Buying or selling a home is 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), they will sign a contract and move forward with the steps required to close the deal.
In almost all real estate transactions, there are expenses and fees associated with the closing. Who (as between the buyer and seller) pays which costs depends in part on which part of the country you live in and its local practices, and on what you negotiate with the other party to the transaction.
Knowing beforehand what these closing costs are likely to be and who ordinarily pays them can help you avoid surprises and a hit to your wallet when you sit down to sign the papers. Fortunately, intense federal regulation of the mortgage industry has greatly reduced the possibility that the home buyer will be surprised by various "junk fees" tacked on at the closing.
Closing Costs Typically Paid by the Property Buyer
A buyer of a home or property usually needs to pay the lion's share of the closing costs. For starters, assuming the buyer isn't paying all cash, the lender or bank giving the buyer a mortgage with which to pay for the home will typically charge for:
- processing the mortgage (including an origination charge, application fee, and underwriting fee)
- appraisal report (to assure the lender that the property is worth what the buyer is paying for it)
- credit report fee (no lender will willingly make a loan without first checking the buyer's credit)
- tax monitoring fee (so that the lender can hire a tax service agency to alert it if the buyer gets behind on paying property taxes), and
- flood monitoring fee.
- fees to the escrow company that serves to bring about the transfer
- a home inspection, in which a professional (or several professionals) checks the home for structural and other physical defects as well as pests, and then prepares a report advising the buyer of these.
- a title company search, to make sure the seller can really transfer clear title; that is, no one else claims to own all or a share of the property and there are no liens against it
- transfer taxes (depending on local requirements)
- a prorated share of property taxes for that year
- a homeowners' insurance premium, and
- fees for recording the property deed with the appropriate government office in the county where the land is located.
To avoid any surprise closing costs, real estate buyers should read the purchase contract, mortgage disclosure forms, and closing papers carefully. If possible (or required in your state), hire an experienced real estate law attorney to be at the closing with you and look over the papers to make sure everything is in order.
Closing Costs Typically Paid by the Property Seller
Typically, the home seller pays the following closing costs:
- escrow company fees (if the buyer didn't agree to pay all of these)
- any fees associated with paying off the existing mortgage (though prepayment fees are becoming less common in home mortgages)
- repairs to the home that the buyer negotiated for, likely based on the inspection report
- amounts owed in order to remove mechanics', tax, child-support, or other liens on the property
- sales commission, if the seller hired a real estate agent or broker to list and market the property
- a home warranty, if (as is common) the seller agreed to buy one for the buyer as a mark of assurance that the home's various systems and appliances are and will remain in good shape (the buyer can also purchase one for him- or herself)
- the cost of preparing and recording the deed (yes, it's equally possible that the buyer will customarily pay these in your area), and
- one-half of the attorney's closing fee, particularly if you live in a state where attorneys are normally part of the closing, such as Massachusetts or New York.
Ask your real estate agent about your expected closing costs and get a written estimate.
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 or she doesn't agree to pay them?
- How much will you charge to represent me at closing? Can you represent both me and the buyer?
- 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?