A guide to understanding what closing costs are and how they impact buyers and sellers.

While requests for closing cost assistance from buyers disappeared during that crazy competitive buying frenzy last year, I have seen them make a comeback.  If you are a first time home buyer, then you might be asking yourself, “what are closing costs?”  If you are a first time buyer, you might be saying, “Do I have to pay those?  Let’s break down what closing costs are and what it means if a buyer asks for closing cost concessions.

What are closing costs?

Closing costs are the fees associated with the buying or purchasing of a home that are charged at the time of closing.  Some of these fees are from things that were done early in your home buying process, like filling out a loan application, while others are from the day of closing.  Whether you buy or sell a home, you will have closing costs.  The amount of closing costs you pay depends on the type of mortgage a buyer is getting, where the home is located, when the closing is happening, and what lender is being used.  For a rough estimate, typically closing costs are about three to six percent of the loan amount. 

Often sellers can use the profit from the sale of their home to cover the closing costs.  Buyers will bring a certified check to closing to pay for the costs.  You will be notified a few days before your closing date of the amount you need to pay.  You can always request a rough estimate of closing costs by speaking with your Realtor®, mortgage lender, and title company.

It is important to know that closing costs are separate from a buyer’s down payment.

Closing costs for buyers might include:

  • Application fee- for the request for a loan
  • Credit report fee-  Mortgage lenders charge for the credit report they use to help assess your qualifications for a loan.
  • Appraisal– a buyer paid fee, some lenders will roll the appraisal charge into the closing costs
  • Attorney fees-  When an attorney is used to prepare and review  the paperwork for closing, a fee is charged.
  • Loan Origination Fee-  This is a charge from the lender for the work done to process and secure your mortgage.
  • Title Insurance–  This is protection for you against any errors that the title company may have made while researching your home’s title.
  • Closing/Escrow Fee-  This is the charge from the title company for the work they did.
  • Private Mortgage Insurance-  For some loan types, buyers are required to have private mortgage insurance.  If this is a requirement of your loan, you will see a charge on the closing statement.
  • Property taxes-  Depending on where you live, property taxes for the home are charged.
  • Homeowner’s Insurance
  • Mortgage Points-  Some people choose to pay the lender points in order to lower the interest rate of the mortgage.

As you can tell, it’s hard for anyone to give a general estimate of closing costs because it is pretty specific to each buyer’s unique situation.

Closing costs for sellers might include:

  • Title insurance-  This is protection for you against any errors that the title company may have made while researching your home’s title.
  • Closing/Escrow Fee-  A charge from the title company for the work they did.
  • Attorney fees-  When an attorney is used to prepare and review paperwork for closing.
  • Transfer Taxes-  Depending where you live, some states/counties charge taxes on the sale.
  • HOA-  Living in an HOA may have additional fee.
  • Real Estate Commissions
  • Mortgage-  If there is an outstanding balance on the mortgage, this is paid at closing.

What are closing cost concessions?

Sometimes, as part of an offer for a home, buyers will ask for closing cost concessions (sometimes termed closing cost assistance or subsidies).  This means that they ask the seller to pay for some of their closing costs.  Sellers are not obligated to do this.  Sellers may agree to the request, they can counter back with a different dollar amount, or they can say no.  

Buyers may ask for closing cost concessions when they are trying to maximize the cash they have on hand.  For buyers, talking with your Realtor® about the current market conditions and the type of mortgage you are getting can help determine if you should ask for closing costs as part of the offer.

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