What Are Closing Costs? Who Pays Them?

Many first-time homebuyers are so laser-focused on figures such as purchase price, down payment, and mortgage rate that they don’t consider other significant expenses, such as closing costs. This oversight can lead to major sticker shock when buyers get to the closing table.

To prevent unpleasant surprises and added stress on closing day, empower yourself with knowledge about what to expect when you’re sealing the deal on a new house, especially when calculating closing costs.

What are closing costs?

Closing costs are the fees, charges, and advanced payments due before a mortgage can be finalized. Most closing costs fall into one of five buckets: 

1. Title and Attorney Fees

These fees cover the cost of ensuring there are no liens against the property or other obstacles that would prevent the seller from legally transferring ownership of the house. Additionally, you will be asked to cover the legal expenses needed to make the transaction official.

However, it’s important to note that the homebuyer has the legal right to shop around for these services and is not obligated to use the seller’s settlement agent. 

Examples of these closing costs include:

• Title search
• Title insurance
• Recording and registration fees
• Notary and attorney services

2. Prepaids and Escrow 

Prorated property taxes and your first year’s home insurance premium will be due at closing. Going forward, these can be rolled into your monthly mortgage bill via escrow, but you will need to make the initial payment. If there is a gap between when you close and when you make your first mortgage payment, you may also need to prepay the interest on the loan that will accrue during that time.

During the sales transaction, money collected toward closing costs will be held by a third-party escrow agent. This is another instance when you should not feel obligated to use the seller’s chosen agent. Shop around and find the best fit for you.

3. Loan-Related Fees

Also known as lender fees, these closing costs cover services provided by the lender during your loan application, approval, and processing. If you plan to pay discount points to reduce your interest rate on the loan, that payment will also be factored into your closing costs.

Other examples of loan-related closing costs may include:

• Origination charges (not all lenders charge this fee)
• Credit report 
• Underwriting
• Wire transfers
• Courier fees

4. Property-Related Fees

Often you will need to pay for a survey to confirm property boundaries, and both mortgage lenders and the Federal Emergency Management Agency (FEMA) require a flood zone evaluation before closing. Some expenses, such as termite inspections and property appraisals, may be classified as loan-related fees or property-related fees.

5. Mortgage Insurance

Buyers who get a conventional home loan and don’t put down 20 percent of the home’s purchase price are required to pay private mortgage insurance (PMI) to protect the lender’s investment. PMI can be removed once you reach 20 percent equity.

This closing cost should not be a surprise because lenders are required to include this information in your loan estimate and closing disclosure documents. Using a mortgage calculator can help you estimate your mortgage payment, including principal and interest, taxes, insurance, and PMI, so there are even fewer surprises along the way. 

How much should a first-time homebuyer budget for closing costs?

In general, closing costs average about 2-5 percent of the home’s purchase price. However, several factors can impact the exact amount, including:

• Price of house
• Amount of down payment
• Type of loan
• State where the house is located

That means for a typical $220,000 house in Indiana, a first-time homebuyer can expect to pay between $4,400-$11,000 in closing costs, whereas the average $612,000 home in Massachusetts will cost you between $12,240-$30,600 to finalize the purchase.

Who pays closing costs and when?

Now that you have a better idea about what to expect, let’s break down the most common closing costs, who is responsible for paying them, and at what point during the sales process they need to be paid.

Costs Paid Before Closing

• Earnest money or good faith deposit
• Appraisal
• Home inspection

Costs Paid at Closing

• Points
• Credit report
• Flood zone appraisal
• Tax monitoring services
• Government fees
• Homeowners association (HOA) fees
• Origination fees
• Attorney fees
• Homeowners insurance
• Mortgage insurance

Traditionally, the buyer pays most of the closing costs, but there may be room for negotiation depending on the market and how motivated the seller is to close the deal. 

For example, the seller pays the commission to their real estate agent and yours, normally equal to 6 percent of the purchase price. The seller also pays whatever portion of the property taxes and HOA fees that were incurred up to the point of closing. 

Some buyers try to negotiate with the seller to pay some of the closing costs, such as attorney fees, property appraisals, home inspections, and mortgage discount points.

In previous years, seller concessions were the norm. In hot markets with low interest rates, these seller concessions are less prevalent and are usually only for outdated homes or those that are overpriced for the area.

Still have questions about closing costs? FFB Mortgage Lenders can help. This blog post is the tip of the iceberg when it comes to understanding closing costs and where they fit into your homebuying strategy. 

The mortgage lenders at FFB can talk you through the entire journey, from determining what type of home loan is the best fit for you to finalizing your mortgage at closing. 

Contact us, and one of our experienced lenders will be in touch to answer questions or help you start your home loan application.