Closing costs are a necessary part of the home buying and selling process, but they can be frustrating for both parties. Buyers add to the already high cost of purchasing a home, while sellers may see a significant portion of their sale price go towards these fees.
While it's impossible to eliminate closing costs entirely, there are ways to reduce them. The amount you can save will depend on several factors, such as the current state of the market. In a seller's market, for example, sellers may be able to save on some closing costs as buyers may be willing to cover fees to make their offer more competitive.
On the other hand, in a hot market where competition is fierce, buyers may be less likely to request closing cost assistance to make their offer more appealing to sellers. Ultimately, both buyers and sellers need to understand the various closing costs and fees involved in the transaction and work with their real estate agent or attorney to negotiate and find ways to save on these expenses.
What Are Real Estate Closing Costs?
Real estate closing costs refer to the various fees and expenses that are incurred during the home buying and selling process. These costs can include fees for services such as appraisals, inspections, loan origination, title search, title insurance, and document preparation.
Closing costs can vary based on several factors, such as the home's purchase price, the type of mortgage loan, and the property's location. Typically, buyers are responsible for paying most of the closing costs, while sellers typically pay for some of the costs.
Buyers can expect to pay for expenses such as the down payment, loan origination fees, appraisal fees, credit report fees, title search and insurance fees, and transfer taxes. Meanwhile, sellers may be responsible for covering expenses such as real estate agent commissions, title insurance fees, and prorated property taxes.
What are the buyer's closing costs?
Buyer's closing costs are the expenses that home buyers typically pay during home-buying. These costs can include the following:
This is how much the buyer puts down on the home purchase.
Loan Origination Fees
Fees charged by the lender for processing the loan application.
The cost of appraising the home to determine its value.
Credit Report Fee
The cost of obtaining the buyer's credit report.
Title Search and Insurance Fees
Fees for researching and verifying the property's title history and insuring against any title defects.
The cost of having the property inspected for any issues or defects.
The cost of having an attorney review the purchase contract and other legal documents.
The escrow company charges fees for handling the transaction.
The local government charges fees for recording the property transfer.
These can include property taxes, homeowner's insurance, and mortgage interest.
The total amount of the buyer's closing costs will vary based on the home's purchase price and the property's location. Buyers should be prepared to pay between 2% and 5% of the purchase price in closing costs. Working with a knowledgeable real estate agent or lender can help buyers understand the specific costs associated with their purchase and find ways to reduce them.
What Do Sellers Typically Pay?
Sellers typically pay a variety of fees and costs associated with selling a property, including:
Real Estate Agent Commission
The seller typically pays the commission for the seller's and buyer's agents. This is usually a percentage of the sale price, typically around 5-6%.
Some local governments charge transfer taxes when a property changes hands. The seller may be responsible for paying these taxes.
The seller may be required to purchase title insurance for the buyer to protect against any title defects.
The seller is responsible for paying any property taxes owed up until the date of the sale.
Outstanding Liens or Judgments
If the seller has any outstanding liens or judgments against the property, they must be paid off before the sale can be completed.
The seller may choose to purchase a home warranty for the buyer to provide additional protection against any unexpected repairs or issues with the property.
The exact costs that a seller will be responsible for will depend on the specific circumstances of the sale, including the location of the property and any agreements made during negotiations. Sellers should work with a real estate agent or attorney to understand their specific obligations and costs associated with selling their property.
How To Avoid Closing Costs When Buying A House
While it may not be possible to avoid closing costs when buying a house completely, some ways exist to reduce or even eliminate them. Here are some strategies that can help you save money on closing costs:
Ask about lender-paid closing costs
Lender-paid closing costs refer to a situation where the mortgage lender agrees to pay some or all of the borrower's closing costs in exchange for a higher interest rate on the loan. This means that the borrower doesn't have to pay these closing costs upfront and can instead finance them over the life of the loan.
Lender-paid closing costs may include things like title insurance, appraisal fees, and loan origination fees. It's important for borrowers to carefully consider the cost of lender-paid closing costs over the long term, as a higher interest rate can result in a higher monthly mortgage payment and increased total interest paid over the life of the loan. Your lender must provide you with a loan estimate within three days of your application.
Negotiate Origination Fees With The Lender
One way to avoid closing costs when buying a house is to negotiate the origination fees with the lender. The lender charges origination fees to cover the cost of processing the mortgage loan, and they can be negotiable. When negotiating with the lender, buyers can ask for a reduction or even a waiver of the origination fees.
However, buyers should keep in mind that the lender may compensate for the reduction of fees by increasing the interest rate or other charges, so it's important to weigh the potential savings against the long-term costs of the mortgage loan.
Buyers can also shop around for different lenders and compare their origination fees and interest rates to find the best deal. Additionally, some lenders offer loyalty programs that may discount origination fees for repeat customers.
Shop around for other services, too
When buying a home, it's not just the mortgage lender that charges fees. Other service providers, such as the title insurance company, the appraiser, and the home inspector, may also charge fees. To avoid paying unnecessary fees, shopping around for these services is also a good idea.
For example, when it comes to title insurance, you may be able to save money by shopping around for a lower rate. You can also ask the seller to pay for this expense. Similarly, you can shop around for an appraiser who offers a lower fee or ask your real estate agent if they can recommend a home inspector who charges a reasonable fee.
Check Into Army Or Union Discounts
When looking to save money on closing costs, it may be worth checking into discounts that may be available through specific organizations or affiliations. For example, some mortgage lenders offer discounts to members of the military or certain unions. It's worth asking about these discounts when shopping for a mortgage lender.
Additionally, suppose you're a member of a credit union or other financial institution. In that case, they may offer discounts or other benefits to help you save money on closing costs or additional fees associated with the home-buying process.
Close Towards The End Of The Month
When you're buying a home, it's a good idea to try to close towards the end of the month. This is because mortgage interest is typically paid in arrears, which means that when you make your first mortgage payment, you will pay for interest accrued during the previous month. By closing towards the end of the month, you can reduce the interest you'll need to pay at closing.
In addition, closing towards the end of the month can also help you save on other costs associated with the home-buying process. For example, you may be able to avoid paying prorated property taxes for the current month, as well as prepaid homeowners insurance for the following month. These costs can add up, so you can save significant money by closing at the end of the month.
Apply for An FHA Loan
If you're considering buying a home, applying for an FHA loan could be an excellent option for you. An FHA loan is a mortgage insured by the Federal Housing Administration (FHA). FHA loans are popular among first-time homebuyers because they often require a lower down payment and have more lenient credit score requirements than conventional loans.
One benefit of getting an FHA loan is that the seller can pay up to 6% of the home's purchase price towards the buyer's closing costs. This can help you save money upfront, as closing costs can be high. You can also receive closing cost assistance through various programs, such as down payment assistance programs or grants.
Request a closing cost credit
Buyers can request that sellers contribute towards some of their closing costs, which is known as a financing concession. Although it is more frequently seen in a buyer's market, where buyers hold more bargaining power, buyers can always ask for this concession, particularly if they have specific circumstances or if the property has been on the market for an extended period.
Who pays closing costs, buyers or sellers?
In a real estate transaction, both the buyer and the seller can be responsible for paying certain closing costs. However, the specifics can vary depending on the terms negotiated between the parties and the customs of the local market.
Typically, buyers are responsible for paying most of the costs associated with obtaining a mortgage, including the loan origination fee, appraisal fee, credit report fee, and any points required to buy down the interest rate. Additionally, buyers typically pay for title insurance and the title search fee and may be responsible for paying transfer taxes and prorated property taxes.
On the other hand, sellers are typically responsible for paying the real estate agent's commission, any outstanding liens or judgments against the property, and their own attorney fees. Sellers may also be required to pay for the home warranty, termite inspection, and other costs that the seller typically pays in their local market.
In some cases, the buyer and seller may negotiate to split certain closing costs, or the seller may agree to pay some or all of the buyer's closing costs as part of the negotiations. Both parties need to review the terms of the purchase agreement carefully to understand their respective responsibilities for closing costs.
How to reduce closing costs by negotiating with the seller
How to reduce closing costs by negotiating with the seller
One way to reduce closing costs as a buyer is to negotiate with the seller to see if they would be willing to cover some of the expenses. Here are some tips on how to negotiate with the seller to reduce closing costs:
Know what you're asking for
Before negotiating with the seller, make sure you understand the closing costs you'll be responsible for and which ones you'd like the seller to cover.
You're more likely to get the seller to cover some of your closing costs if you make a reasonable request. Asking for the entire amount to be covered is unlikely, so think about what would be a fair amount.
Have a strong offer
Sellers may be more willing to negotiate on closing costs if they have a strong offer from a buyer. Make sure you've done your research on the home's value and are offering a fair price.
Work with a real estate agent
Your real estate agent can help negotiate with the seller on your behalf. They have experience in these types of negotiations and can help you make a reasonable request.
If the seller isn't willing to cover all the closing costs, consider negotiating for other benefits instead. For example, the seller could make repairs or provide a home warranty.
Get it in writing
Once you've reached an agreement with the seller, make sure to get it in writing. This can help avoid any confusion or misunderstandings later on.
Which closing costs can buyers and sellers negotiate?
Buyers and sellers can negotiate some of the closing costs, depending on the circumstances of the sale. Typically, buyers can negotiate the lender fees, loan costs, and title insurance fees. On the other hand, sellers can negotiate real estate agent commissions, transfer taxes, and prorated property taxes, among other expenses.
Both parties can also negotiate the escrow fees and document recording fees, which can vary depending on the location of the sale. However, closing costs, such as underwriting fees and mortgage insurance, cannot be negotiated as the lender or government sets them.
It's important for buyers and sellers to carefully review the closing cost estimate and discuss with their real estate agent and attorney to determine which closing costs can be negotiated.
Does the buyer or seller pay closing costs?
Both the buyer and seller typically pay closing costs, but the allocation of who pays what can vary depending on the specific transaction and the location. In some states, the buyer may pay most of the closing costs; in others, the seller may be responsible for most of the costs. The details of the closing costs and how they are divided are usually negotiated as part of the home buying and selling process.