In every real estate transaction, both buyers and sellers are responsible for certain costs during the closing process. Put simply, closing costs are the various fees (e.g. taxes, commissions) paid in the process of finalizing a closing on a home.
As a seller, you incur quite a bit of cost to sell your home: around 10% of your home’s sales price when everything is said and done. If you’re selling a home, you’re usually also buying a home, so it’s important to consider expenses on both sides of the transaction.
This guide will take you through everything you need to know to minimize those costs and keep more money in your pocket.
Closing costs can vary greatly depending on where you live, how much the home costs, and your mortgage. Some costs are recurring while others are one-time fees.
Here are a few common examples of closing costs:
- Settlement fees
- Home inspections
- Property tax
- Credit report
- Home appraisal
- Lender’s title insurance
- Real estate agent commissions
- Escrow fee
- Notary, attorney, and courier fees
- Land survey fee
The above list are common closing costs for buyers and sellers. In the next section, we’ll dive into who pays what in the transaction.
Who pays closing costs and how much are they?
Both buyers and sellers pay closing costs, but it’s not an even split.
In general, buyers pay around 2-5% of the home sale price in closing costs. A majority of these costs go to the mortgage loan lender. According to CostCorp, the average cost to buyers at closing is $5,749 including taxes. These fees typically consist of the lender’s title, owner’s title, appraisals, settlement fees, recording fees, land surveys and transfer tax.
Meanwhile, sellers owe closing costs equivalent to 8-10% of the final sale price. Given the U.S. median home value of $247,084, this comes out to an average of $19,000-$24,000, which is a huge weight on sellers. The biggest chunk of a seller’s closing costs goes to real estate agent fees. Because the seller usually pays for both their own agent and the buyer’s agent fees, commissions average 5-6% of the home sale. An additional 2-4% of the seller’s closing costs come from taxes and fees.
Let’s look a little closer first at what closing costs are covered by the seller.
What are the closing costs for the seller?
As we’ve said, the seller pays for a majority of closing costs. Often, this adds up to 8-10% of the total sale price. Before diving into how the totals, let’s define the common seller closing fees you’ll commonly see as a seller:
- Title search: A title search ensures there is no outstanding legal action or claim on the property and establishes that the seller is the rightful owner.
- Title insurance: There are usually two types of title insurance policies: the home buyer’s and the lender’s title insurance policies. Both policies cover situations in which problems arise with ownership of the property. The seller usually covers the home buyer’s title insurance while the lender’s policy is paid by the buyer.
- Escrow fee: These fees are paid to a title company or to an escrow company for their services (e.g. paperwork) in setting up escrow. Typically, earnest money is included in escrow. In a real estate transaction, this closing fee is split between buyer and seller.
- Transfer tax: Some states tax the transfer of property from one owner to the other. When they do have this fee, this is called a transfer tax. Note: It is different from property taxes.
- Outstanding amounts owed: This fee includes prorated items like property tax and utilities. It is the seller’s responsibility to pay for these up to the date of the sale, at which point the buyer takes over the costs.
- Real estate commissions: Real estate commission is the largest single cost that home sellers face. On average, total commission costs are 6% of a home’s final sale price.
You can save on commission with Clever, which connects you with top-rated agents who work for 1% or $3000, depending on the price of your home.
Here’s a table to help you understand how these fees quickly add up:
|Type of Seller Closing Fee||Average cost|
|Real estate agents commissions||5% – 6% of total home sale|
|Title search||$150 – $400|
|Title insurance||$1,000 – $4,000|
|1/2 escrow fee||1/2 of 1% of home sale price|
|Outstanding amounts owed (e.g. utilities, property tax)||Variable|
Costs will vary greatly upon where your property is located. It’s not even just between states that these values will differ; counties can have different rules, too. For example, transfer tax in New York State is $2 per $500 of the home’s sale price. But, in New York City, this tax can increase up to 2.625% of the home’s value. So, if you sell your home for $200,000 outside of NYC, the transfer tax will be $800. Meanwhile, the same home in New York City would accrue a tax of $5,250.
What closing costs do buyers pay?
Considering a majority of the buyer’s closing costs come from lender fees, it should be noted that different lenders have different costs. So, it benefits buyers to shop around for mortgage plans and go with the one that offers both fair terms and low closing costs. A closing cost calculator like this one can help you determine average costs and compare lenders.
Buyers need to consider the different types of mortgage available.
A few common loans include:
- Fixed-rate vs. adjustable-rate mortgages (ARMs): A fixed-rate mortgage locks the borrower in at a fixed interest rate for the lifetime of the loan. An ARM locks in a rate for a certain duration and then resets every period to the current market interest rate.
- FHA, VA, and USDA loans: These are government-backed mortgage loans that each come with a special set of requirements and terms. This Forbes article has information on each type, along with their advantages and disadvantages.
As a buyer, you should get a Loan Estimate from multiple lenders so you can determine which lenders offer what services and you can tally expected closing costs. Within a Loan Estimate, notice and compare the sections titled “Services You Can Shop For” and “Services You Cannot Shop For”. The Consumer Finance Protection Bureau has an excellent tool to understand Loan Estimates, which can help you shop around for the best deals.
Buyers also may be responsible for non-lender fees related to determining the value of the home. Home inspection costs often run $400-$600, and appraisal fees can add hundreds more. While these costs may seem unnecessarily high, they’re essential in ensuring you’re getting everything you pay for.
How can I avoid paying closing costs?
The “I” in the question above can be either the seller or the buyer. Let’s first start by talking about what a seller can do to reduce how much they pay in closing costs.
How sellers can avoid paying closing costs
The single biggest cost to home sellers is the real estate commission fee, which averages between 5-6% of the home’s final sale price.
Many sellers try to negate this fee by going with a flat fee MLS service where they end up paying a flat fee ranging from $100 to $3000. They get their home listed on the MLS, but to attract buyers they still need to offer the buyer’s agent commission fee (effectively a “bounty” for buyers agents to collect that incentivizes them to show your home to sellers). You’re typically looking at between 2.5% and 3% of the home’s value in buyer’s agent commission, even if you go with a flat fee MLS.
Then there’s the headache of handing showings, photography, marketing, negotiations, and paperwork for your home. Only 7% of real estate transactions were sold FSBO in 2018, likely due to the high time investment required to sell a home without an agent.
So you need an agent, but how can you reduce the commission fee?
Well, a great place to start is working with a real estate company that has pre-negotiated commission rates. Using a site like Clever can save you a significant amount in closing costs because Clever commissions are fixed at 1% or $3,000.
You still enjoy benefits like working with full service, top-rated agents, but Clever also finds the best agents and negotiates their services at a lower, fixed rate. Discover how you can save by finding an agent on their site.
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How a buyer can reduce their closing costs
Buyers can ask sellers to cover some of their closing costs. These requests are known as seller concessions. They can cover specific closing costs or be a percentage of total costs. Common seller concessions include:
- Inspection fees
- Appraisal costs
- Property taxes (pay out taxes due through end of year)
- Attorney fees
- Loan origination fees
The total amount a seller contributes is based on the buyer’s mortgage loan and lender. This limit on seller concessions is put in place in order to prevent home price inflation. For example, let’s say you offer $200,000 on a home. The seller counter-offers $225,000, but they say they will pay $25,000 in closing costs. So, the home sale price is listed as $225,000 and thus raises prices in the area even though you as the buyer are out of pocket the same $200,000 you initially offered.
Here are the seller concession limits for conventional mortgage loans:
|Down Payment %||% Seller Can Contribute to Closing Costs|
|Less than 10%||Up to 3%|
|10% – 25%||Up to 6%|
|More than 25%||Up to 9%|
Keep in mind, though, that there are different kinds of loans besides just conventional. VA, FHA, and USDA are all government-backed mortgage loans that offer certain benefits:
- VA loans are backed by the Veterans Administration and only given out to current members of the U.S. armed forces, veterans, National Guard or reservists, and eligible surviving spouses. The major advantages of VA loans are less strict credit requirements, no down payment (because it’s backed by the VA), and no private mortgage insurance. However, there is a funding fee (a one-time charge) that’s usually 1.25% – 3.3% of the loan amount.
- An FHA loan is backed by the Federal Housing Administration and is a popular option for first-time home buyers with low credit. While it offers more flexibility and a down payment that’s as little as 3.5% of the home sale price, FHA loans do come with mortgage insurance premiums both upfront and annually. And, there is a maximum limit on how much you can borrow.
- USDA loans are intended for rural and suburban housing and are backed by the U.S. Department of Agriculture. Like VA loans, USDA loans offer a zero down payment and low interest rates. They are intended for families with low to very low incomes, with income limits set based on region and household size. USDA loans have a maximum limit that varies by location and competitiveness of the real estate market, but can be up to $500,000.
With these exceptions (and one more as listed below), there are different seller concession limits, too:
- In the sale of an investment property, the seller can contribute up to 2%
- With a VA loan, the seller can contribute up to 4%
- With FHA & USDA loans, the seller can contribute up to 6%
Now, let’s talk about what sellers can do to reduce their closing costs.
Can closing costs be included in the loan for buyers?
So, we’ve gone over some ways for buyers and sellers to avoid paying closing costs. But, there is another option for buyers, and that’s to roll some closing costs into their mortgage loan. We already know the majority of closing costs for the buyer are fees relating to their loan, so it makes logical sense that some costs can be included in the loan itself. Right?
Not necessarily: It depends on your lender and your situation. The major reason for buyers to include closing costs in their loan is to receive money up front that can go towards immediate needs, like repairs. Let’s dive a little deeper into what it means to roll closing costs into a loan.
Loan-to-value ratio – or LTV – is important when considering rolling closing costs into a loan. LTV helps lenders determine the amount of risk they are undertaking when giving out a loan.
Here’s the LTV formula: Mortgage Amount (MA) divided by Appraised Property Value (APV)
For example: Let’s say the APV of a home is $150,000. You pay a $20,000 down payment, which means you’ll need to borrow $130,000 (the MA). So, your LTV is $130,000/$150,000 = 86.67%. The closer the MA gets to the APV (aka the more money you borrow), the higher the LTV. And, the higher the LTV, the higher the likelihood that the loan will default – at least this is how it’s perceived in the eyes of the borrower.
The way to achieve a lower LTV is to make a higher down payment on a lower-priced home. A low LTV ratio also means a higher chance of approval and lower interest rates. The most favorable rates are achieved at an LTV of 80% or lower.
So to bring it all back to closing costs, lenders can roll closing costs into your loan but they cannot exceed the LTV threshold.
Let’s look at an example: If your LTV is 70% and the home you’re buying is $200,000, the maximum loan amount is $140,000. If your closing costs are $8,000 and you need to take out a $135,000 loan, the lender will not cover anything beyond that $140,000. This leaves you with $3,000 worth of closing costs you still need to pay for.
To include or to not include closing costs in a loan
The LTV ratio is one part of the puzzle a buyer needs to consider when adding closing costs to a loan. The other is that adding closing costs will increase the size of the loan, therefore making you pay more in interest. Essentially, you’re paying interest on those closing costs over the lifetime of the loan.
That’s also where premium pricing comes into play. Premium pricing is an option offered by lenders where they increase your mortgage interest rate in return for a credit towards closing costs. For example, let’s say your mortgage interest rate is 3.125% and it’s a $200,000 mortgage. A premium pricing offer from your lender increases the interest rate by 0.125% and gives you a 2% credit towards closing costs. So, your interest rate increases to 3.25% but you get $4,000 in credit.
Why should a buyer include closing costs into a loan? If you need money upfront for repairs or building an emergency fund after spending lots of savings, including your closing costs into the loan is a wise financial decision.
Why should a buyer not roll in costs? If you want to avoid higher monthly costs and have more home equity to utilize in the future (e.g. for taking out a home line of credit), rolling closing costs into your loan is not a wide move.
Now let’s take everything we’ve learned and apply that to totaling up the closing costs for the seller on a $200,000 home.
Running the numbers: How much are closing costs on a 200k home for a seller?
The answer to this question will vary by location. As we saw in our initial table of closing costs for the seller, there are some line items – like transfer tax – that are highly varied between states. But, we can use that table and sub in some of the numbers we know in this case for a $200,000 home. And, for the sake of making this a more complete equation, we’ll say the home is located in Florida. Check it out:
|Type of Seller Closing Fee||Average cost||Total|
|Seller’s real estate agent commission||3%||$6,000|
|Buyer’s agent commission||3%||$6,000|
|Title search||$150 – $400||$150 – $400|
|Title insurance||$1,000 – $4,000||$1,000 – $4,000|
|1/2 escrow fee||1/2 of 1% of home sale price||$1,000|
|Transfer tax||$0.70 per $100||$1,400|
|Outstanding amounts owed (e.g. utilities, property tax)||Variable||Variable|
|Grand Total:||8 – 10%||$15,550 – $18,880|
As you can see, the majority of a seller’s closing costs come from real estate agent commissions. Not including the buyer agent’s commission, you’re still left paying on average a 3% commission fee just to your listing agent. And, on a $200,000 home, you can see that adds up – to $6,000, in fact.
With Clever, there is a flat commission fee of either 1% or $3,000. Stating the obvious, $6,000 is double the $3,000 it costs to list with Clever. Yet, you don’t have to sacrifice quality, speed, or value to save this amount. In fact, sellers that list with Clever get offers 2.8x faster and work agents that are the top 5% of their market – all while saving an average of $9,000 per transaction. Ready to save on closing costs? Check out Clever today.
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