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Closing Costs: Understanding How They Work and Who Pays for Them

Real estate agent handing over the home keys to a happy couple after settling the contract and closing costs.

You’ve come this far, and finally, it’s time you’re about to buy your dream home. However, before you append your signature on that dotted line on the buying contract, there are things you’d want to know to avoid surprises. Understanding how closing costs work and where you stand as a buyer on the closing table is vital.

Before we know who pays closing costs, let’s first understand what they are. Closing costs generally comprise all fees and extra expenses incurred or associated with settling a real estate transaction. What makes them particularly important is because they’re not included in the purchase price and sometimes may come as a big surprise, especially to first-time homebuyers. 

So, Who Pays the Closing Costs?

First and forward, both the buyer and the seller take part in settling the closing costs. Depending on the purchase contract, realtor, or the state(location), the amount payable by the seller and the buyer may differ from one transaction to another.

Buyer’s Closing Costs

Typically, buyers pay for most closing items, with the total amount ranging between 2% and 5% of the purchase price. Mathematically, that means for a $250,000 house, expect between $5,000 and $12,500 in closing costs. Below is the expanded list:

  • Attorney fees.
  • Credit report fees: If you’re buying a home using a mortgage, the lender may charge you fees to check if you qualify.
  • Loan origination fees: These are charges by the lender for processing your mortgage loan.
  • Appraisal fees: The price of the home you’re purchasing must first be justified. You pay appraisal fees for this service.
  • Inspection fees: Lenders, as well as local governments, require the home to be inspected, and these fees cater for that.
  • Title search fees: This includes running a background check on the property to check any unpaid dues and credibility.
  • Survey fees to verify the dimensions of the land. However, this can go to the seller, depending on the contract.
  • Escrow fees: Charges for keeping the purchase money on a neutral account during buying.
  • Underwriting fees: costs of assessing your loan application.
  • Mortgage discount point fees: Payable to the lender to reduce the interest rates.
  • Recording fees: Payable to the city or county for recording your purchase.
  • Insurance fees: This mainly applies to where the down payment is less than 20% of the loan. You can pay private mortgage insurance (PMI), or if you’re using FHA, USDA, or VA mortgages, you’ll instead pay mortgage insurance premiums (MIP). Other insurance fees may include title insurance and homeowner’s insurance policy.

See a visual breakdown of a Closing Disclosure

Seller’s Closing Costs

The home seller doesn’t go free either during the finalizing of the purchase. They have fewer items but actually pay more. These fees may include:

  • Realtor fees: This is the commission payable to the real estate agents of both parties. This is the largest part paid by the sellers, usually amounting to 6% of the purchase price ( or 3% for each agent).
  • Title insurance: Depending on the contract, sellers may also pay for title insurance, which protects the owner and lender in case of claims or issues later on.
  • Transfer and recording fees
  • Unpaid taxes and HOA dues: This compensates buyers for fees they’ll be paying for months before taking ownership of the property (but that if the seller hasn’t paid already). If they have paid for the current year, the vice versa is also the true-the buyer will have to compensate them.
  • Warrant premiums: Sellers commonly offer home warranty (usually 1 year) to attract and assure buyers. 

Seller Concessions

You might hear this term from real estate experts, and we think it is good to grasp its meaning early. Essentially, seller concessions are closing costs that the seller agrees to pay on behalf of the buyer. These fees may include property taxes, appraisal, inspection, and attorney fees. However, we advise you to be on the lookout, not be blindfolded by what the seller is willing to pay and forget the property’s actual value

The Upshot: Who is Your Real Estate Agent?

Do you want an average agent who works for themselves or a team that works together for you? The Path & Post team works together for you – the buyer and the seller. Our real estate strategist crafts a custom plan with proven results to accomplish what matters most. Contact us now to get started.

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