Most buyers want to know, “What are closing costs when buying or selling a home?”
Before buying OR selling it’s important to understand what closing costs are and who is responsible for paying them. Both the buyer and seller have their own costs associated with closing on a property but the amount and how they are paid vary from transaction to transaction.
Let’s dig into buyer-related closing costs.
Buyer Closing Costs: When a buyer is purchasing a property, they are responsible for a down payment (anywhere from 0-20%, typically) and closing costs of usually 3-6%.
You’ve been saving hard, counting all the extra pennies, skipping coffees, and you finally have a 10% down payment to buy your dream home. Now you’re thinking, “What the heck… I need MORE money? Can the seller pay some of the closing costs?”
How much are closing costs and what are they used for? Typically, you can
expect anywhere from 3% to 6% of the purchase price in closing costs depending on your loan and the amount of insurance coverage you select.
Buyer’s closing costs consist of:
- Fees you pay the lender for doing their work to get you the loan.
- Fees to the title company for getting a clear title, title insurance if you choose to purchase it, and attorney fees.
- Things we Realtor’s call “prepaids,” which are payments toward your insurance policies (homeowner’s and flood) and taxes.
At the closing you are “prepaying” or paying up front your insurance policy. Most buyers wonder why they are paying for those each month as well? Once you prepay for your insurance policies, you have insurance for the next year. As you pay your mortgage each month, you are paying for next year’s insurance. When it becomes due a year from now, it has already been saved in an escrow account by your mortgage company and you don’t have to think or stress about it at all.
Can you still buy a home if you haven’t saved for closing costs? Yes, you can!! You have a couple of options:
- You can put a smaller amount down and use the extra money for closing costs. Example: You’ve saved for 10% down, but instead consider doing a 5% down loan so you have extra cash for closing costs.
- You can get some or all of the closing costs elsewhere such as a gift from a family member.
- When you submit your offer, you can ask the seller to pay some of your closing costs.
Note that your loan may impact what amount of closing cost you can ask for. At the same time, since closing costs will vary depending on your insurance coverage, sellers typically won’t agree to just pay ALL closing costs. In your offer to purchase, it is best to ask for a certain amount ($2k, $10k…. depending on what you may need or want).
Keep in mind: A seller may not be willing to accept a low contract price if they are paying for some of your closing costs. Sellers are looking at their takeaway amount after they have paid their fees when considering offers. Also, you are responsible for any inspection costs associated with your home purchase (general, termite, plumbing, etc.).
Let’s go through an example:
A seller has a home for sale for $200k. After their own fees and paying off their mortgage, they want to walk away with $50k. In order to get $50k, their bottom sales price to accept is $195k.
A buyer offers $193k and asks the seller to pay $3k of their closing costs. The seller will look at this offer as $190k because they’re paying $3k in closing costs they did not budget for.
For the seller to get their desired amount of $50k or bottom line of $195k, they may counter the buyer at $198k and offer to pay $3k of the buyer’s closing costs.
We are here to help.
We get it, there are many moving parts of a transaction! It is a lot for a buyer and seller to understand. If you have any questions or want to walk through your personal situation with us, reach out at sold@brunoswift.com. We’d love to hear from you!
