Who Pays Which Closing Costs in a Home Purchase?
When you’re buying a house, you get detailed estimates from your lender of what you’ll pay. Still, more than a third (35%) of homebuyers are surprised by higher than quoted costs at the closing table, according to a recent survey by mortgage data firm ClosingCorp.
Some of the confusion comes down to the large number of fees and costs involved in closing.
The good news? Nearly all of these costs are negotiable, and the seller is able to cover most of them.
These negotiations can help save you money or limit the amount of cash you need to pay upfront. The purchase contract you signed at the beginning of the process will be the starting point for discussing who pays which closing costs in a home purchase.
In this article, we will cover:
- Closing costs and who can pay them
- When to decide who pays which costs in a home purchase
- Negotiating who pays which costs
- Lending programs limits on much of your costs can be paid
Closing costs and who can pay them
In general, buyers will pay the costs related to getting financing on their home, plus a portion of the title fees, while the seller pays the fees related to transferring ownership, such as owner’s title policies and any property taxes that are owed up until the date the sale closes.
Who pays for all of these closing costs is negotiable. Everything from origination fees to the initial deposit of property taxes paid into an escrow account can be paid by someone other than the buyer.
Keep in mind, the seller cannot pay any portion of your down payment. There may be exceptions if you are buying a home from a family member, but if you’re buying from an unrelated seller, the down payment will have to come from you.
Common closing costs in a purchase transaction are broken down into lender costs, closing and title fees, and property related fees.
Closing costs related to your loan
Lenders may have different names for fees, but in the end the charges are related to the processes involved in getting your loan approved.
Your mortgage lender must quote you the price on most closing costs, and there’s a federally mandated zero tolerance policy for any change to the amount — if the fees are higher, the lender has to pay the difference. There are other tolerances for non-recurring costs, which can’t be exceeded by more than 10%. The lender pays the difference if these limits are exceeded.
Here are some of the basics.
Some lenders may charge these fees, and a portion of the fee may be used to cover the cost of your appraisal.
Credit report fees
A basic credit report fee will not usually cost more than $25, but if you recently paid down credit cards or need to have some incorrect information fixed in order to complete your loan it can cost more. Sometimes this fee is bundled with the application fees.
Depending on the type of loan you are approved for, the fee for these can be a low as $275 for a conventional appraisal, and up to $600 or higher for a VA appraisal. If you are buying a multi-unit property, or a property that is far outside the city limits, additional fees may apply.
These cover the lender’s cost for processing your mortgage, such as document preparation, underwriting, loan disclosure and funding all related to finalizing your loan.
You can pay discount points to get a lower mortgage rate. A seller may be willing to pay discount points to make it more financially favorable for you to buy their home.
Depending on when you close, interest payable through end of the month will be due at closing. It’s best to close at the end of the month to minimize this expense.
Title-related closing costs
It’s important that you can take ownership to your new home without any issues with title. Tax liens, mechanic’s liens for work that was done on a house, or judgements are all items that can affect your ability to have “clear title,” and a title company researches public records to make sure all of these items are cleared. Title insurance provides you with protection against these types of claims after you take ownership of your home.
It’s also necessary to have someone trained in how to have your closing documents properly signed, and that’s where an attorney or escrow officer provide support.
Your state may not require attorneys, but if they do, the fee for their services is usually between $500 to $1,500. If the property you are buying has a lot of liens or other issues that require extra document preparation, the fee may be higher based on whatever the attorney’s hourly rate is.
Courier and notary fees
Signed documents usually need to be sent to the lender after you close. If you will be traveling at the time your closing is scheduled, a notary may be hired to meet you to sign closing documents.
This fee will depend on the city or county you live in, and is required to provide notice that you are the new owner of the property you are buying.
Title insurance fees
There are usually two types of title insurance payable in a purchase loan. Lender’s title insurance is payable by a buyer, and covers the lender against any prior claims on the property such as tax liens, undisclosed ownership interest. The owner’s policy is usually paid by the seller and covers you (the buyer) against any prior claims on the property in the same way it protects the lender. There may also be title search fees, endorsement fees, and other title-related costs. The cost of the insurance is based on the sales price and the loan amount, so the higher the sales price and loan amount, the higher the title insurance costs will be.
If you are buying a house in a non-attorney-state, also known as an escrow state, you will be charged a fee that covers the costs of the person who assists you with the signing of your paperwork, usually known as an escrow officer. The escrow fee is usually split between the buyer and the seller.
Property-related closing costs
The most common property-related costs will be your homeowner’s insurance and property taxes. Who pays the taxes and how much of the tax bill due from you depends on the how the county collects payments in your neighborhood. Homeowner’s insurance is required as well, but you are free to shop around for the best coverage at the lowest price possible.
If you are making less than 20% down payment on your home, you’ll likely need an escrow account for your lender to pay your property taxes and insurance as they come due. The cost to set up the account can easily run into several thousands of dollars depending on how high the taxes are on the property you are buying.
Transfer taxes and HOA transfer fees
Depending on where you live, there may be sizable tax fees payable for the transfer of ownership in to your name. Transfer taxes have to be paid by your lender if they are improperly disclosed.
Some exclusive homeowners’ associations have large buy-in fees that can be as much as 1% of the price of your home. HOA transfer fees are usually paid by the buyer.
Home inspection fees
These are payable by the buyer to get a more detailed look at all of the working parts of the house. Unlike an appraisal, the primary purpose of the home inspection is to make sure the house doesn’t have major problems that need to be fixed before you complete the purchase.
Real estate commissions
Real estate commission are paid to the agents that help sell a home. Buyers usually don’t pay real estate sales commissions. There are two agents involved in most real estate transactions: a listing agent and a buyer’s agent.
Listing agents represent sellers, marketing their houses for sale for an fee of 6%. If a different agent helps find a buyer, the buyer’s agent splits the commission with the listing agent at an agreed upon percentage.
When to decide who pays which costs in a home purchase
Who pays for these fees will be spelled out in the home purchase agreement. This is a legally binding document between you and a seller outlining the price and terms you’ve agreed upon for the purchase of a home. It can also be called a purchase contract, a contract for sale, or a sale contract.
Once you sign it, you are making a commitment to all of the terms within the contract, meaning no changes can be made without the authorization of all parties. It also means the parties of the transaction don’t have to agree to any more negotiations regarding who pays which closing costs.
Your contract may also open another window called a home inspection contingency while you are getting home inspections to negotiate for the payment of closing costs. Most contracts allow you to renegotiate the terms of your contract after your home inspections are done, in the event you want to have repairs done.
If the repairs are not that significant, you can ask the seller to pay for some of your closing costs instead of doing the repairs. Once this inspection window closes, you’ll have a hard time negotiating any other closing cost contributions.
The time to decide whether you want the seller or anyone else to pay any of your closing costs is before or during the preparation of an offer to buy a home. You should have a general idea of how much the seller is allowed to pay depending on the type of loan program you are pre-approved for.
Negotiating who pays which costs
Who pays which costs really comes down to the haggling abilities of you and your real estate agent. Here are some strategies that can be used to get other parties involved in the purchase to cover some, or all of your closing costs.
Get a credit toward costs from your lender
Your lender may be willing to reduce the origination fee, but it may come at a higher interest rate. Although the payment increase may not be that significant, you should use a mortgage calculator to determine how much extra interest you’ll pay over the term of your loan.
Ask your realtor to cover some costs
Your real estate agent may be willing to cover some costs if push comes to shove. Keep in mind, once the contract is executed, your agent’s commission is one of the costs that is agreed to. If you’d like to ask your agent to help out with costs, be sure to discuss it before you have an accepted contract.
Ask the seller’s realtor to pay costs
Although not very common, there are situations that may motivate a seller’s agent to pay some of your closing costs. This will usually have to do with something the seller is unwilling to agree to, like a minor repair the seller doesn’t want to make.
Offer a higher price than the seller is asking for
If the asking price is reasonable, but you really don’t want to pay, or don’t have the extra funds to cover all the closing costs, you can offer a higher price to the seller, and ask to have the difference paid toward your closing costs. A higher price equals a higher loan amount, which means your payment is higher, so be sure you look at the mortgage payment options before you make your final offer.
Lending programs have limits on much of your costs can be paid
When someone pays closing costs on your behalf, the mortgage lender consider that a “concession.” In general, government loan programs allow higher seller concessions than conventional loans.
If you are making less than a 10% down payment, Fannie Mae and Freddie Mac’s conventional mortgage programs will only allow the seller to pay costs to be paid up to 3% of the price of your home. If you make a higher down payment, the seller may be allowed to pay up to 9% of the price.
The FHA loan allows you to negotiate for the seller to pay up to 6% of the price of your home toward closing costs.
If you are currently serving in the military or are a veteran, you may be eligible for VA financing, which allows for a seller to pay up to 4% of the sales price toward closing costs. The VA also allows the seller to include the payment of credit balances and judgments as part of your closing costs. Be sure to check with your VA lender if you are looking for the seller to help pay any of your credit — not all lenders will allow for this even though the VA guidelines give them the option.
One important note — there are certain fees that a veteran or active military buyer is not allowed to pay. Be sure to let your realtor know if you are pre-approved for VA financing so he can add the language regarding the VA fees to the offer to purchase.
If you are purchasing a home in a rural area eligible for USDA mortgage financing, you may be able to purchase a loan with no down payment requirement and ask the seller to pay up to 6% of your closing costs. This program has income restrictions, but may be a great option if you are buying a home in an area eligible for USDA financing.
The bottom line: Who pays which costs is negotiable
You can’t get around paying closing costs if you’re buying a home, but you shouldn’t hesitate to haggle over who pays to minimize how much money you end up spending on the purchase of your home. If you reduce the amount of money you spend on costs to buy your home, you’ll have more in the bank to cover your move-in expenses.