So, you’ve found the perfect house.
You love it. Your family loves it. You have an offer in, and the seller is ready to sign on the dotted line.
But your lender needs something from you before moving in – closing costs. These fees for your new house could be up to $6,000 more than you expected.
If you’re like most people, you might wonder who pays closing costs—and whether that person will show up and cover the hefty bill.
The answer isn’t as straightforward as you’re about to find out. The party that pays closing costs depends on several factors, and getting familiar with these factors might lead to you paying less for your home when closing time comes around. Read on to learn more about the costs you might be responsible for.
What Are Closing Costs?
Closing costs are the fees associated with purchasing a home. Some of these costs are paid by the seller, and some by the buyer. These fees can vary from state to state, but they typically include:
A title search is a fee the title company charges for searching public records to ensure there are no outstanding liens or other claims on the property. The title company will also provide the buyer with insurance against previous owners declaring the property’s control.
The appraiser will determine the current fair market value of the property by comparing it to recent sales of similar properties. The appraisal fee ranges from $300-$450 depending on several factors, such as square footage, lot size, and location.
A notary is a licensed professional who witnesses the signing of important documents and verifies the identity of the signers. A notary typically charges up to $20 per document for real estate transactions.
The recorder’s office will charge a fee for recording the deed and mortgage (if applicable) to make it official. These fees vary by state but are typically around $125.
Credit Report Fee
A credit report provides lenders with a detailed overview of a borrower’s credit history, including outstanding debt and previous delinquencies. The fee for a credit report is typically under $30.
Flood Certification Fee
A flood certification determines if the property is in an area prone to flooding. If it is, the lender will require the borrower to purchase flood insurance, typically costing around $600.
A homeowner’s insurance policy protects against damage to the home and its contents from factors such as fire, theft, or natural disasters. This fee amounts to about 20% of your total premium.
At closing, the average property tax fee is about two months of regular property taxes. So, for example, if your annual property tax bill is $2,000, you can expect to pay about $333 at closing.
An escrow fee covers the cost of a third-party professional who handles the transaction and distributes funds to the right places. This fee is about 2% of your home’s value.
If you’re using an attorney to help with your home purchase, expect to pay about $350/hour in fees. Attorneys can help protect your rights before and after you buy a home. Attorney fees are optional—you could choose to handle the closing yourself.
Inspections are important for ensuring that the home you’re about to buy has a sound structure and is up to code. An inspection will cost about $200-$500, depending on the size of your home.
When you take out a mortgage, your lender will charge you fees to process the loan. These are called “loan origination fees.” Expect to pay about 0.5-1% of your home’s value as an origination fee.
For example, if you’re buying a $200,000 home, expect to pay $1,000-$2,000.
Homeowners Association Transfer Fee
If the home you’re purchasing is part of a community with an HOA, they may charge a transfer fee to cover administrative costs associated with changing ownership. The administrative costs can be around $100 but vary by state and neighborhood.
Private Mortgage Insurance (PMI)
Many home buyers must purchase private mortgage insurance (PMI) if they make a down payment of less than 20% on the purchase price. This insurance protects the lender if the borrower defaults on the loan.
Depending on the size of your down payment and the terms of your loan, PMI will cost you between 0.5% to 1% of the loan.
Property Tax Escrow
If you don’t pay your property taxes in full when you close on a house, the lender will require you to make monthly escrow payments to cover the taxes. This means a portion of each mortgage payment will be for ownership taxes.
The amount of money held in escrow will be determined by the amount of tax on the property and the size of the mortgage.
Rate Lock Fee
If you are taking out a variable-rate mortgage, your bank may charge you a fee to lock in a certain interest rate for a specified period (usually sixty days). The cost of such a fee varies but is typically about $100.
Who Pays Closing Costs?
There are no hard and fast rules about this. It all depends on what you negotiate with the seller.
The standard practice is for the seller to pay many of the smaller fees, like title insurance, while the buyers pay most of the larger ones (loan origination fee, home inspection, etc.). But ultimately, it’s up to you and your real estate agent to iron out these details before signing a purchase contract.
Buyer’s Closing Costs
Closing costs for buyers are around 3% to 4% of the home’s purchase price. So, if you’re buying a $200,000 house, expect closing costs of between $6,000 and $8,000.
Buyers are often responsible for:
- Inspection fees
- Loan fees
- Appraisal fees
- The cost of the title
- Survey expenses
- Real estate agent fee
- Homeowner’s insurance
- Property taxes
- Escrow fees
Your real estate agent should be able to walk you through all the expenses involved in purchasing your home.
Seller’s Closing Costs
Home sellers typically pay around 1% to 3% of the sale price in closing costs. So if you’re selling a $300,000 house, that comes out to $3,000 to $9,000. Commissions for the listing agent and buyer’s agent account for a sizeable chunk of this expense.
As a seller, you’re also expected to cover:
- Other real estate commissions
- Attorney fees
- Sales tax
- Title transfer fees
Closing Costs NY
On average, closing costs in New York add up to 2.34% of the home loan. That’s way higher than any other state and second only to the District of Columbia.
To put that into perspective, the national average for closing costs is $6,087, however, in Missouri—home of America’s most frugal homeowners—the closing cost total averages just $1,290.
New York homebuyers can expect to pay a lot more for closing costs than they did last year. The average sale price of a single-family home in New York is $767,693, and it costs an average of $17,964 to close on that property.
As a note: Remember that 2.34% is the average and not necessarily what you’ll pay. It’s not always an even 3% either; it could be a lot more.
Who Pays Closing Costs in a Cash Transaction?
If you’re paying cash for a home, there’s no mortgage involved and thus no lender closing costs. But you will still have to pay fees common to all real estate transactions, including title insurance premiums, recording fees, and property taxes.
Be sure to factor these in when budgeting for your purchase.
Who Pays the Closing Costs on a New Home?
When you’re closing on a brand new home, your final expenses are likely roughly the same as when buying an established property. However, some home builders may lower these costs, especially if you agree to work with their in-house lender.
Do Closing Costs Include the Down Payment?
No, closing costs are separate from your down payment. The down payment is the amount you pay upfront for the house and is usually a percentage of its purchase price.
Will a Large Down Payment Reduce My Closing Costs?
It might. A large down payment reduces the size of your mortgage and, in turn, the interest you’ll have to pay for it. That’s because lenders charge their fees partly based on the size of your mortgage, so requesting a smaller loan could mean paying lower lender fees.
You don’t always have to put down a large amount to reduce your closing costs. You can talk to your lender about their fees and see if there is any wiggle room.
When Are Closing Costs Due?
Closing costs are due at closing, the day you sign the paperwork for your home loan and officially become a homeowner. You will receive an itemized document of the fees associated with your mortgage—including your down payment, points paid to lower interest rates, appraisal fee, title insurance premium, and more.
Your lender might charge you small fees before signing, but you pay most of the closing costs when ownership changes hands.
How to Lower Closing Costs in New York
Some fees on your list might be negotiable. Here’s how to get a better rate:
Shop for a Mortgage
Get multiple offers so you can compare fees. Don’t just look at the interest rate; ask about origination points (a fee to cover loan processing), application fees, and other charges.
Some lenders offer “no closing cost” mortgages. With these loans, the lender absorbs all the upfront costs in exchange for a higher interest rate over the life of your loan. Do the math and see if this is a good deal.
You could also consider an adjustable-rate mortgage, which is more affordable than fixed-rate loans.
Check Your Credit Score
Lenders will check your credit score when you apply for a mortgage. A high score shows lenders you’re a low-risk borrower, which could lead to lower interest rates on your mortgage and decreased bank fees.
You can get free credit scores from several sources, including:
- Credit Karma
- Experian’s website
Check all three of your scores before applying for a mortgage because there can be discrepancies between them. For example, if one of your scores is significantly higher or lower than the others, ask the lender why they’re using that number instead of another one.
What to Do When You Have a Low Credit Score
If you can show that you’ve worked to improve your credit, there’s a slight chance a lender may offer a better deal. This can include actions like:
- Paying off outstanding debt
- Paying all of your bills on time
- Reducing credit card balances
- Getting rid of errors on your credit report
If you’re having trouble improving your credit, it might be worth looking into help from a reputable credit counseling service.
Work With Your Real Estate Agent
Start by ensuring that you and your agent are on the same page about what type of mortgage you’re getting, then get pre-approved. It’s also a good idea to make sure that your real estate agent knows about any credit issues you have. Then, they can keep an eye out for houses with mortgages that are more likely to approve you.
Avoid Discount Points
Discount points are a fee that lowers your interest rate, but they’re also a way for lenders to make more money off you. These cost at least 1% of your mortgage and decrease your interest by 0.25%.
To put this into perspective, one discount point costs you at least $2,500 at closing on a $250,000 mortgage. You’re better off waiting to see if your lender offers you a lower interest rate without the points.
Skip the Appraisal
Appraisals are required for nearly all mortgages, but there are a few that will let you get by without one. For example, if you’re getting a new mortgage to refinance an existing loan under $250,000, then appraisal requirements do not apply.
Wait Until the End of the Month
If you close escrow in the middle of the month, your lender will charge you interest for the period between closing and the first of the following month. To avoid this unnecessary expense, pick a closing date that falls at the end of the month.
Use Your Military Discount
If you’re in the military or a veteran, you can get a home loan from the Department of Veterans Affairs with no down payment or origination fee. You may still need to pay some closing costs, but you can wrap those into the loan amount.
The Importance of Negotiating Closing Costs Upfront
Unlike a VA loan, buyers and sellers will have to negotiate who pays what at closing. It’s important that you know this upfront because the seller is more likely to cover the costs if they know that’s a condition of the sale.
For instance, you might ask the seller to pay all closing costs, or you won’t buy the property. It’s hard for the seller to turn down that request if they need the money from the sale.
Can the Seller Pay All Closing Costs?
A seller’s willingness to pay for closing costs doesn’t mean they can. Loans have guidelines regarding how much a seller can contribute.
Under the terms of conventional loans, a seller may contribute up to 9% toward closing costs depending on your down payment and the loan-to-value ratio.
Under USDA loan guidelines, sellers can help buyers pay up to 6% of the sales price toward closing costs and prepaid expenses. Although a down payment is not required for this type of mortgage, you may use funds contributed by the seller as part or all of a down payment.
Under the VA loan program, the seller can pay all costs associated with the mortgage (including two discount points) as long as the buyer meets certain eligibility requirements.
Additionally, they can pay up to 4% of the sales price toward appliances, paying off debts, and so on. This is a unique feature that no other program offers.
VA Loan Requirements
The primary requirement for this loan is to have served 90 days of active service during wartime or 181 consecutive days of peacetime. You can also apply to the program if you have been in the National Guard or Reserves for over six years.
For those under Title 32, 90 days of service affords you this benefit. However, remember that 30 of those days must have been consecutive.
The surviving spouse of a member of the military who died in the line of duty or from a service-related injury can also take advantage of this perk.
What To Do If You Can’t Afford Closing Costs
If you can’t afford closing costs, there are many ways to secure your dream home. For example, you can ask the seller of the home to pay for some fees, have a family member gift you the money needed for closing, or take out a loan specifically to cover these costs.
While these are viable options, they may not be ideal for you. In that case, try one of the methods below:
Pay a Higher Mortgage Rate
You can agree to a high-interest rate for closing-cost rebates, which you can apply to your home expenses. Typically, the rebate is only available for mortgages of $200,000 or greater. This may not, however, bring you the long-term savings it might seem.
Paying a higher mortgage rate usually means you have to make higher monthly payments. These higher payments can cost you hundreds, if not thousands, of dollars in interest.
Ask Your Employer
Your employer may have a financial assistance program that you can tap into. Larger companies with significant financial resources usually offer these.
Remember: Grants from your company may require you to continue working for the company or abide by other conditions. Familiarize yourself with the details of any conditions you agree to.
Closing Cost Grant
Some agencies offer grants for low-to-moderate-income borrowers. However, these grants come with the conditions that homeowners must occupy their property for a specified period and may not refinance. If the borrower sells, vacates, or refinances their property before this required number of years, the sponsor can force them to repay the entire grant amount.
Cover Some Costs Yourself
To close on a mortgage, you must ensure the property is free of any liens or other claims. Your lender can handle this for you, but you’ll save money if you do it yourself.
Also, you can save money by hiring your own appraiser to assign a value to your home. Your lender may allow this, but make sure it’s acceptable before going ahead with the plan.
Get Affordable Closing Rates
It would be best if you made it a point to understand who pays closing costs and what you’ll be responsible for. It’s money well spent to have a real estate agent on your side who is committed to educating you about the process and helping you keep your fees as low as possible.
At Dean Miller Real Estate, we understand that buying a home is one of the biggest investments you’ll ever make. We’re here to guide you every step of the way, from home search to closing day. So call us today and become a homeowner!