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The bundle of fees associated with the buying or selling of a
home are called closing costs. Certain fees are automatically assigned to
either the buyer or the seller; other costs are either negotiable or dictated
by local custom.
Buyer closing costs
When a buyer applies for a loan, lenders are required to provide them with a
good-faith estimate of their closing costs. The fees vary according to several
factors, including the type of loan they applied for and the terms of the
purchase agreement. Likewise, some of the closing costs, especially those
associated with the loan application, are actually paid in advance. Some
typical buyer closing costs include:
- The down payment
- Loan fees (points, application fee, credit report)
- Prepaid interest
- Inspection fees
- Appraisal
- Mortgage insurance
- Hazard insurance
- Title insurance
- Documentary stamps on the note
Seller closing costs
If the seller has not yet paid for the house in full, the seller's most
important closing cost is satisfying the remaining balance of their loan.
Before the date of closing, the escrow officer will contact the seller's
lender to verify the amount needed to close out the loan. Then, along with any
other fees, the original loan will be paid for at the closing before the
seller receives any proceeds from the sale. Other seller closing costs can
include:
- Broker's commission
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
Negotiating Closing Costs
In addition to the sales price, buyers and sellers frequently include closing
costs in their negotiations. This can be for both major and minor fees. For
example, if a buyer is particularly nervous about the condition of the
plumbing, the seller may agree to pay for the house inspection.
Likewise, a buyer may want to save on up-front expenditures,
and so agree to pay the seller's full asking price in return for the seller
paying all the allowable closing costs. There's no right or wrong way to
negotiate closing costs; just be sure all the terms are written down on the
purchase agreement.
Prorations
At the closing, certain costs are often prorated (or distributed) between
buyer and seller. The most common prorations are for property taxes. This is
because property taxes are typically paid at the end of the year for which
they were assessed.
Thus, if a house is sold in June, the sellers will have
lived in the house for half the year, but the bill for the taxes won't come
due until the following year! To make this situation more equitable, the taxes
are prorated. In this example, the sellers will credit the buyers for half the
taxes at closing.
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