Closing Costs: Everything Home Sellers Should Know

Buying or selling a home is no small feat. Any real estate transaction involves a sizable chunk of money changing hands, and typically requires the expertise of a home mortgage lender. And the lender isn’t the only real estate professional who is involved in the process. Appraisers, inspectors, real estate agents, and a number of other professionals can also help to ensure a smooth, legally compliant transition.

One question buyers and sellers often have is this: How do all of these real estate service providers get paid? The short answer: Closing costs. Closing costs are all of the fees and expenses accrued over the course of the real estate transaction, and they are paid at the very end of the process, just as money and properties change hands.

But who pays closing costs, exactly? And how much are home closing costs going to be? In this article, we’ll provide you with a full rundown of home closing costs, helping you know what to expect when closing day finally comes.

What Are Closing Costs?

Any time a mortgage loan is taken out in order to buy a home, there are fees involved, typically amounting to thousands of dollars. The specific amount can vary pretty wildly, but usually falls somewhere between two and five percent of the total home value.

These fees are the closing costs. While home closing costs can sometimes be subject to negotiation, you can anticipate that the closing costs associated with your transaction will encompass the appraisal, title search, and credit check. Closing costs can also include the commissions paid to each of the real estate agents involved in the process.

Is there ever a time when you don’t have to pay closing costs at the end of a real estate transaction? Conceivably, if the buyer pays for the home in cash, and if neither party uses a real estate agent, home closing costs will be pretty slim. Situations like this are going to be rare, however, and even then, there can be fees associated with any attorneys who are brought in to shepherd the transaction.

Of course, one question you’ll want to know is who actually pays closing costs. Is this the responsibility of the buyer? The seller? Do both parties have an obligation to pay closing costs? Let’s take a closer look at exactly who’s on the hook for these fees and expenses.

Who Pays Closing Costs?

In most transactions, both the buyer and the seller are responsible for certain portions of their closing costs.

What Does the Buyer Pay?

We’ll start with the portion of closing costs for which the buyer is responsible. Generally speaking, homebuyers are obligated to pay for any home closing costs that are associated with the mortgage loan process. (After all, it is their loan.) Before closing day, buyers will receive a document called Closing Disclosures, which will outline all of the mortgage-related fees for which they are responsible.

Buyers also typically pay any closing costs that are associated with the property itself. The most obvious example here is the cost of the appraisal, which is something that most mortgage lenders require. Also note that property taxes and HOA fees are prorated, and the buyer will be asked to pay for the portion of those fees covering the part of the year during which they will own the home.

In some cases, buyers will also need to pay for insurance. Specifically, buyers who are unable to provide a down payment of 20 percent or more will need to purchase private mortgage insurance (PMI), at the behest of their mortgage company. Most insurance companies will require the annual premium to be paid up front, as part of the total closing costs. Buyers will also need to pay for title insurance (which protects the lender), and an upfront premium for their homeowners insurance policy.

What Does the Seller Pay?

Now let’s consider the portion of home closing costs that the seller must pay.

The good news is that sellers pay fewer total fees and expenses during the course of the real estate transaction. The bad news is that they will typically pay a bit more at the actual home closing. This is mostly because sellers pay real estate commissions, both for their agent and for the buyer’s agent. These commissions often represent the most sizable portion of closing costs. 

In some cases, the seller may also choose to pitch in for other closing costs, most commonly the buyer’s title insurance. These are comparatively low-cost items, and the seller may offer to cover them simply to “sweeten the deal” to ensure a signed contract with their buyer.

Indeed, buyers and sellers alike should be aware of “seller concessions,” which are the expenses and closing costs that the seller agrees to pay on the buyer’s behalf. These seller concessions are usually determined through the negotiation process, and can vary from one real estate deal to the next.

How Much Are Closing Costs (For Buyers)?

Buyers and sellers alike should be ready to pay some closing costs… but how much, exactly? 

What Types of Closing Costs Do Buyers Pay?

For a more detailed list of the buyer’s closing cost obligations, consider the following:

• Appraisal fee. The buyer typically pays $300 to $500 for an appraisal to verify the home’s value for the lender.
• Home inspection costs.Buyers often pay a few hundred dollars for a home inspection to check for potential issues.
• Title search. A title search ensures no ownership disputes, with an average cost of $450.
• Title insurance. Buyers usually pay up to 1% of the loan amount for title insurance to protect against ownership disputes.
• Credit report fee. Lenders charge $25 to $75 to check the buyer’s credit history.
• Origination fee. Some lenders charge a loan origination fee, typically around $100.
• Application fee. Fees for processing a mortgage application tend to be more rigorous, and may run several hundred dollars.
• Underwriting fee. You can expect to pay up to 0.5 percent of your total loan amount to cover the administrative costs of underwriting.
• Legal fees. If you hire a real estate attorney, you’ll pay by the hour for their services during closing.

This is just a partial list to provide you with some sense of how closing costs break down for the buyer. Now, let’s turn our attention to the home closing costs that are handled by the seller.

How Much Are Closing Costs (For Sellers)?

The main thing for sellers is real estate commissions. Both the buying agent and the selling agent will need to be compensated for their time, and the seller usually pays both commissions. This can be anywhere from one to six percent of the total value of the transaction. Also note that the seller may have to pay some additional fees as seller concessions, but this is strictly subject to negotiation. 

Calculating Closing Costs

Both buyers and sellers will want to plan for closing costs, and should budget accordingly. Ultimately, closing costs can increase the total loan amount for buyers, or else require them to pay a few thousand dollars in cash. And for sellers, closing costs chip into their bottom line, depleting their profit margin by a few thousand dollars.

There are a number of online closing cost calculators you can access; in fact, most lenders will offer access to closing cost calculators for their buyers. These can be helpful tools, arming you with a ballpark of how much you’ll pay in closing costs. Keep in mind that they are just estimates, however.

For buyers, you can always contact your mortgage lender for a more personalized idea of how much closing costs will be. Your Closing Disclosure documents will include a final/specific number, but your lender can likely give a fairly accurate estimate before these documents are finalized. 

For sellers, it’s important to remember that you’ll lose some of your profits to paying real estate commissions. Ask your agent what their percentage is, and ask them to furnish a ballpark estimate of what your final closing costs will be.

Learn More About Closing Costs and Home Selling

Do you have additional questions about closing costs, or about the process of selling a home? We’d love to tell you more about how the process works, and about the steps you can take to calculate and plan for closing costs.

Take our free quiz to get a better sense of your home selling options. And with specific questions, don’t hesitate to contact the team at SOLD.com at any time. We are here to help you make an informed decision about if and how to sell your property.