What are closing costs in a real estate transaction and who pays for them? There are many fees associated with buying or selling a home. It is important to consult with your REALTOR® or local real estate attorney before taking the next step.
Closing costs occur when the title of property is transferred from the seller to the buyer. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between 2% to 5% of the purchase price but closing costs may be paid by either the seller or the buyer. A real estate transaction is a somewhat complex process with many players involved and numerous moving parts. Some states require certain inspections beyond the basic inspection you pay directly to a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees.
Laws require lenders to provide a loan estimate that reveals the closing costs on the property. Under the Real Estate Settlement Procedures Act (RESPA), lenders are required by law to provide this estimate, also known as a good faith estimate, within three days of the lender taking a borrower’s loan application. At least three days prior to the closing, the lender should also provide a closing disclosure statement outlining all closing fees.
The lender will charge an application fee. This is a fee charged by the lender to process your mortgage application. The real estate attorney will charge a fee to prepare and review the home purchase agreements and contracts. They will also do a title history search to make sure the property is clear of liens. Lender’s title insurance is an up-front, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that it did not find in the title search. The lender will also charge a credit report fee to pull your credit reports from the three main reporting bureaus.
There are many other fees associated with the transaction that the buyer will pay including flood certification, property taxes, homeowner’s insurance, inspection and appraisal costs. Consult your lender and ask for upfront costs so you can determine if this transaction is in your best interest.
Another fee is the real estate commission. Buyers do not pay this fee, though; sellers do. Typically, the commission fee is 5% to 6% of the home’s purchase price, and it is split evenly between the seller’s agent and the buyer’s agent. The seller is also responsible for the deed preparation. If applicable they will have a mortgage payoff and any outstanding amounts owed on the property. The seller will pay a real estate transfer tax, sometimes called a deed transfer tax. This is a one-time tax or fee imposed by a state or local jurisdiction upon the transfer of real property.
Before you start your home search, consult with your lender or local attorney so you know the total closing costs upfront. Then contact your REALTOR® and start looking for that perfect home!
Happy 2021 to you all and remember to do good things!