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What are Closing Costs?
Closing day is coming! This is an exciting day — it means a real estate deal is almost complete. The price has been set, and buyers might be eager to start planning the next step — moving in. But, the deal isn’t over and done with quite yet. When the buyer sees the closing paperwork, they will realize that there are more costs in buying a house than just the negotiated sale price.
Closing costs are the miscellaneous fees paid to various third parties in the transaction. Real estate agents, lenders, appraisers, insurance companies https://loansolution.com/payday-loans-az/, and the tax authorities among others will need to paid. The Good Faith Estimate and HUD-1 form provided by the lender will itemize these costs.
Typical Closing Costs Paid by the Buyer
The buyer will typically pay for closing costs associated with obtaining a mortgage and doing due diligence on the property. This means they are generally responsible for paying for borrowing money, and ensuring that the property condition and boundaries are as advertised. Below is a list of closing costs paid by buyers:
Points: Prepaid interest at closing. The buyer puts extra money up front in exchange for a reduced interest rate for the monthly payments.
Appraisal Fee: The buyer will pay for the lender required appraisal to assess the fair market value of the house.
Survey Fee: The buyer and lender will want to be sure of the exact boundaries of the property before the purchase.
Homeowner’s Insurance: Prior to closing the buyer will get a quote from an insurance company to cover the house. The first year’s premiums are paid upfront at closing.
Typical Closing Costs Paid by the Seller
Typically the buyer has fewer charges, but pays a total larger amount. Many of the closing costs could be a few hundred dollars or less. The brokerage commission though can be thousands of dollars on one itemized line.
Brokerage Commission: The seller will pay the brokerage fee, which is then split between the real estate agents. It is often 6% of the sale price.
Closing Costs Negotiations Between Buyers and Sellers
Who pays the closing fees can be a matter of negotiation. Many sellers ount to cover the buyer’s cost. Let’s look at some of the fees which can often be negotiated.
Title Services and Insurance: The company providing closing services, title research and insurance can be paid by either party. The seller might pay for the costs of hiring the title company to manage the closing process. Likewise, the buyer will probably pay for the actual insurance for themselves and the lender.
Inspection Fee: Buyers want to know the property is in good shape. A seller might decide to pay for inspections as a show of good faith to motivate buyers.
Home Warranty: A buyer can always purchase a home warranty if they desire. A seller might offer to pay for it to act as an incentive. Perhaps the seller is willing to pay the first year’s premium to boost buyer confidence.
Tax Stamps or Transaction Document Fees: These fees function similar to a sales tax. The local government or multiple layers of government may charge a one time fee for selling or transferring the property.
Some of the costs of a house can be clearly split between the buyer and seller. It doesn’t seem reasonable or fair to make one party pay taxes or fees for the time they didn’t own the house. The closing paperwork will show a split of these costs so that the buyer and seller pay for their proper share.
Prorated costs cover the proportion of the monthly payment that covers the period from the date of sale to the beginning of the new month. For example, a sale date of January 10th means the buyer owns the home for 21 days in January. The prorated costs will be broken down so that the buyer only pays for 21 days worth of these costs, not the whole 31 days.
Property Taxes: Let’s say the house is sold on October 3rd. At closing, the buyer pays their prorated portion for the remaining days left in the month of October. The seller also pays for their share of the taxes from the days in October prior to the sale.
HOA Fees: If the house is part of a Homeowners Association, the buyer pays prorated dues for the number of days in the closing month that they own the home.
Mortgage Interest: The bank wants interest from the day the owner gets the house. However, the first monthly payment isn’t typically due until a few weeks after closing. Prorated interest for the remainder of the month is due at closing.
Rent: Let’s say the house is an investment property that is currently rented. The buyer and seller can prorate the rent so that each party gets an appropriate portion of the rent for the number of days they owned the property.
Every real estate transaction will have closing costs. These fees are paid at the conclusion of the real estate deal to third party service providers. These include real estate agents, insurance companies, lenders, tax authorities, and others who provide services for the buyer and seller. Each of these costs are traditionally paid by either the buyer or seller. However, who pays for specific fees can often be negotiated for as part of the deal.