem.
The average pest inspection costs about $100. Depending on the situation, this may be covered by the buyer, seller or lender.
Survey fee
In some states, you must get a land survey before you can complete a home sale. A survey fee goes to the survey company that verifies and confirms your property lines before you close.
Expect to pay on average $1,300 – $1,500 for your land survey, if you are required to do so. You may pay more if you’re buying a very large property or one with unusual boundary lines.
How much are closing costs for a seller?
Buyers aren’t the only ones who pay closing costs. As the seller, you’ll also need to bring a little cash to the closing table to finish out the loan, but of course, your closing cost will be paid out of the sale proceeds. Your real estate agent may be a good source to discuss your possible closing costs in detail. If you have questions and want to talk to a local agent, press here to create a free service request on the Rionta portal.
To get an idea what to expect here are some common closing costs sellers pays when sale a home.
Real estate agent commission
Sellers usually pay for both the buyer’s and the seller’s real estate agent commissions. This does depend on the market you’re selling in. Real estate commissions may vary, but the average rate is 5 – 6% of the total loan value. The buyer's agent and the seller's agent split the fee evenly.
Escrow fees
Escrow services are beneficial to the buyer and the seller. When you use an escrow account to hold funds and oversee the transaction closing, both buyers and sellers are assured that money is securely held in an escrow account until all the contractual terms are completed.
Sometimes buyers and sellers agree to share the escrow costs, but most of the time it is covered by the Seller out of sale proceeds. When negotiating who pay escrow fee, seller should remember that it is eventually paid out of buyer’s money, however in addition to escrow fee, buyer normally have higher closing costs in connection to the financing, and typically no closing costs can be financed, so that is always extra cash for the buyer to bring to the table.
HOA transfer fees
The HOA usually charges for the transfer of the ownership. HOA transfer fees as well as monthly fees you might owe are to be paid at closing. Contact your HOA to see specifically how much you’ll need to pay before you sell your home.
Owner’s title insurance
The seller usually pays the title insurance premium. Unlike the lender’s insurance, the owner's title insurance policy is definitely purchased one time with the change of the ownership and cover’s new owner of the property. Owner’s title insurance policy is usually paid by the seller, and the buyer pays for the lender's title insurance coverage. In most states, title insurance costs about 1% of the total value of your home, but usually has a maximum.
Prorated property taxes
When you sell your home, you must pay property taxes that accumulate up to the date of the sale. The current property taxes bill due are required to be paid, and the charges are usually prorated at the closing. These taxes vary widely by state and locality. The experienced real estate agent is the best person to guide you through and estimate what you will have to pay at closing.
Recording fees and transfer taxes
Local or county governments charge fees whenever a property changes hands. The seller is usually responsible for covering transfer taxes and recording fees. Sellers may have to pay fees to the county and/or city government, state government, both or neither – it all depends on your state. Transfer taxes are usually expressed as a set number of dollars per $100,000 of the home’s appraised value and vary from county to county.
Credits toward Buyer’s closing costs
If you’re selling your home in an area where competition for property is slow, you might need to take extra steps to help the buyer to get the transaction closed in case if the cash is limited for them. Often the buyer may send you an offer asking to contribute some money to cover their portion of the closing costs. The seller’s credit to cover buyer’s closing costs is usually limited by the lender by 3% of the loan amount. If agreed, you need to pay those amounts at closing.
Tip: It is best for the seller to be flexible when negotiating closing costs with the buyer. For the seller the expenses are just deducted from the sale proceeds, but the buyers may have limited cash resources to cover down payment and buyer’s closing costs. Often the buyer may offer a slightly higher sale price when asking for the seller's contribution. When comparing the offers do not spend too much comparing every little fee. The most important for the seller to consider is the net proceeds after closing of the transaction.
How can the closing costs be estimated?
Average closing costs are typically 3 - 4% of the loan balance. This is a significant additional to your down-payment amount you have to be ready to pay. Use the Rionta closing costs calculator to estimate your closing costs.
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