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Who pays closing costs when you purchase a home?

By Shelley Sines

September 2020

So you’ve saved up enough money for a down payment to buy the home of your dreams. That’s a huge accomplishment! But before you break out the bubbly and go to town purchasing new furniture, fixtures and paint, you’ll want to make sure you’ve saved enough money to cover the often-overlooked closing costs associated with taking out a mortgage loan to purchase a home.  

Knowing what closing costs you will be expected to pay and building them into your home purchase budget will save you a headache in the future. After all, you don’t want any unpleasant surprises when it’s finally time to close on your new home. 

First of all: What (and how much) are average closing costs?

Closing costs are the funds paid at settlement, which is when you formally close on your mortgage loan with the lender. The costs that are due at closing (in addition to your loan down payment) are for services and expenses such as the loan origination fee, points to buy down the interest rate, credit report fee, title insurance and wire transfer fee. They vary from state to state but are typically 2-5% of the home’s purchase price. That means on a $250,000 home purchase, the closing costs would be anywhere from $5,000 to $12,500.

So, who pays closing costs? The buyer or the seller?

Remember: Anything is negotiable! If the buyers are motivated to move quickly due to lack of housing inventory on the market, they may bite the bullet and agree to pay for all the closing costs themselves. Conversely, if properties aren’t selling quickly, the sellers may be more likely to take on some (or all) of the closing costs. Likewise, if a property needs repairs, the closing costs may be negotiated with the sellers with repair costs taken into consideration. And if the sellers haven’t yet paid their annual property taxes, they will typically credit the buyers for the number of days the sellers owned the home that year.

In short: Most closing costs fall on buyers, but sellers typically pay some too, such as the real estate agent’s commission. Some states, counties and cities offer low-interest loan programs or grants to help first-time homebuyers with closing costs; check with your local government to see what’s available.

Do I have to pay all the closing costs up front?

Not necessarily. You can ask your loan officer or lender about bundling the closing costs into your loan amount (this is called “amortizing”), and then repaying them on a monthly basis. This will of course increase your monthly mortgage payment, but you won’t need as much cash on hand when you actually close on your loan.

How will I know what closing costs I’m expected to pay?

Your lender is required to outline your closing costs in the Loan Estimate you receive when you first apply for the loan, as well as in the Closing Disclosure document you receive in the days before the settlement. The Closing Disclosure breaks down all the closing costs and identifies exactly how much money you need to bring with you to your loan closing. Review this breakdown closely and ask questions about anything you don’t understand.

Here are some of the closing costs you might see (courtesy of nerdwallet.com):

  • Appraisal fee
  • Home inspection
  • Application fee
  • Assumption fee
  • Attorney’s fee
  • Prepaid interest
  • Origination fee
  • Discount points
  • Mortgage broker fee
  • Mortgage insurance application fee
  • Upfront mortgage insurance
  • FHA, VA and USDA fees
  • Property taxes
  • Upfront HOA fee
  • Homeowners insurance
  • Title search fee
  • Lender’s title insurance
  • Owner’s title insurance
  • Various other fees (e.g., pest control)

Shelley, how did your loan closing go?

Well, I’m not going to lie. It was a bit nerve-wracking! But for a totally unexpected reason – technical issues with the wire transfer. (Don’t worry, we still closed on our house that day, just with a few more gray hairs.)

My takeaway? You can’t predict possible hiccups at your loan closing due to technology or other minor issues, but one thing you can absolutely control is understanding exactly what you will owe to close on your new house, and then showing up with the right kind of check made out in the correct amount.

Sources: nerdwallet, thebalance, Zillow

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Shelley Sines has been writing for MGIC since she graduated from college in 2007. Currently raising a sweet little family with her husband in the suburbs of Milwaukee. Happiest when cooking or gardening. Competitive Scrabble player. Enthusiastic about road trips, wine, good TV.
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