Who Pays Closing Costs — Buyer or Seller?

Closing costs are fees that need to be paid in full before the home buying transaction can be completed, and there is almost nothing more upsetting for the buyer than finding out at the last minute during the home buying process that the buyer is the one who is paying the closing costs. Remember that every real estate transaction is different, so the sellers can also be asked to pay certain closing fees.

Regardless of whether you’re a determined buyer who’s dead set on a particular house, or a veteran homeowner trying to decide if now is the right time to sell, the process can quickly become overwhelming. Understanding the ins and outs of closing costs will allow you to be better prepared when it's time to close. 

Key takeaways:

• Buyer closing costs can include Private Mortgage Insurance, Title insurance, appraisal, inspection and home insurance costs.
• Seller closing costs often include real estate commissions, property taxes, HOA fees and seller concessions.
• Determining who pays what closing costs will vary and can often be negotiated.

What are closing costs?

Don’t forget your checkbook before you leave to get your new keys! Your seller won’t hand them over until you’re able to settle your closing costs. Closing costs are fees paid to cover the costs required to finalize your mortgage when buying or refinancing a home. These taxes and fees can range from 2%-5% of your total purchasing price but can vary based on your local property tax laws. For example, let’s say your home’s purchasing price is $275,000; you can expect to pay a closing cost of anywhere from $5,500 to $13,750. We know — not cheap. Taking the time to factor closing costs into your initial home-buying budget will take away mind-numbing headaches at the end of the purchase. 

Many people are intimidated by home buying or selling once they become aware of how little they know about the process. That’s why it’s important to find a great real estate agent and a home insurance company that can guide you step-by-step, just like we’re about to do right now (creating a closing day checklist doesn't hurt either). Continue reading for everything you need to know to successfully settle your real estate deal and start enjoying the home of your dreams. 

Buyer closing costs

Before you can tackle buying a home insurance policy to protect your new property, closing costs must be paid in full by the buyer to compensate the realtors involved for funding, insuring and approving the property’s sale. These costs often can take buyers by surprise since they’re not listed under the home's purchase price but can be included in the mortgage to be paid in installments over time. Here are some of the closing costs you can expect to pay before getting ahold of your new keys:

Private mortgage insurance

Private mortgage insurance (PMI) is a policy designed to protect the lender financially. There are certain criteria a person must meet in order to qualify for a mortgage loan. These include having a low debt-to-asset ratio, good credit history and a down payment of 20% or more. If you do not meet these criteria, you could still be eligible for a mortgage loan, but the lender may require PMI to further protect themselves from additional risk. 

The cost of PMI relies heavily on your credit history and how much you intend to borrow. Since PMI is typically a percentage of your total loan, the more expensive your real estate, the more you'll pay for mortgage insurance.

Title insurance

The process of transferring the home’s title from the seller to the buyer is a sensitive transaction. An owner’s title insurance policy (and enhanced title policies) provide extensive financial protection should any ownership issues arise. Without this policy, you could become responsible for unpaid debt and back taxes from previous owners. 

Pricing for title insurance varies by state, company and the number of policies you buy. Homeowners can expect to pay anywhere from $1,000 and up for full title coverage.

Appraisal and inspection

Homeowners have appraisals and inspections performed on their property to get an accurate estimate of its replacement value and identify safety hazards that need addressing. Licensed professionals perform these, sometimes referred by the desired insurance company. Can appraisals and inspections cause more headaches if an issue is spotted? Yes. Will you be glad once you’ve fixed all your problems and finally pass? Absolutely.

You should expect to pay anywhere from $300-$400 for an appraisal and between $270-$400 for an inspection, although the price can fluctuate depending on the size of the home, your location and what features of the home are being examined.

Home insurance

You might have your heart set on that beautiful Queen Anne on the corner of Lafayette and Harvard Street, but have you thought about how much it’ll cost to insure it? Your lender will check before the sale can be complete. According to the National Association of Insurance Commissioners, the average cost of a homeowners insurance policy in the U.S. is $1,200 per year. 

Many factors can increase your coverage premium, such as poor credit history, natural disaster risk, multiple past claims and living close to the coast. These factors can increase your premium because providers want to be financially protected in the event of an unforeseen accident or natural disaster.    

Is it OK to ask the seller to pay closing costs?

As a first-time buyer, it can be a challenge to put up a down payment and pay for closing costs at the same time. To alleviate a portion of this expense, some buyers will ask their seller to pay for some of the closing costs. In a highly competitive market, doing so can put you at a disadvantage in comparison to other interested buyers who might not be asking the same. A less competitive market will likely present sellers who are more open to taking on some of the expense to move forward with the sale.

What happens if I can't afford closing costs?

We know the home buying process is expensive, but don’t give up hope. There are options for home buyers that can help make securing your future home still possible. As mentioned above, you can always ask the seller if they’d be willing to absorb some of the closing costs. Reducing the amount of your down payment to reallocate funds toward your closing costs is another potential strategy. There are also grant programs providing financial assistance to first-time buyers looking to purchase a home. 

Seller closing costs

At the end of a sale, the buyer is usually responsible for paying closing costs. In a buyer’s market, sellers may be more open to negotiating terms of sale with interested parties to  incentivize the deal further. Below is a list of closing costs that sellers usually pay:

Real estate commissions

Real estate commission is a percentage of the total transaction price paid to the buying and selling agents involved. Due at the end of escrow, these agents split the commission fee, which usually makes up 5%-6% of the home’s purchase price. The seller will likely put a portion of the funds earned from the property’s sale toward paying commission fees.

Property taxes

Property taxes are paid to the government to fund city infrastructure projects, schooling, community services, etc. It can be difficult to estimate how much property taxes are going to be at the end of escrow because of varying factors such as prorating, location and property value. You can get a rough estimate by multiplying the property’s assessed value by your local tax rate.

HOA fees

Purchasing a home and moving into a new neighborhood means becoming part of a new, more significant community of homeowners. Oftentimes, local communities will form homeowners associations (HOA) to make sure voices are heard and ensure community guidelines are established and adhered to. HOAs try to help keep the community safe and preserve the residential property values. To maintain the HOA’s community standards, a fee is assessed at the end of escrow.

What are seller concessions?

Seller concessions are offered to the prospective buyer to make the home more affordable. In a less competitive market, the buyer may be able to negotiate with the seller to cover closing costs that put the home price out of budget. 

There is a limit to how much a seller can give in concessions — this cap prevents buyers from using concessions to pay for the majority of their down payment. You can consult with your real estate agent to determine whether your market’s condition presents the opportunity for seller concessions. 

How can I avoid paying closing costs?

For most buyers, avoiding closing costs entirely is a difficult task. The key is knowing how to utilize your resources to reduce some of the expense. Below is a list of methods you can use to relieve some of the financial pressure of closing your deal: 

• No closing cost mortgages: These are mortgages where the lender agrees to pay for closing costs up front, charging a larger interest rate over the loan’s duration to make up the difference in revenue.
• Close at the end of the month: Closing at the end of the month allows you to only pay a few days of per diem interest, whereas closing at the beginning of the month requires you to pay for the majority of the month. 
• Get the seller to pay: If you’re in a buyer’s market, asking your seller to pay some or all of the closing costs could be a good course of action.
• Wrap closing costs into the loan: Some lenders will allow you to include closing costs into the loan for an additional fee.
• Apply for an FHA loan: Low-income households could qualify for an FHA loan, a government-backed mortgage. Credit score considerations are more lenient as they take into account the buyer’s financial situation.   
• Look for lender specials: Some banks will offer incentives to finance your home with their institution. Pay attention to offers highlighting “reduced origination fees.”     

So, you’ve gone through the effort of prospecting countless homes, researched who pays closing costs and made it through the buying process — you should be proud! Why not keep up the momentum to make sure your new home has protection from whatever life has to throw your way? Explore Hippo’s home insurance services to learn how to further protect your lovely abode from life’s many unexpected curve balls.