Who Pays Closing Costs?
Both buyers and sellers pay closing costs. However, the buyer usually pays most of them. You can negotiate with a seller to help cover closing costs as part of their seller concessions. Arranging for the seller to pay concessions can be extremely helpful in making your home purchase more affordable.
However, sellers have limits on the amount they can offer toward closing costs. The seller’s contribution can only reach a certain percentage of your mortgage amount, which varies by loan type, occupancy and down payment amount. We’ve broken this down with an example and in the sections below.
Conventional Loans
The limits on seller concessions for conventional loans can depend on a few different factors, including whether the property is a primary residence or second home.
Below, we include the percentage of the total loan amount the seller can expect to pay in concessions for different down payment amounts. The down payment percentages are based on the purchase price or appraised value, whichever is lower.
For primary residences:
- Down payments of 25% or more: 9%
- Down payments of 10% – 24.99%: 6%
- Down payments less than 10%: 3%
For second homes:
- Down payments of 25% or more: 9%
- Down payments of 10% – 24.99%: 6%
For an investment property, the maximum amount of seller concessions for any down payment is 2%.
FHA Loans
Seller concessions on FHA loans are much more straightforward. The contribution limit on seller concessions is 6% based on either the appraised value or the purchase price of the house, whichever is lower.
VA Loans
VA loan seller concessions follow a couple of different rules depending on what they’re being applied to. The full amount of seller concessions can be applied to discount points, origination costs, surveys, appraisals and credit report fees, up to 4% of the total loan amount.
The remaining concessions can be applied to prepaid escrows, like property taxes and homeowners insurance, or the VA funding fee.
Jumbo Loans
Seller concessions for jumbo loans can vary widely by lender.
An Example Of Seller Concessions In Practice
Let’s say that you take out a loan worth $200,000. It’s a conventional loan, so the seller can only contribute a maximum of 3% ($6,000) toward your closing costs if you make a down payment of less than 10%.
If your closing costs come to less than 3% of your loan value, the seller can contribute up to 100% of the closing cost value. This means that if your closing costs on the same loan equaled $2,500, the seller could only offer up to $2,500. These limitations are designed to help prevent fraud.
What’s Included In The Closing Costs For A Buyer?
Not every buyer will pay the same amount in closing costs. Some costs are lender requirements, some are government requirements and others may depend on the situation. How much you’ll need to pay for will depend on where you live, your specific lender and the type of loan you take out.
At least 3 business days before you attend your closing meeting, your lender will give you a document called your Closing Disclosure. This will list out every closing cost you need to cover and how much you owe. Let’s look at some of the most common closing costs you might see on your disclosure.
Application Fee
Some lenders charge an application fee to process your loan request. This fee varies by lender but can cost up to $500. The application fee may be a separate fee or used as a deposit that will be applied to other closing costs.
Appraisal
Your lender will order a home appraisal to determine how much your property is worth. The appraisal is typically ordered through a third-party appraisal management company. The company will then send a professional appraiser to take a look at your home. They’ll do some basic safety checking to make sure the property is move-in ready.
Appraisals are important because they establish your home’s value, which affects the amount you can borrow for a mortgage. The home appraisal also ensures you aren’t overpaying for a property. Appraisal fees are usually in the $300 – $600 range, but they can be higher or lower depending on your unique situation.
Attorney Fees
In some states, you can’t close on a home loan without an attorney. Attorney fees cover the cost of having a real estate attorney coordinate your closing and draw up paperwork for your title transfer. Real estate attorney charges often depend on state and local rates.
Closing Fee
Your closing fee goes to the escrow company or attorney who conducts your closing meeting. In some states, an attorney must sign off on every mortgage closing. These costs vary depending on your state and whether an attorney must be present on closing day.
Courier Fee
Courier fees cover the cost of transporting mortgage documents. Expect to pay around $30 in courier fees if your lender charges them.
Credit Reporting Fee
Credit reporting fees cover the cost of pulling your credit report and looking at your credit score. Most credit reporting fees range between $10 – $100.
Discount Points
Lenders allow you to pay money upfront on your loan to reduce your interest rate by buying mortgage discount points (essentially, buying down your rate to save money in interest over time). One discount point equals 1% of your loan amount.
For example, if you get a mortgage for $100,000, one point will cost you $1,000. For a $200,000 loan, a point costs $2,000. Unlike other fees, discount points aren’t mandatory.
Your fees for any discount points will appear on your Loan Estimate under the origination charges.
Escrow Funds
Sometimes referred to as reserve fees or prepaids, escrow funds hold reserved money for property taxes, homeowners insurance premiums and mortgage insurance. Your lender keeps your escrow funds in a special account and uses them to make payments on your behalf as part of your regular mortgage payment.
At closing, your lender might require you to put a few months’ worth of expenses into an escrow account. Although the number of months depends on your lender, many buyers put down 2 months’ worth of expenses at closing.
FHA Mortgage Insurance
With an FHA loan, you’ll need to pay an FHA mortgage insurance premium (MIP) upfront at closing, plus a monthly MIP fee for the life of the loan unless you make a down payment of 10% or more. In that case, MIP is removed after 11 years. The current FHA MIP rate is 1.75% of your base loan amount.
For example, if you borrow $100,000 to buy your home, your MIP due at closing is $1,750. This upfront payment is separate from your monthly MIP, which ranges from 0.15% to 0.75% of your loan value.
Flood Certification
You will likely need to pay $15 – $25 for a flood certification. This money goes to the Federal Emergency Management Agency (FEMA), which uses the data to plan for emergencies and target high-risk zones. This closing cost only applies if you’re buying a house in a flood zone.
Homeowners Association (HOA) Transfer Fee
If your property is located in an HOA, your homeowners association transfer fee covers the cost of moving HOA fees from the seller to the buyer. It ensures that the seller is up to date on their HOA dues and provides you a copy of the association’s payment and dues schedule, as well as HOA financials.
Most of the time, the seller covers this cost. However, you might need to pay your transfer fee if you’re buying in a very competitive market.
The amount you’ll pay for your transfer depends on the HOA’s policies. If you live in an area without an HOA, you won’t pay this fee at all.
Homeowners Insurance
Homeowners insurance is a type of protection that compensates you if your home gets damaged. Most mortgage lenders require you to have a homeowners insurance policy as a condition of your loan. Homeowners insurance typically protects against natural disasters, house fires, theft and vandalism. You may also have the option to include liability coverage and personal property coverage in your policy.
Many lenders require you to pay a year’s worth of homeowners insurance at closing. As a general rule, expect to pay about $50 a month for every $100,000 in home value.
For example, if you buy a home worth $200,000, you’ll likely pay about $100 per month for homeowners insurance. This means that your lender might require you to put $1,200 into an escrow fund at closing.
Lead-Based Paint Inspection
If you’re buying a home built before 1979, it might have lead paint. Lead-based paint poses a significant health risk to both adults and children living in a home.
This fee covers a test for lead in the home. Expect to pay around $300 or more for a lead-based paint inspection.
Lender’s Title Insurance
Lender’s title insurance protects the lender from loss if you lose your home to a title claim. Unlike with other types of insurance, you only need to pay for lender’s title insurance once at closing.
Lender’s title insurance, which typically costs between 0.5% – 1% of the mortgage, is separate from owner’s title insurance.
Loan Origination Fee
Your loan origination fees cover the cost of processing and underwriting your loan. These fees go to your lender in exchange for underwriting your loan and generating your loan paperwork. You can expect to pay about 1% of your loan’s value in origination fees.
Along with mortgage discount points, this will show up under the origination charges on your Loan Estimate.
Owner’s Title Insurance
Owner’s title insurance is optional, but it can protect you in a variety of scenarios. A title insurance company will cover you if the previous homeowner brings a lawsuit against you after you purchase the property.
For example, let’s say a lien on the title of your home is uncovered 10 years after you buy the house. The title insurance company will reimburse you for the amount of your policy. Typically, title insurance costs an average of 0.5% – 1% of the home’s purchase price.
Pest Inspection Fee
In some states, you’re required to get a pest inspection before closing on your loan. Pest inspections are also sometimes required if you’re buying a home with a VA loan. It may be required for other loans if the appraiser finds a problem with the home.
The average pest inspection costs about $100, but it can be more or less based on the size of your house and the type of pest it’s being inspected for. Depending on the situation, the buyer, seller or lender may cover the pest inspection fee.
Prepaid Daily Interest Charges
Your lender might ask you to pay any interest that accrues on your loan between closing and the date of your first mortgage payment upfront. The amount of interest you’ll accrue depends on your loan amount and interest rate, as well as your closing date.
Private Mortgage Insurance (PMI)
Your lender will require you to pay PMI if you put less than 20% down at closing on a conventional loan. PMI protects the lender if you default on your loan.
Your lender might ask you to put down your first month’s PMI premium when you close on the mortgage. The exact amount you’ll pay for PMI depends on your lender, but most homeowners pay $30 – $70 each month for every $100,000 they borrow.
With a conventional loan, you also have the ability to pay for part or all of a PMI policy upfront at closing in order to have lower or no monthly fees for mortgage insurance.
Property Tax
Property taxes are fees you pay to your local government to subsidize public services. Property taxes fund key institutions such as public schools, roads and fire departments. The amount you’ll pay in property taxes depends on where you live and your home’s value.
Your lender might require you to pay up to a year’s worth of property taxes at closing. You can estimate your property taxes using public records and your appraisal value.
If you’re buying a home from a family member or friend, you may want to ask them what percentage they paid in property taxes the previous year. This will give you the best estimate of how much you’ll owe in property taxes on closing day.
Rate Lock Fee
Some lenders might charge you a fee to lock your interest rate, called a mortgage rate lock, between getting initial mortgage approval and closing on the loan. You’ll usually pay 0.25% – 0.50% of your loan value when you lock your rate. However, many lenders offer this service for free depending on the length of the rate lock.
Recording Fee
A recording fee generally costs around $125 and is paid to your local city or county government to update public land ownership records. Be aware that the price of this fee can vary by county.
Survey Fee
In some states, you must get a land survey before you can complete a home sale. A survey fee goes to the survey company that verifies and confirms your property lines before you close on the house.
Home buyers can expect to pay $400 – $1,000 for the land survey. You may pay more if you’re buying a very large property or one with unusual boundary lines.
Tax Monitoring And Tax Status Research Fees
Tax monitoring and status research fees cover the cost of hiring a company to verify that your calculated property taxes are correct. This company will also notify your lender if you miss any ongoing property taxes. The amount of this fee will vary depending on where you live and which company your lender uses.
Title Search Fees
Title searches look for claims against a property you want to buy. Liens, bankruptcies or unpaid back taxes can mean the seller doesn’t technically own the home they’re selling.
A title insurance company performs the title search in most states, while certain laws dictate whether real estate attorneys need to handle title searches in other states. Either way, expect to pay $75 – $200 or more for your title search.
Transfer Tax
Transfer taxes go to your local government in exchange for updating your home’s title and transferring it to you. Like most local taxes, this fee will vary depending on where you live.
VA Funding Fee
You may need to pay a VA funding fee at closing if you buy a home using a VA loan. Your VA funding fee goes toward administrative costs for the VA loan program.
The amount of the funding fee is based on the down payment, whether it’s a purchase or refinance, and whether it’s the first time you’ve used your VA benefits. Let’s take a look at how the amount of your VA funding fee differs based on these factors.
- If you put down less than 5% on your loan and you’re a first-time VA user, your VA funding fee is equal to 2.15% of your total loan amount.
- If you make a 5% down payment, your funding fee is 1.5% of your loan amount. (This applies to first-time and repeat home buyers.)
- A 10% down payment lowers your VA funding fee to 1.25%. (This applies to first-time and repeat home buyers.)
- If you’re refinancing from a different type of loan into a VA loan, the funding fee is 2.15% if it’s your first use and 3.3% for a subsequent use.
- VA streamline refinances (also called Interest Rate Reduction Refinance Loans, or IRRRLs) have a 0.5% funding fee.
The funding fee can be waived if you’re receiving VA disability or applying as a surviving spouse of a veteran who died while in service or as a result of a service-related disability. If you’re a Purple Heart recipient serving in an active-duty capacity, you’re also exempt from the VA funding fee.
