Understanding Closing Costs

Closing costs can come as a surprise for first-time homebuyers, so we want to take as much of the guesswork out of the process as possible. These costs are included to compensate the individuals or businesses involved in the mortgage process. Two homes could be purchased in the same price range and the buyers would likely pay different amounts in closing costs, as these fees vary by state, loan type, and mortgage lender, among other factors.

Depending on the area you plan to buy a home in, closing costs typically range from 3% to 6% of the loan amount. Therefore, if you purchase a $300,000 property, you can expect to pay between $9,000 and $18,000 to close on the house. If you work with a real estate agent, he or she should be able to provide an estimate based on the area and the home price. In 2021, the average cost to close on a single-family home in the U.S. was $6,905.

Closing Cost Process

Once you apply for a mortgage, the lender is required to send a loan estimate within three business days. This document will outline the projected closing costs and other important information. As your closing date approaches, your lender is required to provide you with a closing disclosure form showing the original estimated costs compared to the final closing costs. You must receive this document at least three business days before your closing date. If any new fees appear that were not on the original loan estimate, you should contact your lender and/or real estate agent immediately to seek clarification.

Who Pays the Closing Costs?

The homebuyer is responsible for most of the closing costs, but there are a few things that typically fall to the seller. Below is a breakdown of common costs for buyers and common costs for sellers.

Common Closing Costs for Buyers

  • Appraisal fee
  • Escrow account funds
  • Flood determination and monitoring fees
  • Government recording fees
  • Loan origination costs
  • Mortgage insurance or fees associated with government-backed loans
  • Pest inspection
  • Prepaid expenses such as home insurance, property tax, and interest
  • Tax monitoring and research fees
  • Title-related costs such as lender’s title insurance, owner’s title insurance, title search fee, etc.

Common Closing Costs for Sellers

  • Real estate agent commissions
  • Property and transfer taxes
  • Title insurance

Seller Concessions

Although buyers are usually responsible for most of the closing costs, they can also ask the seller to cover some of the costs. When the seller agrees, it is called a seller concession. Your real estate agent should be able to help you determine the best negotiating strategy with the seller and their agent. It is worth noting that lenders place limits on the amount sellers can contribute toward closing costs for the buyer. The maximum the seller can contribute toward a conventional loan on a home that will be used as a primary residence is as follows:

  • If the buyer puts less than 10% down on the home, the seller can contribute up to 3% of the sale price or the home's appraised value – whichever amount is less
  • If the down payment is between 10% and 25%, the seller can provide up to 6%
  • If the down payment is 25% or more, the seller can give up to 9%

However, if the buyer is purchasing the home as an investment property, the seller can only contribute 2%. The down payment is not considered in this scenario.

Government-backed loans have different rulings than conventional loans, with the following limits placed on the amount sellers can contribute:

  • FHA loans: Up to 6% of the sales price
  • USDA loans: Up to 6% of the sales price
  • VA loans: Up to 4% of a home loan

As the name suggests, closing costs are due when you close on the home. Additionally, it is common to pay the sum with a cashier’s check rather than a personal check. If you are curious to find out what the closing costs might be on a home you are interested in, a closing cost calculator is a good tool to utilize at the beginning of the homebuying journey.

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