How much will you be responsible for when determining who pays closing costs? Typically, buyers and sellers each pay their own closing costs. A home buyer is likely to pay between 2% and 5% of their loan amount in closing costs, while the seller could pay 5% to 6% of the sale price to their real estate agent.
But it doesn’t always work out that way. Buyers may be able to get someone else — like the seller, the lender, or a down payment assistance program — to cover some or all of their out-of-pocket expenses. Here’s how.
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Both buyers and sellers will pay closing costs, and the amounts they pay will vary depending on the sales price of the home, the type of mortgage, and whether your state requires a real estate attorney.
Moreover, because home purchase contracts are negotiable, the details of the transaction can also impact who pays closing costs and how much. For example, seller concessions make it possible for a seller to pay some of the buyer’s closing costs. And, in some cases, a lender may cover some of those costs, too. But more on that later in the article.
When most people think about closing costs, they’re thinking about the buyer’s closing costs. These are your out-of-pocket fees to set up a home loan, get the house appraised, have the title transferred to your name, and so on.
Here are the most common and expensive closing costs home buyers have to pay:
Your down payment will also be due at closing, although it’s not typically thought of as a closing cost. Yet, it may show on the closing disclosure as part of the cash needed to close. Furthermore, any earnest money put into escrow when you made an offer on the house will be credited toward your down payment at closing by your escrow company.
Note that closing costs also depend on the mortgage lender. While some closing costs are set by third parties and cannot be changed, others are controlled by the lender and can vary a lot.
While the above third-party fees are not necessarily negotiable, you can save money by selecting which vendor you choose to perform services. Of course, this wouldn’t apply to your county recording fees, which are usually a set fee charged by your local government.
As a rule of thumb, shopping for the lowest fees is a simple and effective way to lower the closing costs of your home buying process.
If you’re still wondering who pays closing costs, know that sellers have closing costs, too. Unfortunately, they don’t have the same flexibility to shop for and negotiate lower closing costs than buyers do. But home sellers should still be aware and prepared to pay the out-of-pocket charges on their sale.
5% or 6% of the purchase price in closing costs. Yes, that’s often shared with the buyer’s agent — but it’s typically still paid for by the seller.
Home sellers should also expect charges for transfer taxes, title fees, escrow fees, and so on. There’s not much you can do about some taxes and fees. But your real estate commission may well be negotiable.
If you’re looking to avoid closing costs as a seller, be sure to explore alternatives: selling your home yourself, finding a discount mortgage broker, or using a different real estate agent. Checking all your options will give you a basis for negotiation.
If you want a full service, you’re going to have to pay for it. But sellers can often shop around and get a lower commission rate than the one they were originally quoted.
For borrowers, the type of mortgage you choose can have a big effect on your closing costs. The biggest of these is mortgage insurance.
FHA loans require annual mortgage insurance and an upfront insurance fee. The latter — called upfront mortgage insurance premium, or UFMIP — is equal to 1.75% of the loan amount, or $1,750 for every $100,000 borrowed.
Despite its name, FHA upfront mortgage insurance doesn’t have to be paid at closing. Most borrowers roll this cost into their loan amount rather than pay it with cash. Rolling UFMIP into your loan will greatly reduce your closing costs. But it does mean you’ll pay interest on the fee over the life of your loan.
Keep in mind that UFMIP is separate from an FHA loan’s ongoing mortgage insurance premiums (MIP). It’s also entirely different from private mortgage insurance (PMI) that is paid by buyers who put less than a 20% down payment on a conventional loan.
VA loans do not require annual mortgage insurance. But they do require a one-time “funding fee” due at closing.
For first-time home buyers, the VA funding fee is usually equal to 2.3% of the loan amount. Buyers who’ve used a VA loan before will pay 3.6% of their loan amount. If you make a down payment of 5% or more, the VA funding fee is reduced.
VA home buyers also have the option to roll this fee into their loan amount instead of paying it along with their closing costs.
Like the FHA loan, the USDA home loan program requires both an upfront mortgage insurance fee and an annual one. USDA’s upfront fee is equal to 1% of the loan amount and can be added to the mortgage balance to reduce closing costs.
The amount you pay in closing costs can vary a lot by lender, which is why you need to consider closing costs as well as interest rates when shopping for a mortgage.
Loan Estimate. This is a standard document lenders are required to give you when you apply for a home loan. The Loan Estimate lets you easily compare fees and understand which lenders are less expensive overall — which may be different from the ones simply offering the lowest mortgage rates.
Here’s an example of page 2 of the standard Loan Estimate, which lists all the fees a buyer can expect to pay on closing day.
Image: Consumer Financial Protection Bureau (CFPB)
Pay special attention to section (A), “Loan Costs.” These are the lender’s own fees — which are the main ones you’ll want to look at when comparison shopping.
The first row, “Points,” shows how much you’re paying to buy the rate offered. The next two rows, “Application Fee” and “Underwriting Fee,” show what lenders charge for their services.
Home buyers don’t always have to pay closing costs out of pocket. There are a variety of ways to reduce your costs — or even, if you’re lucky, avoid them altogether.
Loan Estimates are just offers. And you’re free to negotiate. If you get some Estimates with lower interest rates but higher closing costs, and vice-versa, call up the lenders and get them to compete for your business.
“I’d love to work with you but your origination fee is X amount higher than lender Y's,” might be a good start.
Don’t expect your closing costs to go away completely. But you may be able to make a significant dent in your upfront costs or even your interest rate simply by asking.
Some (but not all) lenders have their own programs that can help with closing costs and down payments. These come in the form of a lender credit. A lender credit typically means the lender will cover part or all of your upfront costs — and in exchange, you’ll pay a higher interest rate.
For example, Bank of America has its America’s Home Grant® program. It “offers a lender credit of up to $7,500 that can be used towards non-recurring closing costs, like title insurance and recording fees, or to permanently buy down the interest rate [discount points]. The funds do not require repayment.”
And, separately, it provides down payment grants.
As you’d expect, that quote from BoA’s website refers you to a footnote that contains a pile of terms and conditions. But its offer is genuine enough — as are countless others from other lenders.
Still curious who pays closing costs when purchasing a home? Many buyers are able to avoid closing costs by getting the seller to pay them instead. This arrangement is known as seller concessions.
Typically, the money comes out of the proceeds of the sale. So the seller doesn’t have to cut a check, because the sum is deducted at closing.
“A strategy here is to offer $10,000 over what you want to actually pay for a home, and then request a $10,000 seller credit towards closing costs,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Be aware that cash-back is not a possibility. The total amount of the buyer’s closing costs is the most that can be put on the table. There are also limits to the amount of money a seller can contribute to the buyer’s closing costs. By loan type, these limits are:
Seller concessions are not uncommon. But the main issue is that sellers are usually only willing to pay the closing costs in a buyer’s market.
However, in a seller’s market — a market with buyer competition — sellers are far less likely to cut such a deal. In this case, you might want to look elsewhere for help — like a closing cost assistance program.
Refinance loans have closing costs, just like home purchase loans. They typically cost around the same amount, too.
Homeowners looking to refinance can shop around for the lowest closing costs. But there’s no home seller to help them pay. However, current homeowners have one option home buyers do not: They can often roll closing costs into their loan amount.
Just remember that there’s no such thing as a free lunch. You’ll be paying down those closing costs — and the interest on them — until you pay down the mortgage, sell the home, or refinance again.
For those who need some extra help with closing costs, there’s one more route to try: closing cost assistance. This type of home buying assistance can come in the form of grants, loans, or gift money to help cover your upfront costs. Here’s what to know about each one.
Closing cost assistance is part and parcel of many down payment assistance (DPA) programs. There are thousands of down payment assistance programs spread across the country — meaning there’s bound to be one (maybe several) covering the area in which you want to buy.
Each DPA program is different.
As their name suggests, DPAs primarily exist to help you fund your down payment. But oftentimes that money can be used to help cover your closing costs, too. Just make sure this is allowed by the loan program you apply to.
Lenders are generally relaxed about receiving gifts toward your down payment and closing costs from loved ones.
Fannie Mae and Freddie Mac define “loved ones” as family, fiance(e), or domestic partner. But other programs (like FHA loans, for example) widen the field to include close friends.
There are rules about such gifts.
These gift rules vary from lender to lender. Some lenders will not need to source the funds when the gift is deposited directly into escrow. But if the gift is deposited into a borrower’s account first, documenting the source of funds will likely be required.
“Also, each different loan program will have its own guidelines as to what the gifting limits will be,” cautions Meyer.
This is usually straightforward enough. But lenders can get picky if they suspect that you’re hiding something. So it’s important to make sure your gift funds are correctly sourced and documented.
For more information on how to receive gift funds toward your closing costs, see this article.
So who pays closing costs? The buyer and seller both do.
If you’re a home buyer, you’ll likely pay 2% to 5% of your loan amount at the closing table (and that’s on top of your down payment). But if you put in some time comparing lenders and looking for help, you may end up paying a lot less than you would have.
Authored By: Peter Warden The Mortgage Reports EditorPeter Warden has been writing for a decade about mortgages, personal finance, credit cards, and insurance. His work has appeared across a wide range of media. He lives in a small town with his partner of 25 years.
Updated By: Ryan Tronier The Mortgage Reports EditorRyan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
