Unless you’re a real estate investor or you’ve been around the homebuying block a few times, there are probably quite a few confusing terms and processes that come with selling your home. You’ve heard about closing costs, you know that they are part of the deal, but you have no concept of the elements and who’s supposed to pay. In this blog post, I'm going to clear things up for you.
What Are Closing Costs?
Closing costs are all of the expenses owed on closing day to transfer the title. Closing costs are typically 3% to 6% of the total purchase price. However, this price depends on certain factors like local property taxes and title or home insurance costs.
Buyers and sellers usually split closing costs, but some contracts or localities have different stipulations, so make sure you read your real estate contract with a sharp eye out for your responsibilities.
What Closing Costs Do Buyers Pay?
Typically, the buyer is responsible for all closing costs related to the property, loan, and insurance policies.
Normally buyers are responsible for fees associated with the mortgage, however certain types of loans may not allow for buyers to pay for certain items. Three days before closing, buyers receive a Closing Disclosure from the lender which outlines the final terms and costs of the mortgage.
Lenders will require buyers to get an appraisal and a home inspection to verify the property’s value is as it is listed. Buyers are responsible for these costs.
Buyers also pay prorated property taxes and HOA fees for the remainder of the year that they own the home. Therefore, if a buyer closes on a property at the end of the year, he will owe significantly less than he would if he closes at the beginning.
If buyers put less than 20% down, they have to get private mortgage insurance (PMI). PMI usually requires an annual premium upfront. This policy protects lenders if buyers default on their mortgage payments.
FHA, USDA, or VA mortgage loans usually require 1.75% of the annual premium down and a monthly fee for the mortgage insurance premium.
Buyers also need title insurance for the lender and themselves. Title insurance protects lenders and buyers from financial loss if there are defects in the title. However, the seller pays for the buyer’s policy upon closing, while the buyer remains responsible for the lender’s policy. You can learn more about title insurance in this blog post.
Finally, buyers must purchase a homeowner’s insurance policy to protect themselves and the lender from the financial repercussions of major damage to the home.
What Closing Costs Does The Seller Pay?
Closing costs that the seller agrees to pay are called seller concessions. The seller is not obligated to pay for any closing costs, but some sellers agree to help pay for things like property taxes, loan fees, appraisals, attorney fees, or inspections.
The cost of the closing service fee is usually split 50/50 between the seller and the buyer. This is what the title company charges to file the documents with the county recorder and officially close the deal. Typically, this filing ranges from $150 - $250.
Why Would A Seller Agree To Seller Concessions?
Seller concessions offer a financial incentive to buyers to consider the property. In a buyer’s market – when there are more houses for sale than buyers – sellers want to make their property more appealing to buyers. Seller concessions are also much more common when a house has been on the market for a long time and the seller is desperate to close. However, not all sellers are willing to compromise, especially in a seller’s market.
Sellers Pay For The Owner’s Title Insurance Policy
If the buyer is using a lender their lender will require the buyer to pay for a lender’s title insurance policy. An owner’s title insurance policy is separate from a lender’s policy and optional, but it is highly recommended and is typically paid for by the seller. If you are using a title company to close the transaction an owner’s policy is required.
Negotiating the Best Deal
Understanding how closing costs work can help you negotiate a better deal, whether you’re a buyer or seller. Your real estate broker can help you understand the market status and what kinds of concessions you should ask for or offer to ensure a swift sale and the best price for both parties.
If you have questions about selling your home in Western Colorado and navigating this current seller's market with the right concessions, let me know how I can help.