Who Traditionally Pays Closing Costs in Real Estate Transactions?

Don't let closing costs get between you and your new home.

Closing costs, the costs associated with signing the loan agreement for a mortgage on a new home, can be substantial, ranging anywhere from 1 to 8 percent of the price of the home, but more typically they range from 2 to 3 percent. Luckily for buyers, these costs, and even who pays for them, can be negotiable.

Who pays?

Traditionally, closing costs are paid by the buyer in a real estate transaction. This can be a significant burden because many home buyers find themselves cash-strapped after paying the down payment. For example, if a buyer is trying to buy a house for $100,000, typical closing costs may be around $3,000. That's in addition to the $20,000 the buyer may already have sunk into the down payment.

What do they cover?

Closing costs are miscellaneous expenses a lending institution passes along to the borrower. They can include a loan application fee, a credit report, a loan origination fee, an attorney's fee, homeowner's insurance, inspections, appraisals, recording fees (for recording the transaction with local government) and a title search (to ensure there are no liens on the property).

Negotiate

Many closing cost fees are also negotiable. Because you can walk away from the loan at any time before closing, you have leverage with the bank. You may be able to lower certain fees, particularly ones set by the bank, simply by asking.

Ask the seller to pay

One option if a buyer is strapped for cash is to ask the seller to cover all or some of the closing costs. Many desperate sellers will be willing to meet the buyer half way on some costs. The worst that can happen is the seller will say no.

Ask the bank to pay

There are a couple ways to make the bank pay the closing costs. One option is simply to ask the bank to pay the closing costs in exchange for a slightly higher interest rate on the mortgage. This may or may not be a good option for you, depending on how long you are planning to live in the home.

Roll closing costs into the mortgage

Another option is to roll the closing costs into the mortgage. This is done by requesting a slightly larger loan than the cost of the house. For example, if the cost of the house is $100,000 and you've made a $20,000 down payment, you would take out a loan for $80,000. By taking out a loan for $83,000 instead, you would be able to pay the $3,000 charge at closing.

References

• "Closing costs explained"
• "Cut those closing costs!"