Who pays closing costs? Does the buyer pay them or the seller? Typically the seller and buyer pay their own closing costs. However it is very common for the buyer to ask the seller to pay the buyer’s costs. A home buyer may pay between 2-5% of their loan amount in closing costs. The seller will usually pay 5-7% of the sales price in commissions and closing costs. Here are some thoughts on closing costs and if you can avoid them.
When most people think about closing costs, they think about the buyers costs. There are several fees that the buyer needs to pay and many are set fees. So if someone is buying a $150,000 home, the costs are less than someone buying a $400,000 home – however many of the fees are set fees and so it will be a higher percentage if the home is priced lower. Here are some of the common closing costs paid by the buyer:
- Origination charges – this is the lender’s charge and usually includes things like underwriting fees, processing fees. We have set fees for underwriting and processing that do not vary based on the loan amount. In Minnesota it was typical for lenders to charge an origination fee that affected your interest rate, that is less common now. When you see your closing disclosure, the origination charges are usually broken down as processing, administrative and underwriting fees.
- Appraisal – this is the cost of the home appraisal and usually is between $500-600
- Title search and title insurance – these are charged by the title company and include title insurance, the title search to make sure your title is clear and a closing fee. The title insurance will vary based on your loan amount.
- Discount points – these are fees charged by the lender to lower your interest rate. You will discuss your interest rate with your loan officer and decide if you want to pay any points to lower your rate. The amount can vary daily and also vary based on the interest rate you choose.
- Escrow – you will need to set up your escrow account to pay your insurance and property taxes moving forward. This is set up with the mortgage company.
- Upfront mortgage insurance or funding fees – these will vary based on your mortgage type. FHA loans require that you pay 1.75% of your mortgage amount upfront – but it’s typically added to your mortgage. VA loans also may have a VA funding fee -the amount will vary based on your down payment and if you have used your VA benefits before
Buyers can pay their own closing costs or they can ask the seller to contribute towards their costs. It’s common to see the seller pay 3% of the buyers closing costs. However, 3% of a $150,000 purchase will not cover everything. So make sure you are talking to your loan officer so you know what you will be expected to pay at closing.
The seller has some of their own fees. The biggest cost for the seller is the commission that is paid to the realtor. The seller will also have to pay a closing fee to the title company and in Minnesota, we have a state deed tax that the seller will pay. There are also some recording fees. The realtor will give you a net sheet that breaks down the fees the seller will need to pay.
As a buyer, you need to understand what your fees are and to do that, you need to get a loan estimate from your loan officer. It can be a great time to shop and compare. But make sure you are asking questions. The interest rate may be better at one company but the closing costs may be worse. You need to compare numbers on the same day if possible. Typically the closing costs will not change but the interest rate and the cost to get that interest rate may change. When shopping make sure you are asking for the interest rate, the cost for the rates (points) and what their fees are.
Once you know that information, you can make an informed decision and decide which lender you want to use. I always ask my clients to let me know if they see rates that are better than mine – I want an opportunity to compare rates. You also want to make sure your lender will get your mortgage done! The cheapest lender may not be the best choice!
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
