here are many different expenses when buying or selling a home. Who pays closing costs, and which costs are each party responsible for?
Real estate transactions are expensive. Closing costs range from 4 to 7 percent when selling a home and 1 to 2 percent when buying. With so many different costs, it’s essential to understand which closing costs you pay so you aren’t surprised at closing.
This article will break down what closing costs are involved in a typical real estate transaction, who generally pays which fees, and tips for saving or avoiding certain closing costs.
After reading, use our closing cost calculator to estimate your total costs when buying or selling a home.
- Understanding closing costs
- Seller closing costs
- Buyer closing costs
- What costs are negotiable?
- Closing cost calculators
What are closing costs in a real estate transaction?
Closing costs are the fees, taxes, and miscellaneous charges involved in buying or selling a home. These costs can range from one percent to seven percent of the home’s purchase price.
Many closing costs are negotiable, while the current market environment dictates whether the buyer or seller will pay the lion’s share.
The seller’s closing costs are deducted from the net proceeds of the sale, while the buyer’s closing costs must be wired to escrow at closing, along with the down payment.
Seller closing costs
When considering who pays closing costs, the seller is responsible for the highest expenses in a transaction. But, for the most part, buyers and sellers have similar closing costs.
The seller’s side of closing costs usually includes:
- Real estate agent commissions
- Transfer taxes
- Attorney or escrow and title company fees
- Title insurance
- Outstanding property taxes
- HOA demand and resale package (if applicable)
- Mortgage payoff costs
- Repair credits for the buyer
Real estate agent commissions
The seller compensates a listing broker upon a successful sale when selling the home. The listing broker offers a cooperative commission to the buyer’s agent for bringing a buyer.
According to Real Trends, a research firm that surveys agents on commissions annually, the average commission in 2021 was 4.94%.
Transfer taxes
A transfer tax is paid to the government when ownership of a deed changes on real property. Each state, city, and county may levy a transfer tax, depending on your location.
Texas and Wyoming have no transfer tax while Arizona has a flat $2.00 transfer tax. In Nevada, it’s $2.55 for every $500 in sales price.
Look up your .
Attorney or escrow and title company fees
Either attorneys or title companies assist in real estate transactions. If you sell a home in the following states, you’re required to use a real estate attorney.
- Alabama
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Kansas
- Kentucky
- Maine
- Maryland
- Massachusetts
- Mississippi
- New Hampshire
- New Jersey
- New York
- North Dakota
- Pennsylvania
- Rhode Island
- South Carolina
- Vermont
- Virginia
- West Virginia
A real estate attorney can charge hourly or, more commonly, a flat fee per transaction. The attorney will help review documents throughout the process and sign documents on closing day.
Both parties may hire an attorney to assist with the transaction.
The remaining states use title companies and escrow officers. Title companies ensure the title and deed on the home are clean and insurable while holding and distributing funds as a neutral third party.
Additionally, the escrow officer assists with signings, recording the deed, providing a title report, and ordering loan payoffs.
The buyer and seller usually split escrow fees 50/50. Costs range depending on the home’s sales price and are typically between $400 to $700.
Title insurance
Title insurance, also known as the owner’s title policy, protects the seller and new homeowner against future title disputes and property ownership claims.
Disputes can range from debtors owed money and attempting to collect after the sale by placing a lien on the property or a nasty divorce with one party fighting for the proceeds or taking back ownership.
Outstanding property taxes
Since property taxes are due quarterly, the seller or buyer will either owe or receive a balance of the taxes at closing.
For example, a home sells on January 31st, and the first quarter taxes are current. Since the seller paid for February and March but will no longer own the house, the seller receives a credit at closing.
HOA resale package, demand, and transfer/setup fees (if applicable)
When selling a home in a homeowner’s association, most HOAs 鈥� and some states by law 鈥� require the seller to order and pay for an HOA resale package.
The real estate contract will outline how soon it must be ordered and delivered to the buyer. The resale package contains CC&Rs and bylaws outlining the rules and regulations of the community, as well as the annual budget.
In many states, the law gives the buyer the right to review and cancel the purchase agreement if the bylaws do not meet their approval.
An HOA demand verifies all HOA costs, including the transfer fee and monthly payments, and if the seller is current on all dues. The demand statement will also note outstanding fees caused by violations.
Some HOA communities require a capital contribution or transfer/account setup fee. The HOA capital contribution and transfer/account setup fees are the most negotiated HOA-related fees.
HOA demand statements and resale packages cost between $125 to $250 for each master-planned community and sub-division.
Mortgage payoff costs
When selling a house with a mortgage, the mortgage company may charge for the payoff statement and the recording fees. These fees range from $30 to $100s depending on the mortgage servicer.
Repair credits and a home warranty
After an offer is accepted, buyers have a due diligence period to hire a licensed home inspector. The home inspector completes a non-destructive home inspection and sends a report with any findings. The buyer then has the opportunity to request the seller to complete repairs.
Sometimes, sellers or buyers request a credit in place of repairs. Any repair credit the seller agrees to is paid to the buyer at the close of escrow.
Buyers may request a home warranty when making an offer on a home. A home warranty protects the buyer if appliances like the refrigerator and oven or the home’s mechanical systems like HVAC or water heater fail after closing.
Warranty pricing ranges based on the residence’s size, type, and features. Home warranties cost between $450 to $700.
You may owe capital gains taxes
Like stocks and bonds, in the eyes of the IRS, your home is considered a capital asset. The profits made from the sale of a home may qualify for capital gains taxes.
For most real estate sales, a long-term capital gain may be taxed at 0%, 15%, or 20% depending on your tax bracket and marital status.
If you’ve lived in the home for 2 out of the past 5 years, you may be exempt up to $250,000 if single, and $500,000 for a married couple. Capital gains taxes are not a closing cost and are due on a normal tax schedule.
Buyer closing costs
While the seller pays the bulk of their closing costs on real estate commissions, the buyer’s highest costs are usually loan-related with many similar fees like escrow or attorney fees.
When buying a new construction home, buyers should expect to pay more in closing costs.
The buyer’s side of closing costs usually includes:
- Loan origination fees
- Title insurance
- Appraisal fee
- Home inspection fees
- Attorney, escrow, or title company fees
- Recording fees
- Prepaid taxes, sewer, and trash
- HOA dues and fees (if applicable)
Loan origination fees
The lender charges loan origination fees for underwriting and loan processing. The loan origination fee typically ranges from 0.5% to 1% of the total loan amount.
On a $400,000 loan, the origination fee costs $2,000 to $4,000. Although, many lenders now offer flat fee loan origination.
When offered a flat fee, it’s essential to ensure the lender isn’t charging additional costs, like underwriting or processing fees, to make the loan origination smaller.
If the lender offers a zero dollar loan origination, it’s common for lenders to compensate through a higher interest rate. When shopping for a mortgage, always compare rates and fees.
For Veterans using a VA loan 鈥� and choosing a $0 downpayment 鈥� you pay 2.3% of the loan amount as a VA funding fee. As the downpayment amount increases, the funding fee decreases.
Borrowers can add the VA funding fee to the loan, unlike loan origination fees.
Veterans exempt from paying the VA funding fee include:
- Veterans who receive compensation for service-connected disabilities
- Veterans who would receive disability compensation if they didn’t receive retirement pay
- Veterans rated as eligible to receive compensation based on a pre-discharge exam or review
- Veterans who can but are not receiving compensation because they’re on active duty
- Purple Heart recipients
Surviving spouses who are eligible for a VA loan
Title insurance
A lender’s title policy protects the lender against a break in the chain of title or a claim on a title that was missed or not filed before closing.
Like the owner’s title policy, this is a separate policy to protect the lender’s investment on the buyer’s behalf.
Title insurance is around 0.25% of the loan amount. You can expect to pay close to $250 for each $100,000 you borrow.
Appraisal fee
When purchasing a home with a loan, the lender will require an appraisal. During an appraisal, a licensed real estate appraiser compares recent neighborhood sales and the condition and upgrades of the home to determine the home’s value.
A lender will only lend based on the value determined by the appraiser. Appraisals cost between $500 to $700, on average.
Home inspection fee
During the due diligence period, buyers hire a licensed home inspector to perform a non-destructive physical inspection of the home. An inspector’s job is to find and note any mechanical issues that may impact its usability or suitability.
Based on the inspector’s report, if there isn’t a significant issue with the home, a buyer sends a repair request or asks for credit in place of repairs at closing.
A home inspector costs $350 to $600, depending on the type and size of the home.
Attorney, or escrow and title company fees
(if you read the seller section, you can skip forward)
Either attorneys or title companies assist in real estate transactions. If you sell a home in the following states, you’re required to use a real estate attorney.
- Alabama
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Kansas
- Kentucky
- Maine
- Maryland
- Massachusetts
- Mississippi
- New Hampshire
- New Jersey
- New York
- North Dakota
- Pennsylvania
- Rhode Island
- South Carolina
- Vermont
- Virginia
- West Virginia
A real estate attorney can charge hourly or, more commonly, a flat fee per transaction. The attorney will help review documents throughout the process and sign documents on closing day.
Both parties may hire an attorney to assist with the transaction.
The remaining states use title companies and escrow officers. Title companies ensure the title and deed on the home are clean and insurable while holding and distributing funds as a neutral third party.
Additionally, the escrow officer assists with signings, recording the deed, providing a title report, and ordering loan payoffs.
The buyer and seller usually split escrow fees 50/50. Costs range depending on the home’s sales price and are typically between $400 to $700.
Recording fees
When buying a home with a mortgage, the lender places a lien on the deed allowing the lender to foreclose and take ownership of the property if the buyer fails to make payments.
The county’s recorder’s office records all liens and deed filings. The filing fee can cost between $40 to $100.
Prepaid taxes, insurance, and interest
A mortgage has what’s called an escrow account. The escrow account pays your property taxes and homeowner’s insurance premiums.
During closing, the escrow account impounds these payments in advance. Often six to twelve months of expenses.
Each monthly mortgage payment will go towards principal, interest, and your escrow account.
HOA dues and fees
If a home is in an HOA community, a buyer might pay an account setup fee or capital contribution. These are negotiable fees and range from $150 to $500, on average.
Much like the prepayment of taxes and insurance, the HOA often collects payments in advance. Since billing and mailing changes aren’t always accurate or real-time, the advanced amount helps the HOA get paid on time, and the buyer can get settled without missing their first HOA payment.
Which fees are negotiable?
Almost all fees are negotiable. The HOA resale package is the only fee protected by law in some states. The law requires the seller to pay for and provide a resale package to buyers.
When a seller contributes towards closing costs, it’s usually a whole number, not specific repair amounts. That contribution is added at closing to offset the amount the buyer needs to bring to close.
The market will dictate closing costs negotiations.
When the inventory of homes is high in a buyer’s market, and sellers are competing for a smaller pool of buyers, it’s more common for a buyer to request a seller contribute towards closing costs.
Often, a buyer will offer the contribution amount above the list price. For example, offering $505,000 on a $500,000 listing with $5,000 in closing costs contributions.
When the home inventory is low and buyers are competing for a smaller pool of homes, buyers will pay their closing costs in a seller’s market. A buyer may even pay some of the seller’s closing costs to have a competitive offer.
HOA capital contributions, home warranty, and transfer fees are the most negotiated costs regardless of market condition.
Every real estate market acts differently from the next. Trust your real estate agent to understand their market when making an offer on a home and negotiating closing costs. Standard practice in Las Vegas is very different from San Francisco.
In conclusion
Closing costs are a normal part of the real estate process. Transparency has also become much more common for buyers and sellers.
Lenders, by law, must disclose all fees they charge during a transaction.
The buyer must receive and review that disclosure three business days before closing. At closing, the title company or attorneys provide settlement statements showing every cost and fee for both parties.
Now that you know who pays closing costs when buying and selling a home, use our closing cost calculator to see an estimate of your expenses when purchasing or selling your next home.
Closing Cost Calculator
Enter the estimated purchase price. If selling, enter your mortgage balance. If buying, enter your loan amount.
