Closing costs when buying/selling property vary. Buyers generally pay for mortgage, inspection, appraisal, and title search, while sellers cover the transfer of title costs. Division of costs is negotiable.
In this article, we will explore the different types of closing costs, who typically pay for them, and how to negotiate them.
What Are Closing Costs?
Closing costs are property transaction fees. The location, mortgage, and purchase or selling agreement can affect these costs. Closing costs may include:
1. Mortgage-Related Fees
Buyers pay most mortgage-related closing costs. Lenders levy these fees based on mortgage type, loan size, and agreement terms. Loan origination fees, which pay the lender’s processing costs, are regular mortgage fees. Underwriting and document preparation expenses are usually a percentage of the loan amount. The loan origination charge might be 0.5% to 1% of the loan amount, depending on the lender and loan agreement.
2. Home Inspection and Appraisal Fees
A home inspection is a thorough examination of the property’s condition by a professional inspector. The inspector will check for any defects or potential problems with the property, such as issues with the foundation, roof, electrical, or plumbing systems.
Based on the findings of the inspection, the buyer can negotiate with the seller to make necessary repairs or adjust the purchase price accordingly. The cost of a home inspection can vary depending on the size and location of the property and typically ranges from $300 to $500.
3. Title Search and Title Insurance
It’s important to verify the seller’s title and safeguard the buyer against future title concerns during a property sale. The closing costs usually include a title search and title insurance.
A title firm or attorney checks the seller’s ownership and legal right to sell. Public records are checked for liens, encumbrances, and other concerns that could affect property title. Before proceeding, title search concerns must be rectified.
4. Escrow and Closing Fees
Escrow and closing fees are a part of the closing costs and are typically paid by the buyer. These fees cover the costs associated with the services of an escrow agent and an attorney, who help facilitate the transaction and ensure that everything is legal and in order.
An escrow agent is a neutral third party who holds the funds and documents related to the transaction until the sale is complete. The agent ensures that all conditions of the sale are met before releasing the funds to the seller. The fee for the escrow agent is typically a percentage of the sale price and can vary depending on the location and other factors.
5. Transfer Taxes
Some states and local governments impose a transfer tax on the sale of real estate, which can be a significant expense for the buyer or seller.
Closing costs are usually a proportion of the property’s purchase price, depending on the transaction’s fees. Buyers and sellers can negotiate some closing costs. It’s vital to read the Closing Disclosure form to understand your purchase or sale’s closing expenses, as they can vary.
Buyer’s Closing Costs
When purchasing a property, buyers are typically responsible for paying a variety of closing costs, which can include:
- Mortgage-related fees: These fees can include loan origination fees, discount points, and other charges associated with obtaining a mortgage. These fees can vary depending on the lender and the type of loan.
- Home inspections: Buyers typically pay for a home inspection to assess the condition of the property and identify any potential issues that may need to be addressed.
- Appraisals: Buyers may also be responsible for paying for an appraisal to determine the value of the property.
- Title searches: A title search is conducted to verify that the seller has clear ownership of the property, and buyers are typically responsible for paying for this search.
- Title insurance: Title insurance protects the buyer against any title defects that may arise in the future and is typically required by lenders.
The total cost of a buyer’s closing costs can vary depending on factors such as the purchase price of the property, location, and the type of loan being used. As a general rule of thumb, buyers can expect to pay anywhere from 2% to 5% of the purchase price in closing costs.
Seller’s Closing Costs
When selling a property, the seller is responsible for paying for certain expenses as part of the closing costs. These expenses include real estate agent commissions, transfer taxes, and any outstanding liens or judgments on the property.
Real estate agent commissions, based on the property’s sale price, are the seller’s biggest outlay. The listing agent and buyer’s agent divide 5% to 6% of the sale price, depending on location and other considerations.
Transfer taxes are another expense that the seller is responsible for paying. These taxes are imposed by the state or local government and are based on the sale price of the property. The exact amount of transfer taxes varies depending on the location, but they typically range from 0.5% to 2% of the sale price.
Closing Costs Negotiation
When it comes to closing costs, the division of expenses between the buyer and seller is negotiable. This means that the parties involved can work together to determine a fair and reasonable division of the costs.
Researching local closing expenses might help you negotiate closing charges. This can help both parties prepare and improve cost-sharing discussions. Consider the property’s condition and any needed repairs as well.
Propose a fair and acceptable offer that considers both parties’ interests while negotiating closing costs. If the buyer agrees to a shortened closing period or waives sale contract conditions, the seller may pay for certain expenditures. If the seller makes repairs or modifications, the buyer may pay for them.
Closing Disclosure Form
The Closing Disclosure form is a document that outlines all of the final costs associated with a property transaction. It is an important part of the closing process as it provides a detailed breakdown of the costs that the buyer and seller will incur.
The buyer and seller must sign the lender or escrow agent’s Closing Disclosure document before closing. It lists the loan amount, interest rate, closing expenses, and prepaid items like property taxes and insurance. The document provides loan terms including length and prepayment penalties.
The Closing Disclosure form ensures that both parties understand the sale costs and there are no surprises at closing. Buyers and sellers can verify all charges and eliminate errors by examining the form beforehand.
Conclusion
In conclusion, closing costs include mortgage-related fees, home inspections, appraisals, title searches, and insurance. Buyers and sellers divide these costs, which can be negotiated. Before closing, check the Closing Disclosure form, which lists all sale charges.
Buyers and sellers should consult their real estate agent or attorney and investigate local closing fees to ensure a smooth closure. Buyers and sellers might feel more confident and prepared to close on a home by understanding closing expenses and negotiation.
