Closing costs defined
Closing costs are fees that are paid at closing in addition to the down payment amount. While closing costs are typically thought of as a buyer’s expense, sellers also incur them. However, the buyer’s closing costs are often covered out of pocket or financed whereas the seller’s closing costs are deducted from the proceeds of the deal.
Several factors impact total closing costs, including the type of loan you are obtaining and what state you live in. For instance, FHA loans and conventional mortgages involve a few slightly different closing costs.
What is included in closing costs?
Closing costs are not a single expense; they are the cumulative total of multiple expenses.
Who pays closing costs?
Both parties in a real estate transaction pay closing costs. Sellers usually pay more total closing costs, but these expenses are deduced from their profits from the transaction.
A seller’s closing costs usually range from 8% to 10% of their home’s purchase price. These figures include 5% to 6% real estate agent commission fees as well as taxes and other miscellaneous fees. A seller’s closing costs may be higher if they agree to cover a portion of the buyer’s out-of-pocket expenses.
Buyers will pay 2% to 5% of the total purchase price toward closing costs. Most of these costs cover the lender and title company fees.
How to reduce closing fees
As you can see, closing costs can be quite high. Fortunately, as a buyer, there are several ways that you can reduce your out-of-pocket expenses.
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Obtain mortgage lender comparisons
Once a lender runs your credit to determine mortgage eligibility, you have a 14-day window to compare other offers. All credit inquiries conducted during that time will not negatively impact your credit score.
You should use this grace period to compare mortgage lenders and find the company that offers the most affordable closing costs.
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Request seller concessions
One of the best ways to reduce closing costs is to negotiate “seller concessions” as part of your real estate deal.
For example, suppose that you want to purchase a house listed at $400,000. Your real estate agent advises you that $390,000 is a fair purchase price for the home. Instead of bidding $10,000 below asking, you could submit a bid for $400,000, but ask the seller to contribute $10,000 toward closing costs.
Keep in mind that there are limits to how much sellers can contribute. The exact limits vary depending on the type of mortgage.
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Explore down payment assistance programs
Down payment assistance programs provide prospective buyers with loans or grants. These funds can be potentially used to meet down payment obligations or to cover closing costs. Generally, only first-time homebuyers can access these programs, but there are a few rare exceptions.
If you are a first-time homebuyer, research down payment assistance programs in your state. Carefully review eligibility requirements. If you meet the criteria, these programs are a great way of funding the purchase of your first home.
Final thoughts
As you begin your journey of buying a home, use this information to help you successfully navigate the process. Make sure to compare multiple lenders before committing to a single institution, but more importantly, find a great agent who can guide you and negotiate with the seller on your final closing costs.
