Whether you are buying or selling a home, the process can be frustrating as well as rewarding. The process will go more smoothly if you know what to expect, especially when it comes to closing costs. The one lesson you must learn is that no transaction is free, no matter if you’re on the buying end or the selling end. You are going to need cash for closing costs. Closing costs are those costs required to complete the transaction and close on the loan. Some buyers make the mistake of only looking at the selling price of a home and fail to factor in closing costs. Conversely, sellers expect to receive the full amount from the sale of their home. But, there are costs associated with selling a home. Some common closing costs are discussed below.
Typical Closing Costs for Buyers
As the buyer, you will need to set aside some cash to pay costs associated with the closing on your new home. These costs are required to be paid out-of-pocket. Buying a home is a confusing process, especially if you’re a first-time homebuyer. Closing costs are frequently misunderstood and many buyers fail to factor in these costs into their budget, leaving them unprepared on closing day. If you know what to expect, you will be able to better plan and avoid a cash shortage. If you fail to plan and are unable to pay closing costs, your transaction will be delayed, and you may not be able to close on your new home. Avoid this heartbreak and disappointment by reviewing the following closing costs that you may be required to pay.
- Fees associated with the mortgage are the responsibility of the buyer. The lender will charge you a mortgage application fee to process your mortgage application. You will either pay this fee prior to or at the closing.
- If you are providing only a small down payment or no down payment at all, you will be required to purchase private mortgage insurance. You should know that you could possibly be required to pay in advance a full year’s worth of private mortgage insurance premiums. Alternatively, you may be allowed to roll your private mortgage insurance premiums into your monthly payment. This is the more affordable option and most homebuyers will elect to take this option if available. The purpose of private mortgage insurance is to protect insurers against loss in the event that you would default on the loan.
- You will need to purchase homeowner’s insurance. If you are borrowing money to purchase a home, you will need insurance. This means you may have to purchase a policy before closing on the home. A homeowner’s insurance policy will combine personal liability and hazard insurance to protect the dwelling and the contents within. You should always read your homeowner’s insurance policy to ensure you understand the coverage you are getting.
- Title insurance is necessary to protect you from any issues involving ownership of the home. For instance, you will run into issues if the person who sold you the home didn’t own the home or if the information on the title was false. Typically, title information is verified before purchase. Title insurance is necessary to protect you from loss in the unfortunate event that issues arise relating to ownership.
- You are going to need written verification of the market value of your home for tax purposes and to justify the purchase price of your home. Therefore, you will need an appraisal which requires you to pay an appraisal fee. This fee will be paid either to your lender or directly to the third party performing the appraisal prior to the closing.
- You may be required to pay an escrow fee. During the closing process, you will need an escrow account to hold the money while the purchase agreement between the buyer and seller is finalized. Additionally, you will probably have a portion of your monthly mortgage payment deposited into an escrow account. Funds are disbursed from this account to pay property taxes and homeowner’s insurance when they are due.
- Origination fees are paid to the lender for the services they provide you in creating your loan. Some of these services include finding a loan program tailored to your needs and working to get you a reasonable interest rate with a loan term that is acceptable to you.
- You might have to pay for mortgage points, also known as discount points. These are fees paid by the buyer directly to the bank or lender in exchange for a lower interest rate. This is known as buying down your rate. Many buyers will elect to buy points because the lowered interest rate results in a lowered monthly mortgage payment.
- A credit report fee is something you should expect to pay. Your lender or mortgage broker will need to run a credit check on you to let you know how much money you are qualified to borrow as well as to determine your creditworthiness. This is necessary and will be required, so you should plan for this expense which will be required early in the process and will be paid directly to your lender or mortgage broker.
- You may have to pay a survey fee to determine the precise property boundary lines and other information if a current survey cannot be located.
- Although it is usually not required for new homes, if you are purchasing an older home, you may be required to pay for a pest and mold inspection. This requirement will depend on your location.
- Prorated property taxes and municipal fees are the responsibility of the buyer. Chances are good that you will close on your new home on a date when the seller has already paid property taxes or a water and sewer bill. You will need to reimburse the seller a prorated amount for these items for the time that you owned the home.
- You may be required to pay state or county recording fees to record the purchase of your new home naming you as the new owner. Any time property changes hands, the state or county in which the property is located requires the transaction to be recorded.
- Although real estate commissions are often paid by the seller, you may be asked to pay some of the commissions. In a typical transaction, the listing agent will be required to split their commission with your real estate agent. This may lead to the seller asking you to pay a portion of the commission.
Keep in mind that these closing costs are typical for buyers. This list is not all-inclusive. Closing costs for buyers will vary depending on where you live. You may not be required to pay all the costs mentioned. It is also possible that you will be able to negotiate some of the closing costs so that the lender or seller will pay a portion or all of certain closing costs. This list is intended to give you an idea of what you might have to pay at closing.
Typical Closing Costs for Sellers
If you’re selling a home, you certainly expect to receive proceeds from that transaction. However, you must keep in mind that no transaction is free and the same is true when you sell your home. There are certain costs associated with selling a home that you cannot escape. It is important that you understand the closing costs that are required of you so that there will be no surprises on closing day that might leave you blindsided. The last experience you want to have is to realize that the proceeds from your home are much less than you had anticipated once you subtract the closing costs. Once you know what to expect in the way of closing costs associated with selling your home, you can plan financially and know exactly how much money you will be receiving from the sale of your home minus the closing costs. Below are typical closing costs paid by the seller.
- When you sell your home, your real estate agent gets a commission. That commission is the responsibility of the seller. Commissions are usually negotiable and vary depending on your market area. Your agent is often required to split that commission with the buyer’s real estate agent. Therefore, you may be able to negotiate and have the buyer pay a portion of the commission.
- You will be required to pay loan payoff costs. When you pay your loan off with the bank, the actual payoff will be higher than the loan balance because of prorated interest. Depending on the type of loan you have, you could also be liable for a prepayment penalty for paying the loan off before the end of the loan term. Additionally, if you owe for a home equity line of credit, that will also need to be satisfied when you close on the sale of your home.
- Transfer taxes and recording fees will need to be paid to transfer the title of the home and record the transaction as required by the state or county in which the transaction took place.
- You should be prepared to pay title insurance fees since the seller typically pays the owner’s title insurance premium.
- If you have an attorney who is representing you for the sale of your home and will prepare all the closing documents, you will have to pay the fee required by your attorney. In some areas it is common for the buyer and seller to have their own attorneys. In other areas, it is customary for the buyer and seller to use one attorney for the closing. Either the buyer or the seller can pay the attorney fees and sometimes such fees will be split between the buyer and seller.
- Liens and judgments associated with your property will need to be satisfied prior to closing. If you do not resolve such issues, you will not be able to close on the sale of your home. Other unpaid fees associated with your property that could halt the closing include homeowner association fees and prorated property taxes. All such fees will need to be satisfied by the seller before the closing can take place.
- A termite inspection and remediation may be included in the closing costs, depending on the purchase agreement.
- You may also be required to pay repair costs or give credit to the buyer for repair costs for items found during the home inspection.
- You may be responsible for paying a home warranty premium.
You will also want to keep cash on hand when you decide to sell your home. Such cash is handy if you need to prepare your home to sell by making cosmetic repairs or improvements to make your home more attractive to buyers. Although such repairs and improvements will possibly yield a higher selling price, you should still have a plan for paying for such costs since these repairs and improvements will be made in the beginning of the process long before you realize the proceeds from the sale of your home.
Buyers and sellers probably don’t think about closing costs initially. But, remembering that no transaction is free and that there will be closing costs associated with the buying and selling of a home will prepare you, whether you are the buyer or seller, for the successful completion of a long process. It’s important that you examine the potential closing costs so that you at least have an idea of what will be required of you. The last thing you want to deal with is a huge surprise right when you are about to close the transaction. Receiving a financial surprise in the form of closing costs will not only leave you shocked but could also mean that the transaction is delayed or won’t be able to take place at all. You’ll want to avoid this scenario by knowing what will be required throughout the transaction, as well as at closing.