If you ever find yourself wondering who pays closing costs on a real estate deal, look no further. This guide is specifically designed to break down the closing costs you can expect to pay on a deal, and, yes, who should pay them.
Closing costs are something most buyers would rather not talk about, and rightfully so: nobody wants to spend more money on top of what will likely amount to one of the biggest purchases of their life. In their simplest form, that’s exactly what closing costs are: an additional payment to enable you to make a subsequently larger payment. It is worth noting, however, that there’s no avoiding them; you have to face them at one point or another, and the more you know about them, the better.
Do you know who pays closing costs?
Who Normally Pays Closing Costs?
To be perfectly clear, both buyers and sellers are expected to pay for certain costs at the closing table, but I digress. Closing costs, at least those that consist of the “line-item” expenses, are reserved solely for the buyer. While sellers will have to pony up for some expenses at the closing table, they are not generally what you would consider a closing cost. Sellers, for that matter, are expected to pay the real estate commission (or Realtor fee) at the time of closing. The buyer, however, is responsible for just about everything else. That said, closing costs (as we have come to know them) are usually the responsibility of the buyer unless the terms of the deal dictate otherwise.
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Who Can Pay Closing Costs?
Common practice suggests buyers are responsible for paying the closing costs on a real estate deal. It is worth noting, however, that any party could end up paying the closing costs — the side expected to pick up the tab isn’t set in stone. While it’s true, buyers do typically carry the burden, there’s no reason subsequent terms or contingencies couldn’t end up reversing the tables. For example, it’s entirely possible for sellers to offer to pay the closing costs in an effort to expedite a sale. Closing costs (or who pays them) may even be negotiated. There are essentially countless reasons either side could end up paying the closing costs on an impending deal.
I want to make it abundantly clear: buyers are usually expected to pay the closing costs on a deal, but that doesn’t mean other arrangements can’t be made
Do Sellers Pay Closing Costs?
Sellers are not typically expected to pay the closing costs on a deal (that honor is usually reserved for the buyer), but that doesn’t mean they never will. For one reason or another, it may actually benefit the seller to offer to pay the closing costs. In doing so, there’s a chance they could expedite the sale, or even convince a buyer that’s on the fence to commit. While it may sound counterintuitive for sellers to offer to pay the closing costs, I can assure you there are scenarios in which a buyer may benefit from paying said costs. So again, sellers are not usually expected to pay the closing costs, but there are situations that may call for them to open up their checkbook at the closing table.
Seller Closing Costs
Sellers don’t pay closing costs, at least not in the sense most real estate professionals have become familiar with. Whereas closing costs are synonymous with line-item expenses such as appraisal fees, title insurance and things of that nature, sellers are typically expected to address a single cost: the Realtor fee or commission. It is worth noting that Realtor fees are not a closing cost, but they are a cost to be paid at closing, so there is understandably some confusion around the subject. Nonetheless, sellers will usually have to pay the Realtor fees at the closing table.
Average Closing Costs For Sellers
Though not technically a closing cost, it’s usually on the seller to compensate the Realtors representing each side of the deal. That said, most Realtors and real estate agents will charge somewhere in the neighborhood of six percent for their services (that’s six percent of the sales price of the house). That means a seller could expect to pay upwards of $30,000 for a Realtor’s help on a home that sells for $500,000 (500,000 x 0.06 = $30,000). It is worth noting, however, that the agents representing both parties will split the six percent commission. So to be clear, sellers will usually have a cost somewhere in the neighborhood of six percent of the sales price.
Buyer Closing Costs
It may surprise many buyers that a lot of the closing costs stem from the loan they are acquiring to buy the property. As a result, the following list highlights some of the average closing costs for buyers:
Tax Servicing Fee
Credit Report Fee
Bank Processing Fee
Average Closing Costs For Buyer
On average, the previously mentioned closing costs will usually amount to something like two to five percent of the purchase price. That said, do not blindly pay the closing costs without knowing full well where the money is going. Be sure to go through each line-item with a mortgage professional to paint a clearer picture of the entire situation.
According to Zillow, “A buyer should receive a loan estimate form early on in the sale process. This document spells out all the approximate costs the buyer will face when making the purchase, so there aren’t any surprises at closing. Some buyers use the information on the loan estimate form to shop for different lenders, interest rate sand costs.”
Other Closing Cost Scenarios
Not surprisingly, closing costs aren’t always as cut and dry as many would appreciate. In addition to the line-items above, there are more costs a buyer must take into consideration — scenarios, if you will. There are some costs that are usually prorated and paid at the time of closing: property taxes and HOA fees, to name a few. “For example, if you’re buying a home and you close toward the end of the property tax period, you’ll likely need to pay the balance of taxes upfront,” according to Zillow. “The same holds true for prepaid loan interest. If you close toward the end of the month, the lender may ask for the first month’s payment up front.”
Who Pays Closing Costs In A Cash Sale?
Whether you pay with a loan from a traditional lender or use cash to purchase a property outright, the same rules apply: the buyer will be expected to pay the closing costs. There are some differences to take into consideration if you intend to pay in cash; namely, the amount of closing costs. Since most of the closing costs are directly correlated to processing a loan, those that pay in cash can expect the closing costs on an all-cash transaction to be considerably less. For example, you will save a lot of money on costs that stem from things like loan origination. Conversely, you will still need to pay closing costs that originate from things like title fees and attorney fees.
Who Pays Closing Costs On A VA Loan?
While VA loans do not require a down payment, they do, however, require the borrower to pay for the closing costs. It is worth noting, however, that the closing costs associated with VA loans are a little less than those of a traditional loan. According to militaryvaloan.com, “VA loan closing costs average around 1% – 3% of the loan amount on bigger home purchase prices, and 3% – 5% of the loan amount for less expensive homes.”
Even though buyers are expected to pay the closing costs on a VA loan, that’s not to say the seller can’t. In fact, the “seller is allowed to pay all of the veteran’s closing costs, up to 4% of the home price.”
Who Pays Escrow Fees?
Escrow accounts are used to hold the deed of the subject property and the money being used to buy it. Both parties involved in a transaction, for that matter, rely on escrow accounts to hold the most important documents and funds involved in a deal. That said, each side of a deal is equally dependent on the services offered by third-party escrow accounts. With escrow services designed to help both sides, escrow fees are typically incurred by each side of a respective deal. It is quite common for escrow fees to be split evenly between buyers and sellers. It is worth noting, however, that the language of a contract or purchase agreement may be changed or negotiated at anytime. As a result, escrow fees may be negotiated by either side of a transaction. Sellers may cover escrow fees as an incentive to the buyer, or vice versa. When all is said and done, escrow fees are usually split between buyers and sellers, but they may also be used as a negotiation chip by either side.
How To Avoid Closing Costs When Buying A Home
I want to make it abundantly clear: there’s no getting out of paying closing costs entirely. That said, you don’t necessarily need to be the one to pay them. If for nothing else, it’s entirely possible to negotiate for the other party to pay them instead. Take the aforementioned VA loan for example. “If you have little or no funds available for closing cost, let your real estate agent know that you are purchasing your home with a VA loan. Your agent may be able to request that the seller pay for some or all of your closing costs,” according to militaryvaloan.com.
Almost everything is negotiable in the world of real estate investing, not excluding closing costs. While it may be hard to convince the seller to pay the closing costs on a property, it’s not impossible. That said, there are a few things you can do if you would like to avoid paying some of the most common closing costs. If you plan to ask the other party to cover some of the closing costs, try some of the following tricks to tip the scales in your favor:
Present A Strong Offer: The easiest way to get the other party to cover closing costs is to present them with a strong offer. The idea is that the offer is so attractive that they will want to do whatever they can to accommodate the purchase. It is worth noting, however, that stronger offers don’t necessarily mean more money. Sometimes it’s as simple as offering cash. Truly great offers make less work for the seller. Therefore, in the event you are able to make the transaction more “convenient,” there’s a chance the seller will cover the added costs to facilitate the deal.
Offer A Quick Close: Truly great real estate deals favor both parties. Therefore, if you want the seller to offer to pay closing costs, you’ll have to make a concession elsewhere. Try offering the seller something they will appreciate in return for covering the costs. Most sellers want to close a deal as fast as possible, so try giving them a shorter closing window, if possible.
Make Fewer Demands: No seller appreciates too many demands. As a result, the fewer demands you make, the more likely the seller will be to cover the closing costs. Again, you need to give the seller a reason to cover the costs. If you can convince them that covering the closing costs is in their best interest, you may find yourself with a lower purchase price. Try limiting any contingencies you may have had in mind, as they are only cumbersome for sellers. Without any obstacles, sellers are more likely to cover closing costs — especially if it means the deal will be sure to close.
Real estate transactions are the result of several moving parts. The final purchase price of a home, for example, includes additional costs, not the least of which are included in the final price of the acquisition. Someone needs to pay for inspections, escrow and a whole slew of costs in order for the deal to be closed, which begs the question: Who pays closing costs? The answer is simple: whoever the terms of the purchase agreement and contract mention. Either side may be responsible for the additional costs, which is why it’s important to know how negotiate at the closing table. The proper negotiation skills could effectively remove any additional costs you may not want to pay.
Are you confident you know who pays closing costs now? Did this guide help paint a clearer picture for you? Please feel free to let us know in the comments below.
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