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.
