If you’re buying or selling a home, you might be surprised at the number of closing costs associated with a real estate transaction. Closing costs can add up to thousands of dollars, depending on the loan and the details of the transaction. Whether you’re buying or selling a home, you need to know who pays for what.
What are closing costs?
Closing (also referred to as “settlement”) is when the buyer, seller, and other involved parties sign the paperwork to complete a real estate transaction. Closing costs are the fees, taxes, and insurance expenses associated with a real estate transaction.
Closing costs vary, depending on the location of the property, type of loan, and what parties are involved in the transaction. Generally, closing costs run between 2-5% of the total sale price of a home. (In Iowa, we’re on the lower end of that range with average closing costs on a $200,000 home, coming in at around $2100.)
Closing Costs Can Include:
- Attorney fees
- Property taxes
- Title search and insurance
- Homeowner’s insurance
- Mortgage insurance
- Appraisal fee
- Loan application fee
- Loan origination fee
- Document/Loan fees
- Escrow funding
- Prepaid interest
- Home inspection
The fees associated with the mortgage loan will depend on the lender and the loan program.
Who Pays for What?
In a real estate transaction, both the buyer and the seller should expect to pay some closing costs.
Generally, sellers pay real estate commissions to the real estate agents who helped sell the home. They may also pay for recording fees, prorated property taxes, a termite inspection, and any repairs or home warranties listed in the purchase agreement with the buyer.
Home buyers typically pay the majority of the other closing costs associated with the transaction. These costs can include attorney fees, title search and insurance, inspection fee, homeowner’s insurance, mortgage insurance, and any other loan-related expenses.
The lender is required by law to provide the details on the closing costs. A loan estimate (also called a Good Faith Estimate) is provided early in the application process and a Closing Disclosure is delivered a few days before the closing.
There are exceptions to the rules. Closing costs can be negotiated as part of the purchase agreement. Sometimes motivated sellers will agree to pay all or part of a buyer’s closing costs to make the sale. Also, in some locations, it is more common for sellers to help pay for closing costs.
Can Closing Costs be Negotiated?
As mentioned above, buyers can negotiate with the sellers and ask them to pay all or part of the closing costs (called a seller concession). Whether the seller agrees will depend on the circumstances.
In a less competitive real estate market (with fewer buyers) sellers might be willing to negotiate to sell their home. But in a seller’s market (with plenty of buyers), asking for a seller to pay closing costs could result in a rejected offer. Consult your real estate agent for advice on negotiating closing costs in your offer.
Some loan programs limit seller concessions. FHA loans limit the seller concessions to 3% of the sale price (the seller cannot contribute more than 3% of the sale toward closing costs). With a VA loan, the seller can cover all the buyer’s closing costs. Limits for seller concessions on different types of loans are dependant upon the type of loan, the lender, and the location.
As a buyer, you can do your homework and shop around for mortgage lenders that have lower costs, or you can ask lenders to reduce their closing costs. While some fees associated with the loan itself are negotiable, other fees, such as property taxes are not.
What About a “No Closing Cost” Loan?
A no-closing-cost mortgage means the closing costs are rolled into the mortgage loan. So, you’re still paying the closing costs, but you don’t have to come up with the money up front. While you don’t have to save as much, you will have a higher payment.
Most of us don’t do real estate transactions regularly, so many of the details associated with a real estate closing are foreign to us. But, it’s still important to understand exactly what you’re paying for.
Don’t be afraid to ask questions about anything you don’t understand!
Whether you’re selling or buying a home, the process can feel intimidating and overwhelming. But it doesn’t have to. At Coluzzi Real Estate, we answer all your questions and simplify the process. We’re here for you every step of the way. Please don’t hesitate to contact us today!