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Who Pays Closing Costs, Buyer Or Seller?

7-Minute Read
Published on September 24, 2021
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Closing costs are an extremely important aspect of real estate 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 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.

In this article, we’ll discuss all aspects of closing costs to guide you through the journey to the closing table.

Understanding Closing Costs

Closing costs are all of the fees and expenses that must be paid on closing day. The general 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 discuss what closing costs look like with your real estate agent early in the home buying process, which may help you negotiate seller concessions. We’ll give you some tips about that later.

Closing Costs For Buyers

In general, all costs related to the loan, the property and the required insurance policies are paid by the buyer.

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 that will give 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 appraisal – which is required by the lender – and home inspection. Property taxes and homeowner’s association fees are prorated, and buyers pay only for the portion of the year that they will own the home.

Property taxes are one of the main swings in closing costs. Buyers closing at the end of the year are only responsible for prorated taxes for the remainder of the year. Buyers who are closing at the beginning of the year and live in a high property tax state may have to pay a substantial property tax bill.

Most property taxes are deductible on federal income taxes, but it’s important to know that the 2019 Tax Cut and Job Act placed a $10,000 cap on total state and local income tax deductions, which includes property taxes. Be sure to check with a trusted tax professional to see how this will affect you.

Insurance Fees

Buyers with less than a 20% down payment will have to pay private mortgage insurance (PMI) – and PMI providers generally require an annual premium upfront. Buyers with FHA, USDA or VA mortgages require an upfront 1.75% down and then a monthly fee for MIP, or the mortgage insurance premium, which is the government mortgage equivalent of PMI.

Buyers will also have to pay for title insurance for the lender – and themselves – in order to protect against title claims. Finally, buyers will have to pay for a homeowner’s insurance policy to protect themselves and the lender in the case of damage to the home.

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Closing Costs For Sellers

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 have not 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 HOA fees.

Understanding Seller Concessions

Seller concessions are closing costs that the seller agrees to pay and can substantially reduce the amount of cash you need to bring on closing day. Sellers can agree to help pay for things like property taxes, attorney fees, appraisal inspections and mortgage discount points to lower your interest rate.

Negotiating Seller Concessions

Sellers can agree, in many cases, 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. There are limits set by Fannie Mae and Freddie Mac, the government’s mortgage investors, who purchase mortgages that conform to their rules for sale in the secondary mortgage market.

Conventional Mortgage: Limits on Seller Concessions

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 

25% or more

9%

Investment Property 

Any amount  

2%

Additionally, FHA, FHA 203(k), VA, USDA loans have their own limits:

Buyer Loan Type

Maximum Seller Contributions

FHA

6%

FHA 203K

6%

VA

4%

USDA

6%


Do Your Research

So how much of a seller’s concession can you get? It’s all about the negotiation.

We talked to REALTOR® and Certified Negotiation Expert (CNE) Ina Sajovich about the best way to ask for and to get sellers to accept your request for concessions to help with closing costs. Sajovich said that having an experienced REALTOR® or agent on your side can really be helpful because they know the market and what’s common. For example, take the scenario we talked about earlier where a buyer has to pay a higher price to get their offer accepted.

“In our current market, the best way to ask for and receive a seller concession is to have your agent scour the recent sales for similar comps (comparable properties) that have closed with seller concessions,” she said. “This can help offset the higher purchase price many buyers have to offer in order to get under contract.”

By having the seller pay for certain items in your closing costs, it 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 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.

Stand Out By Covering Closing Costs

However, you might also save money by taking the opposite tack.

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 there are multiple bids on the home, it may actually work to your advantage to have a lower bid but the ability to pay for your full closing cost, rather than to have a higher bid with concessions included.

“We are pretty lucky in our area because, even though we are in a low inventory seller’s market,” Sajovich said. “It is common for sellers to pay for the title insurance policy and to split closing costs. In multiple offer situations, many buyers’ agents don’t realize that the buyer could cover these costs, which puts money in the sellers’ pocket without increasing purchase price and running the risk of having the appraisal come in low. This is where I often see that an offer price that is $2,000 or $3,000 less than any other offer can still get the house.”

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 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.

FAQs About Who Pays Closing Costs

Understanding who pays closing costs and how to negotiate with sellers can be complicated if you’ve never purchased a home before. 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?

Here’s how it works: Sellers don’t agree to pay for closing costs out of the goodness of their hearts. Generally, sellers agree to pay in return for a higher sales price. Buyers might prefer this because it frees them from a demand for cash at a time when there are 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 as buyers might seek to include furnishings or other non-real-property-related items into increased mortgage payments. Lenders might not be able to recoup their losses on a home should it go into foreclosure, which would lead to tightening credit and a larger chill on the housing market. Thus the limits on sellers’ “generosity.”

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. Done this way, though, you will 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 are simply deferring the costs – and paying interest on those costs – not 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 in turn will make it difficult to get the financing you need. Make sure the price offered is warranted for comparable sales in the area.

Knowing How Closing Costs Work Can Help You Negotiate A Better Deal

Understanding when and how to ask for seller concessions can help make closing day more manageable. Learn some more tips for buying a home in the Learning Center.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds 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.