Buying or selling a home is exciting and stressful at the same time. It's a new beginning and a huge financial deal. Once a buyer and seller come to an agreement over the purchase price for the home (or any type of real estate, for that matter), a contract is signed, and it's time to close the deal.
In almost all real estate transactions, there are expenses and fees associated with the closing - the closing costs. Knowing beforehand what these costs usually are and who pays them can help you avoid surprises and a hit to your wallet when you sit down to sign the papers.
Typical Closing Costs
Closing costs are usually charged by the buyer's lender, the bank that gave the buyer a mortgage to pay for the home. They typically include charges for things like:
- Processing the mortgage
- The title company's search to make sure no one else claims to own the property and there are no liens against it
- Recording the deed with the appropriate government office in the county where the land is located
Usually, the sales contract requires the buyer and seller to pay their own closing costs. But, if you're not careful, you could end up paying some costs and expenses you weren't anticipating.
To avoid these surprise closing costs, you need to read the closing papers carefully. If possible, hire an experienced real estate law attorney to be at the closing with you and look over the papers to make sure everything's in order.
How would you react if you sold property and the contract called for the buyers to their own closing costs, waited a month for them to get financing, and then at the closing, found out you were being charged for:
- Tax Service Fee - $55.50
- Inspection Fee - $35.00
- Photos - $15.00
- Lender's Inspection Fee - $80.00
- Document Review Fee - $25.00
- Lot Review - $25.00
- Appraisal Inspection - $50.00
- Filing Fee - $50.00
All of these fees were charged to sellers in actual closing statements, even though the contract called for the buyers to pay them. You can, of course, protest the charge. Chances are, however, the closing or escrow agent, who usually doesn't represent either the buyer or seller, will say, "Oh, HUD (or FHA or VA) requires the seller to pay these charges."
In fact, neither the Federal Housing Administration (FHA) or its parent organization, the US Department of Housing and Urban Development (HUD), nor the US Department of Veterans Affairs (VA) requires the seller to pay anything. They don't even have the legal authority to require it!
To be accurate, the closing agent should tell you that these agencies don't allow these costs to be charged to the buyer-borrower, but they do allow them to be charged to the seller.
Have a Plan of Action
Typically, the seller agrees to pay some closing costs, such as:
- The sales commission, if a real estate agent is involved
- The cost of preparing the deed
- Pest inspection and clearance letter
- A title search (sometimes)
- One-half of the reasonable and customary attorney's closing fee
Even these items are negotiable, though. The buyer could agree to pay any and all expenses involved with the transfer of ownership. But, the law requires nothing except that the sales contract:
- Be in writing
- Reflects the true intent of the parties
- Is signed by parties, who are competent - of legal age and sound mind
So, why aren't carefully negotiated and expressly written contracts always followed? A big reason is that, while the federal government requires lenders to provide the buyer with a good faith estimate of closing costs well before the closing date, the seller gets no such estimate until the actual closing.
The real estate agent may offer an estimate, but usually doesn't know what, if any, hidden or ambiguous "fees and inspections" may be added later.
In the end, you need a plan. Ask about closing costs and get a written estimate. Some lenders, and particularly mortgage companies, take advantage of the reality of the situation: They know most sellers are either simply naive about closing costs or aren't about to kill the sale at the last minute because of a couple hundred dollars in excess charges they're bullied into paying.
Don't let this happen to you.
Questions for Your Attorney
- If a buyer tries to charge me with closing costs that properly belong to the buyer, can I cancel the sale if he doesn't agree to pay them?
- How much will you charge to represent me at closing? Can you represent both me and the buyer, like the real estate agent is doing?
- If I show up at closing and I get a 20-item list of closing costs that the buyer wants me to pay, can I ask for more time to investigate the charges, or do I have to close on that day and agree to pay?
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