For anyone who has previously bought or sold a home, the term “closing costs” is probably a familiar one – but to those new to the property market, these additional fees and costs could come as a bit of a shock toward the end of an already demanding process.
In this article, we will break down the ins and outs of closing costs, including what they are, what types of things might be considered “closing costs,” and who pays for them.
What Are Closing Costs?
Simply put, “closing costs” are the fees and expenses associated with the purchase or sale of a property. While they may be estimated throughout the process, the final amount due (while usually very close to the estimate) is generally determined quite close to the closing date.
These costs are separate from the actual purchase price of the property and can vary depending on several factors, including the type of mortgage you get, the location of the property in question, and the specific terms of your transaction agreement.
Types of Fees That May Be Included In Closing Costs
For the most part, the closing costs cover all of the practical and administrative things that have to happen behind the scenes to get a deal across the finish line. In many cases, the total amount due for all associated closing costs is calculated and made payable to a single organization or person – such as the mortgage company or closing attorney. Then that organization is responsible for distributing the appropriate amounts to each entity.
Some of the most common closing costs are:
Loan-Related Fees
These include application fees, origination fees, points, and credit report fees. Lenders may charge these fees for processing and underwriting the mortgage loan.
Title-Related Fees
These fees are associated with the title search and insurance. They ensure that the property’s title is clear and that there are no ownership disputes or liens.
Appraisal Fees
Lenders often require a professional appraisal to determine the property’s fair market value. The cost of the appraisal is passed on to the buyer.
Attorney Or Closing Agent Fees
Some states require the involvement of an attorney or a closing agent to handle the legal aspects of the transaction. These fees vary based on the specific attorney or closing agent’s standard rates.
Government Fees
Certain taxes and fees are paid at closing, such as transfer taxes, recording fees, and mortgage recording taxes. These fees vary by jurisdiction.
Prepaid Expenses
These include expenses that need to be paid in advance, such as property taxes, homeowners association fees, and prepaid interest on the mortgage loan.
Home Inspection Fees
Buyers often hire a professional home inspector to assess the property’s condition. The buyer nearly always pays the cost of the inspection. In many cases, the fee is paid separately and directly to the inspector; however, in some cases, it’s paid as part of the overall closing costs.
It’s important to note that closing costs can vary significantly depending on the location and the specific details of the transaction.
Who Pays Closing Costs?
Closing costs can be negotiated between the buyer and the seller, and the specific arrangements can vary depending on the real estate market, local customs, and the purchase agreement terms. Buyers and sellers can – and very often do – negotiate who pays for certain closing costs, and in some cases, the seller may agree to cover a portion or all of the closing costs to facilitate the sale.
We recommend a review of the loan estimate and closing disclosure provided by the lender, which outlines the estimated closing costs, to understand the expenses involved in the transaction. While the estimated closing costs are typically very close to the actual amount due, the final total isn’t usually specified until a few days before closing since some fees may depend on fluctuating market rates. Traditionally, there are customary practices regarding who typically pays certain closing costs, but these practices can be negotiated and may vary by location. Here’s a general breakdown:
Buyer’s Closing Costs
Loan-Related Fees
The buyer typically pays fees associated with obtaining a mortgage, such as application fees, origination fees, and credit report fees.
Appraisal Fees
The buyer usually pays for the property appraisal to determine its value. This is paid as a separate invoice directly to the appraisal company or the mortgage lender who ordered the appraisal. However, it may be rolled into the final lump sum if the mortgage company covers the cost initially. In most cases, the choice of appraisal company is made solely by the mortgage lender, and the buyer does not have input into the selection process.
Inspection Fees
The buyer is responsible for hiring and paying for a home inspection to assess the property’s condition. This is another fee paid directly by the buyer to the service provider since the buyers are able to select an inspector of their choosing. While these fees are typically not included in the final “closing costs” lump sum, it is still important that the buyers account for them as it is an additional expense – usually of a few hundred dollars – that must be paid.
Title-Related Fees
The buyer may be responsible for fees associated with the title search, title insurance, and other title-related expenses so that the mortgage company is confident that the property in question is free of any liens or ownership disputes. These services are generally ordered by the mortgage company or closing attorney through a company of their choosing, with the cost passed to the buyer.
Government Fees
The buyer usually pays certain taxes and fees, such as transfer taxes, recording fees, and mortgage recording taxes.
Seller’s Closing Costs
Real Estate Commission
The seller pays the real estate agent’s commission, which is usually a percentage of the sale price. This fee is negotiated strictly between the seller and their real estate agent, with the selling real estate agent then offering a commission split to the buyers’ agent. In many areas, it’s common to see most real estate agents requesting and offering similar commission splits, although there are no legal standards for any maximum or minimum amounts.
Title-Related Fees
The seller may be responsible for fees related to the title search, title insurance, and other title-related expenses to prove that they are the property’s current owners.
Government Fees
In some jurisdictions, the seller may be responsible for certain taxes and fees, such as transfer taxes.
Ready to start your real estate journey as a buyer or a seller (or both!)? Let’s chat! The team at Wilson Associates are experts in all facets of the real estate transaction process.
