Many wannabe first-time home buyers and sellers alike wonder who should pay what costs for on the wonderful day that both parties seal the biggest deal of a lifetime. As virtually every item is subject to negotiation, there are no standard rules or formula for precise calculation. Fortunately, though, prevailing norms do exist that we present below for basic grasp of a big task with an itemized list of typical buyer-seller closing cost splits.
What Title Closing Costs Typically Cover
Either or both parties may retain a lawyer to review the sales contract and draft or file legal documents with appropriate local government office(s). This expense is usually optional, except in cases where lenders require attorneys.
As lenders require appraisals to verify fair market value before granting final approval, buyers generally pay appraisal fees, but this is negotiable.
Brokerage commissions are paid by sellers to compensate realty professionals who facilitate home sales by marketing efforts and assisting contractual negotiations and various document preparation. A vast majority of realty commissions are percentage-based on final sales price and split between listing and selling brokers by some pre-agreed upon subdivision. This item is practically always the single biggest closing cost.
Government agencies assess these charges to enter deeds and other legal papers into the public record to officially document real property transfers. Like recording fees in all U.S. locales, some states’ laws require document stamps or taxes and stipulate which party(ies) may pay those charges.
Either party may pay a professional surveyor to verify lot size and boundaries, location of structures and whether any land encroachments or easements exist.
Title Company Service Charges
Sellers customarily pay title search and title insurance costs. A few states’ laws requiretitle insurance that necessarily adds extra title search costs. In such cases, parties are likely to negotiate mandatory title fees for an equal split.
Mortgage Loan Costs
Normally paid by buyers to process mortgage applications. Some lenders require payment when applicants initially submit loan requests, while others roll processing fees into the mortgage loan or escrow ledger balance.
Commonly known in lender parlance as ‘discount points,’ each point equals one percent of the total loan amount that buyers pay upfront to lower long-term interest rate by up to one percent per point. However, sellers often pitch in a point or two to help speed things along.
Home Inspection Costs
This customary buyer’s cost covers licensed pest control and construction inspections for documentation to satisfy lenders that subject properties have no termite infestations and meet applicable building code regulations. Many lenders also require roof inspections to verify integrity of a major structural element with high replacement cost equaling totally lost investment by foreclosure sale of abandoned homes that literally caved in on absconding mortgagors. Some years ago, VA-backed mortgage applicants were very popular victims ‘shingled’ out for extra picky mandatory expert roof exams.
Private Mortgage Insurance
PMI is usually paid by buyers but often reimbursed by sellers because lenders require it for loan-to-fair market value ratios of 80 percent or greater. Borrowers can request PMI cancellation when home equity exceeds 20 percent of fair market value. In addition, federal law requires lenders to cancel PMI once home equity reaches 22 percent or higher.
Customarily paid by buyers but reimbursable by sellers. Monthly mortgage loan installments are due on a specific date each month, on which most home sales do not occur. Thus, an adjustment is made to prorate interest for the number of days that will elapse until the buyer’s first mortgage payment becomes due.
Pursuant to U.S. federal law, all residential property sales with mortgage loan financing must be documented in detail on a standard HUD-1 Form. Although principals must receive a complete HUD-1 Form, no government entity is legally entitled to a copy or notified of subject transactions.
Prepaid Homeowner’s Insurance
Buyers ordinarily pay at least one year of homeowner’s insurance premiums in advance to protect the lender’s collateral against various perils and hazards. Mandatory flood insurance is also a new trend among mortgage lenders in low-lying areas.
Prorated Ad Valorem Property Taxes
This may be fully charged to buyer, seller or partially to both parties. Nearly all municipalities assess land taxes that become due on a specific date each year. Because a vast majority of real estate sales don’t close on that exact date, closing statements must adjust with a tax prorate to reflect proportional length of each party’s ownership during the calendar year when taxes are due.
Note: This is a basic guide for buyers and sellers. More specific details such as standard figures applied to certain types of government-insured mortgage loans and current prevailing market interest rate percentages are freely available and subject to change so need to be researched at time of sale.