Real estate transactions can be overwhelming, especially if you are selling or buying a house for the first time. One of the rookie mistakes to beware of is not taking into consideration the closing costs. To be specific, who pays closing costs and how much they are.
What are Closing Costs?
A real estate transaction is a complex process with multiple stakeholders. Closing costs are expenses paid to different individuals, parties, and entities involved in the process. These costs are incurred over and above the net value of the property.
Closing costs are sometimes also called settlement costs.
Why are Closing Costs Important?
Paying closing costs is important to finalize the real estate transaction. For instance, mortgage lenders typically require a home appraisal report and home inspection reports to determine the net worth of the property, the loan amount and calculate the risk involved. Without these, they may not approve the loan.
Closing costs are also important to transfer the ownership of the house from the seller to the buyer. To understand this better, let’s consider recording fee. It is charged by state and/or local government agencies to register the real estate sale, making it a matter of public record. Not recording the sale can be a gateway to legal liabilities in the future.
That being said, it is crucial to develop an understanding of closing costs before you begin a real estate transaction. If you are selling a house, it will help you find the right price for your property without narrowing your profit margins.
If you are buying a house, being well-versed with closing costs can help you establish your affordability.
Who Pays Closing Costs: Buyer or Seller?
Both the buyer and the seller have to pay certain closing expenses.
Closing costs for sellers can amount to 8%-10% of the final sale price of the home. This does not include the mortgage payoff. The biggest closing cost (5%-6%) the seller has to pay is the listing and buyer’s agent commission. The remaining 3%-4% includes expenses like home inspection fee, HOA fee, estoppel fees, etc.
» Closing Costs for Sellers: Here is a breakdown of ALL closing costs the seller typically has to pay.
Usually, the buyers are responsible for most of the settlement costs. Closing costs for buyers can amount to 2%-5% of the final sale price of the home or the mortgage amount. Nonetheless, they can negotiate these costs with the seller and the lender. Some sellers may offer to pay certain buyer closing costs to sweeten the deal or sell their home faster.
» Closing Costs for Buyers: Here is a breakdown of ALL closing costs the buyer typically has to pay.
Who Pays Closing Costs in Cash Sale?
In a cash sale, the buyer does not have to take a mortgage to finance their real estate purchase. Cash deals are beneficial for both the buyer and the seller as they are quicker, less risky and complicated, and have lower closing costs.
Both the seller and the buyer have to bear certain closing expenses in a cash sale.
Some seller closing costs on a cash sale are attorney fees, closing/settlement fees, escrow fees, HOA fees, pro-rated property taxes, title insurance, and transfer tax.
Since the buyer does not opt for a mortgage in case of a cash sale, they do not have to pay lender-related closing costs like application fees, appraisal fees, credit report fees, discount points, lender’s title insurance, loan origination fee, and underwriting fee. Buyer closing costs on a cash sale include attorney fees, courier fees, escrow fees, homeowners insurance, HOA fees, property tax, title search fees, transfer tax, and property tax.
Who Pays Closing Costs in Wholesale Deal?
Three parties are involved in a real estate wholesale deal, the seller, the wholesaler, and the buyer. The wholesaler acquires the property from the seller on contract and sells it on their behalf. Wholesalers often look for distressed properties priced below market value. Such deals are usually low risk and present the opportunity to make a larger profit in a shorter time span.
The seller and the buyer pay closing costs in case of a wholesale real estate deal. The wholesaler is not responsible for closing costs. However, they may have to pay taxes on the assignment fee (. Monetary compensation wholesalers receive for organizing the deal. It is usually a percentage of the final purchase price.) they receive.
Some seller closing costs in a wholesale deal are attorney fees, escrow fees, HOA fees, transfer tax, and pro-rated property tax.
Buyer Closing Costs on a wholesale deal include appraisal fees, assignment fees, escrow fees, owner’s title insurance, recording fee, survey fee, title search fee, etc.
Who Pays Closing Costs on Land Sale?
Land is a tangible asset, and its value only increases with time as it has a limited supply. In addition, this niche of real estate is less competitive as compared to house flipping and wholesale deals.
Both the buyer and the seller have to pay some closing costs on the sale of land.
Seller closing costs on land sale include attorney fees, deed preparation fees, HOA fees, pro-rated property tax, real estate agent commission, recording fees, transfer taxes, etc.
Some buyer closing costs on land sale are appraisal fees, attorney fees, environmental inspection, land survey fees, loan application fees, origination fees, soil percolation test fees, title insurance, and title search fee.
Who Pays Closing Costs on New Construction Home?
Purchasing a new construction home means buying a house directly from the builder or developer. Here, the buyer is the first person to live in the house since its construction.
Usually, the buyer has to bear all closing costs on a new construction. Nonetheless, the builder may offer certain incentives towards closing costs to make the property more attractive, especially if the buyer chooses to work with their in-house lender.
Buyer closing costs on a new construction include attorney fees, deposit registration fees, development fees, harmonized sales tax, loan origination fees, meter installation fees, notary fees, pro-rated property taxes, real estate broker commission, settlement fees, transfer taxes, and Tarion enrolment fee for new homes.
Who Pays Mortgage Closing Costs?
Mortgage closing costs are paid by buyers who take loans to buy properties. It includes traditional loan-related closing fees like application fees, discount points, loan origination fees, mortgage broker fees, premium mortgage insurance, prepaid interest, etc.
Mortgage closing costs also depend on the type of mortgage the buyer opts for. Let’s take a look at who pays the closing costs based on the type of loan.
Who Pays Closing Costs on Conventional Loan?
A conventional loan is a type of loan that is not insured by the government or any federal agency.
Lenders require buyers to pay Private Mortgage Insurance(PMI) for conventional loans when they make a down payment of less than 20%. The average rate of PMI for conventional loans ranges from 0.5%-1.86% of the original loan amount. Buyers can choose to pay the full PMI or a part of it upfront to lower their monthly mortgage payments.
Who Pays Closing Costs on a VA Loan?
VA loans are exclusively for active-duty members, veterans, and, in some cases, surviving family members. It is guaranteed by the U.S. Department of Veterans Affairs (VA).
Buyers opting for VA loans have to pay a VA funding fee. This is a one-time fee paid to the Department of Veterans Affairs (VA). The VA fee that a buyer has to pay depends on the down payment they make for a property. Buyers who make a down payment of less than 5% have to pay a VA fee of 2.3% for their first home and 3.6% on any subsequent homes.
Who Pays Closing Costs on FHA Loan?
FHA loans are designed to help moderate-income buyers with lower credit scores become homeowners. It is insured by the Federal Housing Administration (FHA).
All FHA loans require mortgage insurance. The buyer is required to pay an upfront premium and an additional annual payment. The amount of these payments is decided according to the size of the loan.
Who Pays Closing Costs on a USDA Loan?
The USDA mortgage loan program is backed by the United States Department of Agriculture. It makes buying a home in rural areas affordable for low- and moderate-income wage earners.
Apart from the traditional fees, buyers opting for USDA loans also have to pay an upfront guarantee fee amounting to 1% of the loan. The federal agency imposes this fee in place of mortgage insurance. This fee can be rolled into the mortgage. In addition to this, buyers also have to pay an annual fee, which is equal to 0.35% of the loan amount.
Who Pays Closing Costs in Each State?
|Region||Closing Costs for Sellers|
|Northeast||Connecticut | New Hampshire | New Jersey | New York | Pennsylvania | Rhode Island | Vermont | Delaware | Maine|
|Midwest||Illinois | Illinois | Indiana | Iowa | Kansas | Michigan | Minnesota | Missouri | Nebraska | North Dakota | Ohio | South Dakota | Wisconsin|
|South||Alabama | Arkansas | Florida | Georgia | Kentucky | Louisiana | Maryland | Mississippi | North Carolina | Oklahoma | South Carolina | Tennessee | Virginia | Texas | Washington, D.C. | West Virginia|
|West||Alaska | Arizona | California | Colorado | Hawaii | Idaho | Montana | Nevada | New Mexico | Oregon | Utah | Washington | Wyoming|
How To Reduce Closing Costs?
1. Opt for a discount broker or a flat fee realtor
Compared to traditional brokers who charge 6% of the sales price as commission, discount real estate brokers only charge 3%-4% of the sales price for their services. In fact, some low commission realtors offer higher concessions if sellers choose them as their buyer’s agents for their next real estate purchase.
2. Choose “For Sale By Owner” (FSBO)
Sellers can save up to 3% real estate agent commission and cut several costs by opting for “For Sale By Owner” services. Houzeo offers services like Flat Fee MLS for FSBO sellers that list properties on the MLS and make the selling process easier and smoother. What’s more, if the buyer is unrepresented, with Houzeo, sellers can sell their homes for zero realtor commission charge!
» Best FSBO Sites: Check out the best FSBO websites in 2022
3. Research and compare
Sellers can save on closing costs such as attorney fees, home inspection fees, and escrow fees by researching and comparing more affordable services to find the one most suitable for them.
4. Ask the buyer to cover seller closing costs
Buyers may agree to cover the seller’s closing costs if the market is competitive and fewer houses are in the market. On the other hand, sellers can raise the listing price to cover full or partial closing costs.
1. Opt for a rebate program
Some real estate brokers offer buyers incentives like rebates that help lower their closing costs and/or buy down the mortgage interest. Real estate agent services are free for buyers as sellers pay the agent commission for both parties.
2. Give a solid offer
Present an attractive deal to entice the other party to cover some of the closing costs. An irresistible offer, although it doesn’t mean more proceeds, can reduce expenses. The better the offer, the more they’ll want to accommodate the deal. Hence, there’s a great chance the seller will pay the added cost to keep the transaction easier and quicker.
3. Minimize requests
Making demands can make the deal slow and troublesome for both parties. Hence, buyers should make minimal requests so the seller will be more willing to cover some of the closing costs. If there are too many inconveniences, the seller may question the genuineness of the buyer and feel the need to back out.
4. Make it quick and hassle-free
Most of the sellers aren’t happy dealing with the lengthy transaction. As much as possible, buyers must keep the transaction straightforward.
5. Research and compare
Buyers can save closing costs by carefully comparing and choosing the best lender for their transaction according to their fee and mortgage rate. Additionally, they can opt for economical insurance providers, pest inspection services, and lead-based paint inspection services.
6. Ask the seller to cover closing costs
Depending on the market conditions, the buyer can negotiate the deal with the seller by requesting them to cover some of the buyer’s closing costs or offer credits towards closing costs.
If you have not begun your real estate journey yet, opt for Houzeo. Houzeo.com, a tech company, provides an unbeatable combination of maximum savings, cutting-edge technology, and 5-star customer support.
With its 100% virtual service, it helps home sellers list their properties without any hassle from the comfort of their homes while also allowing home buyers to explore properties and make offers online.
Houzeo’s customer-centric approach, advanced technology, and flat fee packages make it an ideal choice for those looking to avoid paying high commissions and closing costs.
» Houzeo Reviews: Check out Houzeo.com’s reviews before listing your house!
Frequently Asked Questions
1. Are closing costs tax deductible?
Closing costs that are or can be considered interest or taxes can be written off for deductions.
2. How can I calculate closing costs?
Closing costs are a sum of specific settlement expenses. These vary according to the location, mortgage rates, and market conditions. Houzeo's closing cost estimator is a free tool sellers and buyers can use to get a close estimate of settlement costs.
3. Are closing costs negotiable?
Yes. The seller and buyer can negotiate who pays which closing costs as a part of the settlement. Buyers can also negotiate certain closing costs with mortgage lenders.
4. Do you have to pay closing costs when you refinance?
Do you have to pay closing costs when you refinance?' Answer: Yes. When refinancing a mortgage, the buyer has to pay some closing costs like application fees, appraisal fees, attorney/settlement fees, credit reporting fees, prepaid daily interest charges, etc.
Who usually pays closing costs?
Usually, the buyer pays most of the closing costs. However, it depends on the contractual agreement between the buyer and the seller.
- How to Sell My House Fast: Selling a house in America takes approximately 90 days from list to close. But that’s only if you get offers fast and there are no hiccups in home inspection, appraisal, and closing. Here’s how you can sell your house fast and for more cash.
- Cash Home Buyers: If you’re looking for an all cash offer to make a quick sale, then companies that buy houses for cash are your best bet.
- How To Sell a House By Owner: If you’re planning to sell your house on your own, check out this guide to help you through the process.
- How To List on the MLS: List your home on the MLS yourself without hiring a real estate agent.
- For Sale By Owner Contract: Check out how to create a contract for an FSBO transaction.
- Selling a House: Selling a house in the United States is complex and requires a good understanding of the real estate market.
- Selling a House As Is: If you want to sell your house without incurring any repair charges, then check out this blog on the ‘as-is’ approach.
- Closing Costs for Sellers: What are the closing costs as a seller? See what’s the real cost and how you can negotiate in your closing costs as a seller.
- Closing Costs for Buyers: What are the closing costs as a buyer? See what’s the real cost and how you can negotiate in your closing costs as a buyer.
- Seller Disclosure: Check out the seller disclosure requirements in each state.
- Best Real Estate Websites: The majority of homebuyers and home sellers go through a real estate website before reaching out to a realtor. Read our list of the top 12 real estate websites in USA.
- Top Real Estate Agents: Check out the top real estate agents in the country who can guide you in your real estate journey.
- Best REALTORS: Check our rankings of the top REALTORS in the country.
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