What are Closing Costs on a Home and Who Pays Them?
Buyers and sellers of a home incur fees above and beyond the price of the property. So how much are those fees, and who pays for what?
Here is a breakdown of the most common “closing costs” for home buyers and home sellers:
Buyers
Overall, home buyers can expect to pay closing costs from zero percent to 3 percent, depending on mortgage terms, who will pay future property taxes and insurance, and the time of the year.
NON-RECURRING (ONE-TIME) CLOSING COSTS
Mortgage Fees: The loan officer who processes the mortgage for the buyer will earn a fee, typically called “points.” Mortgage fees often are 1 percent of the loan, though they can be manipulated to favor the buyer’s financial situation.
For example, the lender could reduce the fees to zero by increasing the interest rate, which increases the borrower’s monthly payment. In such cases, the loan officer’s fee comes to them in the form of a rebate from the bank.
Fees can be increased to lower the interest rate, as well. This is referred as “buying down the loan.”
Escrow: The escrow company is the independent third party that processes the home-sale transaction and takes their instruction equally from the buyer and seller. Fees in Southern California are around $250 plus $2.50 per $1,000 of the sales price. So a $300,000 home sale would incur an escrow fee of $1,000.
Title Insurance: A home buyer would only have to purchase a title insurance policy if they were securing a mortgage to purchase the home. The policy insures the lender in case unforeseen liens pop up on title after the sale. Title policies are based on the sales price, and buyer policies typically are about half of the cost of a seller’s policy.
Miscellaneous Fees: Buyers may have extra escrow and title fees that include notary, loan document signing, processing, wire and delivery, endorsements or even sub-escrow. These fees range from $10 per notary signature to a few hundred dollars for sub-escrow fees.
Home Warranty: Buyers often ask the seller to purchase a one-year home warranty policy on their behalf. If the seller refuses, the buyer would then incur the cost, which ranges from $350 to $550, depending on the company and whether the home has a swimming pool.
RECURRING (PREPAID) CLOSING COSTS
Prepaid closing costs are for homeowner services, products or levies. They can be one-time fees or ongoing monthly and annual costs.
Property Taxes: A lender may require that the property taxes, due twice a year, be paid by the mortgage servicer from an impound account. This is also sometimes referred to an “escrow” account, though it has nothing to do with the escrow company that processes the home sale.
The buyer would prepay a specific amount, determined by the time of the year that the home sale closes (how close to the payment dates). And then each monthly payment would include one-twelfth of the total annual taxes, to continue to keep enough money in the impound to pay future taxes.
At the very least, the escrow company overseeing the home sale will calculate the prorated property taxes based on the closing date, and buyer and seller will each be responsible for their portion at the close of escrow.
Fire Insurance: The buyer will purchase a one-year fire insurance policy at the close of the sale. Insurance policies on average homes range from $600 to $1,000, though they can be more for homes with pools or those located near hazardous areas. If a lender requires the insurance payment to be impounded, the monthly mortgage payment will also include one-twelfth of the insurance policy cost.
Mortgage Insurance: If the loan is greater than 80 percent of the home’s value, the lender will require a mortgage insurance policy, which will insure the lender if the buyer stops paying.
Most policies on conventional loans have no upfront costs, but the monthly mortgage payment includes a fee, based on a percentage of the loan amount. The Federal Housing Authority loan program has a substantial upfront fee, which can be thousands of dollars, in addition to a monthly cost on the mortgage payment.
Appraisal: If the buyer is getting a mortgage, the lender will require an appraisal of the home’s value. Appraisals are usually paid up front to the lender, which orders the appraiser through an independent appraisal-management company. Appraisal cost from $350 to $600, depending on loan type and property type.
Credit Check: The lender may also require an upfront fee to pay for the borrower’s credit check. Fees range from $20 to $35 per person.
Home Inspection: The buyer is responsible for the cost of a home inspection. Prices are often based on the size of the home, with add-ons for swimming pools and outbuildings. Average inspections range from $250 to $500. Inspectors get paid at the door on the day of the inspection.
Miscellaneous Insurance: Lenders may require a buyer to purchase flood insurance if a home is in a flood plain. Buyers may also choose to buy earthquake insurance or expanded home warranty insurance for such things as roof coverage.
Sellers
Overall, home sellers can expect to pay closing costs from 6 percent to 8 percent, depending on agent commission and the time of the year.
Real Estate Commission: The seller pays the commission fees for the listing agent and buyer agent. Fees are not set in stone — they are negotiable. Typical fees range from 8 percent to as low as 1 percent, depending on service level, market cycle and sale type.
In hot seller’s markets, agent commissions tend to decrease, while they increase in buyer’s markets. Full-service agreements tend to cost more than limited MLS-only services. And short sale agents may charge more than standard sale agents.
Escrow: The seller also will pay the escrow company that processes the home-sale transaction. Fees in Southern California are around $250 plus $2.50 per $1,000 of the sales price. In that case, a $300,000 home sale would incur an escrow fee of $1,000, or about one-third percent of the sales price.
Title Insurance: A home seller purchases a title insurance policy for the benefit of the buyer, in case of unforeseen liens after the sale. Title policies range from a quarter-percent to a half-percent of the sales price.
Transfer Taxes (County and City): Think of them as a sales tax on a home. In Riverside County, the tax is 0.11 percent of the sales price, split between the county and the city. The tax on a $300,000 sale would be $330.
Some areas have higher fees. For instance, the City of Riverside charges 0.11 percent for the county and another 0.11 percent for the city. Los Angeles County charges 0.11 percent while the city of Los Angeles charges an additional 0.45 percent!
Natural Hazard Disclosure: The natural hazard disclosure report, which details whether a home is located in hazardous zone, is required by law. It costs $90-$125.
Homeowner Association Document and Transfer: If the property is in an HOA, the buyer will need to have HOA documents that detail the financial health of the HOA, as well as Covenants, Conditions and Rules. The HOA will charge $150-$350 for these documents, as well as another $150-$250 to transfer the HOA membership to the new buyer. Some property have more than one HOA, so make sure to take all possible fees into account.
Home Warranty: Buyers often ask the seller to purchase a one-year home warranty policy on their behalf. Policies range from $350 to $550, depending on the company and whether the home has a swimming pool.
Septic Certification: If the property has a septic system, the buyer may ask the seller to provide a certification of the system’s functionality. Certifications, which include pumping the system, start at about $600 if there are no repairs.
Prorations: The property tax and HOA fees will be prorated to the date of the home sale closing. So any fees that are due but not yet payable become a closing cost for the seller. For fees that were already paid, the buyer must reimburse the seller for their prorated amount — this would show up as a credit on the seller’s closing costs.
Miscellaneous Fees: Sellers may have extra escrow and title fees that include notary, recording fees, wire and delivery, endorsements or even sub-escrow. These fees range from $10 per notary signature to a few hundred dollars for sub-escrow fees.
Closing Cost Credits
Some home buyers scrape together every penny they have to cover the down payment on a house. So how do they handle their closing costs?
After the buyer and seller agree on who is responsible for each fee, the buyer may then ask the seller to pay all or a portion of their closing costs. In a hot seller’s market, it’s more difficult for a buyer to find a willing seller. In a slower market, the practice is common.
Some buyers will increase their offer by the amount of the closing costs, and then ask the seller to credit back to them the same amount to pay for the buyer’s costs. This is often referred to as “stacking the costs” into the price. If the home appraises for the full purchase price, this is a good strategy. But in fast-moving markets, it can lead to low-appraisal problems.
Lenders can also decrease a buyer’s closing costs by increasing the mortgage interest rate, also a good strategy to allow a weaker buyer to compete against multiple offers.
Thinking about buying or selling a home? Want to discuss today’s best strategies? Call us today at 951-778-9700 or use the form below to request a 10-minute consultation.
illustration courtesy of Stuart Miles, Danilo Rizzuti, renjith krishnan | freedigitalphotos.net
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Buyer and Seller Closing Costs | Buying a Home in Riverside CA | Selling a Home in Riverside CA | Brian Bean and Tim Hardin Dream Big Realty ONE Group