Closing costs are an extremely important part of a real estate transaction that home buyers must prepare for, but who pays them? In short, buyer and seller closing costs are paid based on the terms of the home purchase contract, which both mortgage parties agree on. As a rule, the buyer’s closing costs are substantial, but the seller is often responsible for some closing fees as well. Much depends on the purchase agreement.
Let’s discuss the key aspects of paying closing costs so you’ll know what to expect when you arrive at the closing table.
What Are Closing Costs?
Closing costs are all of the fees and expenses that buyers and sellers must pay on closing day. The rule of thumb is that total closing costs on residential properties will amount to 3% – 6% of the home’s total purchase price, although this can vary depending on local property taxes, insurance costs and other factors.
Although buyers and sellers generally split closing costs, some localities have developed their own customs and practices about how to split closing costs. Be sure to get with your real estate agent early in the home buying process to discuss what closing costs will look like. Knowing this can help you negotiate seller concessions, which we’ll discuss later.
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Do Buyers Pay Closing Costs?
Buyers are responsible for the closing costs related to paying their mortgage lender as well as getting established in their new home. In general, the buyer pays all costs related to the home loan, the property and the required insurance policies.
Mortgage Costs
If a fee is associated with the mortgage process, it’s the buyer’s responsibility. Three days before closing, buyers receive a Closing Disclosure with a final breakdown of all the costs associated with the mortgage loan. If you’re early in the home buying process but would like to get a sense of what a disclosure will look like, visit the Consumer Financial Protection Bureau’s website to see a sample disclosure form.
Property Costs
Buyers pay for the home appraisal – which is required by the lender – and a home inspection, if they choose to get one. Property taxes and homeowners association fees are prorated, and buyers pay only for the portion of the year that they’ll own the home.
Property taxes are one of the main factors in closing costs. Buyers closing at the end of the year are only responsible for prorated taxes for the remainder of the year. Buyers closing at the beginning of the year and living in a high property tax state may have to pay a substantial property tax bill.
Mortgage Insurance
Buyers with less than a 20% down payment on a conventional loan will have to pay private mortgage insurance (PMI) every month until they’ve paid down 20% of the principal loan balance. Buyers with a Federal Housing Administration (FHA) mortgage must make a down payment of at least 3.5%, pay 1.75% (of the total loan amount) upfront in mortgage insurance and pay a monthly mortgage insurance premium, or MIP, which is the government mortgage equivalent of PMI. Unlike with PMI, you’re required to pay MIP regardless of the size of your down payment.
Mortgages through the U.S. Department of Agriculture (USDA) and the Department of Veterans Affairs (VA) have no down payment requirement and don’t require mortgage insurance.
Homeowners And Title Insurance
Although owner’s title insurance is optional, home buyers must purchase lender’s title insurance to protect the lender against title claims. Finally, buyers must purchase a homeowners insurance policy to protect themselves and the lender in the event of damage to the home.
When embarking on the home buying journey, it’s important for the potential buyer to consider all closing costs so they have a better idea of what they can afford before signing on the dotted line.
Do Sellers Pay Closing Costs?
Sellers pay fewer expenses, but they may actually pay more at closing. Typically, sellers pay real estate commissions to both the buyer’s and the seller’s agents. That generally amounts to average closing costs of 6% of total purchase price or 3% to each agent.
Additionally, sellers often pay for the buyer’s title insurance policy, which is a low-cost add-on to the lender’s policy. They may also have to pay the buyer for property taxes if the taxes haven’t already been paid for the year.
Just remember that if taxes have already been paid, the buyer will owe the seller repayment for the portion of the taxable year after the closing, but if they haven’t been paid, the seller will pay the buyer for the period before the closing. Use the same process for determining who owes whom for homeowners association (HOA) fees.
What Are Seller Concessions?
Seller concessions are closing costs the seller agrees to pay, and they can reduce the amount of cash you need to bring on closing day. Sellers can agree to help pay fees like property taxes, attorney fees, appraisal inspections and mortgage discount points to lower your interest rate.
Negotiating Seller Concessions
Sellers will sometimes agree to make some concessions toward closing costs. In a buyer’s market, for example, sellers may need to sweeten the deal by agreeing to concessions. Even in a seller’s market, some houses simply have been on the market too long, either because the asking price was too high to begin with or the property is in poor condition. In those cases, too, sellers might have to offer some financial incentive to buyers who are willing to consider these slow-moving homes.
However, just because a seller can pay for closing costs doesn’t mean they will, and just because they’re willing doesn’t mean they can. Limits are set by Fannie Mae and Freddie Mac – government-sponsored enterprises (GSEs) that purchase mortgages that conform to their rules for sale in the secondary mortgage market.
Here’s a breakdown of the limits on seller concessions for a conventional mortgage:
Type of Property | Amount of Down Payment | Limit on Seller Concessions |
|---|---|---|
Primary residence or second home | Less than 10% | 3% |
Primary residence or second home | 10% – 25% | 6% |
Primary residence or second home | Above 25% | 9% |
Investment property | Any amount | 2% |
Additionally, FHA, FHA 203(k), VA and USDA loans have their own limits:
Buyer Loan Type | Maximum Seller Contributions |
|---|---|
FHA | 6% |
FHA 203(k) | 6% |
VA | 4% |
USDA | 6% |
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So how much of a seller’s concession can you get? It’s all about the negotiation.
Having the seller pay for certain items in your closing costs enables you to make a higher offer. Therefore, you’ll effectively be paying your closing costs throughout the life of the loan rather than upfront at the closing table, because they’re now built into your loan amount. This can save you from having to spend a ton of money just to get in the door.
Your real estate agent may also have insight into just how motivated the sellers are to move. If they need to get rid of the home, they may be more willing to work with you on concessions than a seller who can afford to wait for the best possible offer.
Seller concessions can reduce the amount of closing costs the buyer needs to pay on closing day. In turn, this makes the transaction more affordable for the home buyers. It’s important to keep these seller concessions in mind when looking at certain properties.
Stand Out By Covering Closing Costs
You might also save money by taking the approach that’s opposite of the one discussed above.
Although seller concessions can be nice, there’s a flip side: Sellers are often motivated to work with the prospective buyer who has the cleanest offer with the fewest strings attached.
For example, if you’re in a situation where a home has multiple bids, it may actually work to your advantage to have a lower bid but the ability to pay your full amount in closing costs, as opposed to having a higher bid with concessions included.
Because a lender can’t lend you any more than the home is worth, a seller may actually benefit if you don’t offer more. That’s because you’re lowering the risk of the deal falling through later on. If you pay the closing costs for yourself, it makes it that much sweeter.
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FAQs: Who Pays Closing Costs On A House?
Understanding who pays closing costs and how to negotiate with sellers can be complicated if you’ve never purchased a home. Remember that your real estate agent is working for you and will know what to ask for in your market.
Who pays for legal fees?
Each party pays their own attorney’s legal fees.
Why are seller concessions capped?
Generally, sellers agree to pay closing costs in return for a higher sales price. Buyers might prefer this because it frees them from a demand for cash at a time when they face many financial demands. A few thousand dollars extra on the mortgage payments – spread out over 30 years – might seem preferable.
Overall, allowing this practice to go unchecked would artificially inflate home prices. Lenders might not be able to recoup their losses on a home if it went into foreclosure, which would lead to tightening credit and a larger chill on the housing market.
What are no-closing-cost mortgages?
These are mortgages that roll closing costs into the mortgage, much like a buyer might seek to do through a seller’s concession. As a buyer, you’ll have to pay more for your mortgage because you are borrowing more. Ask your lender whether they have a no-closing-cost option, but remember that you’re simply deferring the costs – and paying interest on those costs – rather than eliminating them.
Can seller concessions make the appraisal process difficult?
Yes, seller concessions can make the appraisal process difficult. If you offer to buy the home for a higher price in return for seller concessions, you may have a problem getting an appraisal that justifies the additional costs, which will make it hard to get the financing you need. Make sure the price offered is warranted based on comparable sales.
The Bottom Line: Understanding Closing Costs Can Help You Negotiate A Better Deal
Before buying a home, it’s crucial to consider the closing costs associated with the purchase. Not only does this give you a better idea of what you can afford, but it also allows you to get educated on how you can negotiate with the seller.
Victoria Araj
Victoria Araj is a Staff Writer for Rocket Companies who has held roles in mortgage banking, public relations and more in her 15-plus years of experience. She has a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.
