Who Pays Closing Costs?
9-minute readAugust 09, 2021
*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.
Buying a home can be an exciting time. After all, you’re opening up a whole new chapter of your life.
However, closing on a home is an expensive endeavor. Even if you’ve diligently saved up for a large down payment, closing costs can be an expensive surprise for the buyer.
Let’s uncover exactly what closing costs are so you can be prepared to close on the home of your dreams.
What Are Closing Costs?
First, it’s important to understand exactly what’s included in closing costs. Basically, a closing cost is anything you need to pay in order to finalize the mortgage of your home. You’ll need to pay these closing costs as the title of the property is transferred from the seller to the buyer.
Generally, the buyer should expect to pay 5% of the purchase price in closing costs. For example, you should expect to pay around $5,000 in closing costs if the purchase price of the home is $100,000.
Although the buyer will pay for most of the closing costs, sellers also have some closing costs to cover.
Here’s a breakdown of who’s expected to pay for what:
Buyer’s Closing Costs
- Loan application fee: Many lenders require an application fee to kick-start your mortgage process. You may need to pay up to $500 for this.
- Loan origination fee: In order to get the ball rolling, a lender may require a loan origination fee. Typically this fee is a percentage of your mortgage amount.
- Any loan points: Depending on your loan, discount points may be included. One discount point is equivalent to 1% of your loan amount. You pay these points directly to the lender up front. In return you’ll lock in a lower interest rate on your loan.
- Appraisal fee: The lender will have an appraiser assess the value of your home. Usually this service costs $300 – $500.
- Credit report fee: Lenders will likely pull your credit report. This fee is usually less than $100.
- Flood fees: If your home is vulnerable to flooding, the lender may require certification to confirm its status. You can obtain this certification from the Federal Emergency Management Agency (FEMA) for around $20.
- Home inspection: This is one fee you don’t want to skip. You’ll need to have a home inspection to ensure the property you’re buying is in good shape. The few hundred dollars you spend on an inspector could alert you to thousands of dollars’ worth of problems.
- Homeowners insurance premium: Typically the buyer will pay for homeowners insurance for the rest of the year at closing.
- Private mortgage insurance (PMI): You can sometimes pay for PMI upfront. Although it varies by lender, this is an opportunity to save money over the long term.
- Property taxes: In most states the buyer will pay property taxes for the rest of the year at closing.
- Homeowners association (HOA) fees: If you’re buying a property with a HOA, you may be required to pay a transfer fee or an annual fee.
- Title and attorney fees: These fees include the cost of the title and other required government filings. You may also need to pay for an attorney to help you through this process.
- Assumption fee: You’ll need to pay an assumption fee to the lender if you’re taking over a conventional loan from the seller.
- Prepaid interest: The lender will require you to pay interest on the loan at a prorated amount from closing day until the next month.
- Lender’s title insurance: This protects the lender from potential legal claims against the home. Usually this costs under $1,000.
Seller’s Closing Costs
- Agent’s fee: If you and the seller are working with a real estate agent, the agent will need to be compensated for their time. Typically real estate agents have a fee of 6% of the total purchase price. It often falls to the seller to cover this cost.
- Owner’s title insurance: This protects you from potential legal claims against the home. The seller covers this cost in some cases.
Who Pays Closing Costs: Buyer Or Seller?
Based on the costs mentioned above, you’ll notice that most of the burden is placed on the buyer. Overall, the buyer should expect to pay 4% – 6% of the total purchase price in closing costs. Meanwhile, the seller is generally responsible for the real estate agent fees (which can add up quickly).
How To Avoid Closing Costs
After looking through all these closing costs you might be looking for a way to get out of them. Unfortunately, you’ll have to pay closing costs of some kind no matter what.
As with many things in life, closing costs are open to negotiation. If you’re the buyer, you could include within your offer a proposed percentage of closing costs for the seller to cover. The worst they can say is no.
However, make sure to think about what you’re asking for first. If you have several demands in a hot real estate market, you might lose the house by asking for extras. On the other hand, you might have more luck negotiating for the seller to cover more of the closing costs if you’re in a buyer’s market.
Maximum Amount Sellers Can Pay Toward Closing Costs
The maximum allowable percentage of closing costs that sellers can cover varies by loan type. Even if the seller agrees to cover more closing costs, there are limits to what they can contribute.
For VA home loans, a seller can’t allow their closing concessions to exceed 4% of the loan. For FHA home loans, a seller can’t pay more than 6% of the sale price in closing costs. For USDA loans, the seller can’t pay more than 6% of the sale price in closing costs. For conventional loans, the seller can’t pay more than 3% of the sale price in closing costs.
Can Closing Costs Be Rolled Into A Loan?
It can be difficult to roll your closing costs into a new loan. Plus, it can be expensive. When you roll closing costs into your loan, you’re agreeing to pay interest on that money for the life of the loan.
You could negotiate with the seller for a concession in exchange for a higher sale price. This would roll your closing costs into your loan. The seller would need to be willing to work with you for this strategy.
For FHA loans and VA loans you may have the opportunity to roll closing costs into the loan. However, you’ll need to talk directly to your lender to determine if this is a good option for you.
How To Pay Lower Closing Costs
Luckily, there are a few ways to decrease the total amount of closing costs.
The first thing to do is improve your credit score. A higher credit score can help you qualify for lower interest rates and fewer discount points. If you’re not sure where to start, check out Rocket HQSM for tips to help you get started.
Another good way to reduce closing costs is to get multiple bids. Make sure to talk to at least three lenders about your needs to make sure you’re getting the best deal. When comparing these loan estimates, remember to ask questions. Although most fees are set in stone, asking about more affordable options may be another way to save.
Closing costs are an expensive part of the home buying process, but don’t let them stop you from purchasing a new home. Instead, do your research and come prepared to closing day.
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