A sold sign in the yard of a beautiful home that's blurry in the background.

Who Pays Closing Costs on a Home Sale?

Are you currently in the market looking to buy or sell a home? Chances are, you’re aware of some of the major expenses. Things like a down payment or repairs. But there are some other costs that can often go overlooked. 

These are the infamous closing costs. And they’re a necessary part of finalizing any real estate transaction.

Closing costs are fees that are paid by both the buyer and seller. Although the amounts and specific fees paid can vary. If you’re a first-time home buyer, it can be difficult to understand who is responsible for which costs. 

Here, we’ll take a more in depth look into the topic of closing costs. We’ll also clarify who pays for what and answer some other common questions along the way.

What exactly are closing costs?

As a home sale nears completion, there are certain expenses that must be taken care of – these are the closing costs. The exact nature and amount of these costs can differ depending on the type and location of the property being sold. In this section, we’ll delve into the costs that are typically associated with all real estate transactions. We’ll also clarify who is responsible for paying them, as well as the various methods of payment that are available.

What a buyer pays

As a buyer, you will generally be expected to cover the majority of the closing costs from your own funds. Here is an overview of the typical expenses you can anticipate:

  • Attorney costs: Real estate lawyers charge for reviewing contracts, titles, and closing documents. Some of these may be hourly charges while others might be fixed fees.
  • Home inspection fee: A buyer should always have a home inspection performed to evaluate the property’s condition. This would be paid for at closing.
  • Appraisal fee: As part of the mortgage application process, the lender will require an appraisal to determine the home’s value.
  • Underwriting/credit reporting fees: The lender may levy charges for conducting a credit check and other underwriting tasks.
  • Prepaid interest: This represents the interest that accrues between the date of closing and the first mortgage payment.
  • Homeowners insurance: Lenders may mandate homeowners insurance, with the first premium payment due at closing.
  • Title search fee and insurance: A title search and title insurance safeguard against future title-related issues with the property. While lender’s title insurance is generally mandatory, buyers can also purchase owner’s title insurance for extra protection.

What the seller pays

As the seller, you will be responsible for some of the closing costs. These are typically subtracted from the sale price of the home. Here are the common expenses you can expect to incur:

  • Realtor commissions: Both the buyer’s and seller’s agents are compensated for their roles in the home sale. Sellers are usually responsible for a percentage of the final purchase price towards both commissions. Opting to sell with a discount broker can significantly lower these expenses.
  • Title fees: These costs are related to transferring the home’s title from the seller to the new buyer.
  • HOA fees: If the home is in a community with an HOA, any outstanding fees must be paid at closing.
  • Property taxes: Any unpaid property taxes must be brought up to date by the seller.

While the buyer’s list of fees may seem lengthier, they typically incur lower overall closing costs. It’s important to keep in mind that these expenses only cover closing costs. They do not include the down payment, which is a separate expense altogether.

A title agent adding up closing costs.

How much are closing costs?

Closing costs can vary depending on several factors, such as the location and type of property. Typically, sellers are responsible for paying between 6% to 10% of the home’s purchase price at closing.  Buyers can expect to pay between 2% and 5% of the sale price.

For instance, if you were purchasing a $250,000 home, your closing costs could range from $5,000 to $12,500. Conversely, if you were the seller, your closing costs would likely fall between $15,000 and $25,000.

Unfortunately, buyers may not know the exact costs until a few days before the closing. They should expect to receive a closing or settlement statement about three business days before the closing date. This statement itemizes all the costs and the total amount they are expected to pay at the closing table.

On the other hand, sellers typically have a more precise estimate of the costs. An experienced agent will provide them with a seller’s net sheet. This lists the expenses deducted from their total profit from the sale of the home. It gives them a fairly accurate idea of what they will receive from the sale once the final contract is signed.

Loan type can have an effect

The type of mortgage chosen by a buyer can significantly affect the closing costs they pay. As we mentioned, generally, conventional loans require buyers to pay between 2% and 5% of the home’s purchase price. However, other types of loans may have additional fees.

For instance, government-backed loans like VA and USDA loans require one-time funding or upfront fees. FHA loans, on the other hand, mandate an upfront mortgage insurance premium (MIP). This is typically equal to 1.75% of the total loan amount at closing, as well as ongoing annual premiums.

Furthermore, buyers who borrow from a private lender with less than 20% down will need to get private mortgage insurance (PMI). Some lenders might ask for an upfront PMI payment at the closing. This means that the entire premium for a year is paid in one lump sum. It’s crucial for buyers to keep these additional costs in mind when choosing a mortgage type.

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Tips to save on closing costs

As a homebuyer, you may face significant expenses from closing costs, but there are ways to reduce these costs. Here are some tips to help you save on closing costs:

  • Negotiate seller concessions: You can negotiate with the seller to pay some or all of your closing costs. They may be willing to offer concessions in exchange for home repairs or a reduction in the asking price. Some states require sellers to pay for title insurance policies for new owners, which can be included in their concessions.
  • Look for lender credits: Lenders may offer to pay part or all of your closing costs. But in return, you may have a higher interest rate on your loan. This option can save you money upfront, but it may cost you more in the long run.
  • Check for assistance programs: Many programs are available for low-to-moderate income or first-time homebuyers. These programs provide grants or loans to help cover your closing costs. Research and apply for any programs that you may be eligible for to save on your closing costs.

The bottom line

Closing costs can be a substantial expense for both buyers and sellers, but there are ways to minimize them. It’s important to have a good understanding of what to expect and negotiate where possible. The type of loan chosen can also impact closing costs, so it’s essential to do research beforehand. By following the tips outlined in this article, buyers can potentially save money on closing costs.

If you’re looking to sell or buy a home in Bentonville, contact us at 1 Percent Lists Arkansas. We’ll provide expert guidance throughout the process. Our team of experienced real estate professionals can help you make informed decisions and achieve your real estate goals.