Whether you’re buying a home or selling a home, you will most likely encounter some sort of question regarding closing costs. Who pays them? What do they include? Why do I have to pay them? There are a lot of different ways that closing costs can affect the outcome of a home sale, and there isn’t really a standard practice when it comes to these customary expenses. Nonetheless, consumers often have a skewed perspective on what these costs are, and who is responsible for them. Here are the facts about closing costs.
What are closing costs?
Simply put, closing costs are fees and expenses that are associated with processing and closing a real estate transaction. The majority of these fees are charged to the buyer for loan origination, loan processing, and title services, however the seller will also have a few small charges for transferring and recording the deed, as well as fees from the closing attorney for using their services. The seller also pays the Realtor commissions.
Depending on the bank / lender you use, the following fees could be considered closing costs when buying a home:
- Loan Origination Fee – this is what your loan officer or bank charges to create the loan.
- Points – You don’t have to take the interest rate that is quoted to you. You can choose to buy a rate. If you pick an interest rate that is lower than the current market rate, you will pay “points”.
- Credit Report – The bank has to review your credit before giving you a loan. The bank / lender pays a fee for pulling your credit, and they usually pass this small fee on to the buyer.
- Flood Certification – This is also pulled by the lender to determine whether or not the home you are buying is in a flood plain.
- Appraisal Fee – This is typically paid out of pocket before you even get to closing, however some lenders will allow it to be paid at closing.
- Title Services – A title agency examines the deed of the property you are buying. They look way back into the past to make sure that no one else owns the home, and that no liens have been placed on the home.
- Title Insurance – Since the title services are performed by human beings, it is possible that an error could be made. Title insurance protects the buyer against paying for these errors.
- Government Recording Fees – The government charges fees to record the deed and mortgage at the courthouse.
- Settlement / Closing Fee – This is paid to the closing attorney for their services. Every real estate transaction needs a closer to reside over it.
- City/County/State Tax – A transfer tax that is charged to the seller for transferring the deed. One dollar is charged per every thousand dollars of the sale price. ($185,000 home = $185 state tax)
- Realtor Commission – The Realtor’s services are paid for by the seller of the home. This commission is agreed upon before the home ever goes on the market, but is only paid if the home actually closes. Therefore this money comes out of the seller’s proceeds at the end of the transaction.
While the number of fees associated with buying a home is larger than with selling, the dollar amount of the fees could actually be much higher on the selling side. So, why do so many buyers feel like the seller should cover all or part of their closing costs? The only answer I have is TV. People watch HGTV for a couple hours and all of a sudden they think that sellers are just expected to pay the buyer’s closing costs. Well, yes and no.
So who should pay them?
I like for my buyers to be prepared to pay their own closing costs for two reasons: 1) it makes your offer stronger by showing the seller of the home that you can afford to buy the house, and pay the costs associated with it. 2) it gives us more negotiating power later down the road if the seller needs a favor from us.
There are plenty of instances where a buyer is completely qualified to purchase a home, but unable to bring a large sum of cash to the table. I get it. In that instance, I tell my buyers that we need to focus on the NET number of dollars to the seller. You see, sellers don’t mind paying a buyer’s closing costs if it makes sense to the bottom line for the seller to do so. A buyer that says, “I will not pay more than $183,000 for that house” needs to make sure that what they are offering is actually $183,000. If that buyer is offering $183,000 but also asking for $4,000 to be paid toward their closing costs, then that buyer isn’t actually offering $183,000. They are offering $179,000 ($183,000-$4,000). No matter how you slice it, or where the money goes, the bottom line to that seller is what they are walking away with. So if this buyer truly needs the $4,000 for closing costs because they just don’t have the money, I would tell them to offer $187,000 and ask for $4,000 to be paid toward their closing costs, creating the true NET of $183,000.
See also, “How much does it cost to buy a house?”
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