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When it comes to buying or selling a home, the purchase price isn’t the only number you need to consider. You also have to pay closing costs, which are the upfront fees associated with a real estate transaction. Let’s walk through who pays what.
Who pays closing costs in a home sale?
Buyers and sellers are each responsible for their own set of closing costs. Depending on the market, it’s common for buyers to ask the seller to pay some of their closing costs – this is called a “seller concession” or “a credit toward closing costs.”
Buyers can receive a seller concession regardless of their home loan type, whether it’s a conventional loan or a government-backed loan (e.g., FHA loans or VA loans.) However, there may be rules around the maximum amount of seller concessions depending on the type of mortgage loan, down payment, and property type. Learn more about seller concessions here.
What are the closing costs when selling a home?
Before a seller can pocket their home sale earnings, that money will first go towards paying closing costs from the transaction. Here are the fees that they’ll typically handle:
– Prorated state property taxes
Because we get billed for state property taxes only a few times a year, the seller is responsible for the charges that have accumulated between their last payment and the closing day.
– Prorated HOA fees and transfer fees
Just like with property taxes, the home seller needs to cover the HOA fees they accrued in the lead-up to closing. Depending on the details of the purchase contract, the seller may also need to pay a fee to their HOA to transfer the property to the buyer.
– Title and associated fees
The seller will pay a title company to do a title search and transfer the title to the home buyer. Sellers also typically handle the new owner’s title insurance, which will protect them in case there are any issues with the deed. Many title companies also handle the escrow account for the transaction, which they’ll include in their fee to the seller.
– Attorney’s fees
Some states require real estate attorneys to complete a home closing. For example, New York law calls for attorneys, while Texas’ does not. If this is a requirement in your state, the seller will be responsible for this expense.
– Realtors’ commission
Home sellers are responsible for any fees charged by the real estate agents involved in the home sale, usually around 6 percent of the sales price.
– Real estate transfer tax
Depending on the location of the property, there might be a tax on transferring ownership of the home, which the seller will cover. The exact amount can drastically vary from state to state. For example, Texas has no transfer taxes, Arizona has a $2 flat fee, and Delaware has a 1.5% fee.
What are the closing costs when buying a home?
Now let’s go over buyers closing costs. (Remember, the seller might agree to pay closing costs for the buyer as well.)
– Mortgage lender fees and any discount points
Lenders usually charge borrowers for processing and funding a mortgage. This fee will be higher if the borrower decides to buy any discount points to lower their mortgage rate (we’ll talk more about this later).
– Inspection, appraisal, and other third-party fees
Most home buyers pay for a home inspection to ensure their prospective home is in the condition they expect. Buyers are also responsible for the third-party fees associated with the mortgage application process, including the cost of the appraisal, credit report, flood certification, etc.
– Prepaid interest, homeowners’ insurance, and property taxes
Buyers will also need to make a certain number of upfront payments for the ongoing costs of owning a home, such as homeowners’ insurance, property taxes, and interest.
– Lender’s title insurance and related fees
While the seller pays for most costs associated with the title, the buyer is usually responsible for purchasing a title insurance policy for their lender, which will protect their investment in the home in case an ownership claim pops up down the road.
– Government transfer and recording fees
The buyer will make payments to their local government to issue and record the deed so that their ownership of the home is in the public record.
– Prorated HOA dues and transfer fees
The home buyer needs to pay the HOA fees they will accrue between their closing date and the next payment date. That way, the buyer and seller only pay for the HOA when they are the legal owner of the home. Depending on the details of the contract, the buyer may also need to pay an HOA transfer fee, as mentioned earlier.
Buyers may have the option of rolling their upfront closing costs into their mortgage in exchange for a higher interest rate – this is called “taking lender credits.” The opposite of this is “buying discount points”, which allows you to get a lower interest rate by paying a percentage of your mortgage interest upfront.
Are you buying a new home and selling your old home?
If you’re buying and selling at the same time, those upfront closing costs can feel pretty overwhelming. Orchard can help you with your buying and selling process, to help streamline the experience and line up the timing of both transactions. When you work with Orchard, we’ll help you unlock your current home equity even before you sell. That way, you can buy your next home and pay your closing costs and down payment using your hard-earned equity.