Who Pays Closing Costs?

Who pays closing costs? If you're buying a home, the short answer is that both buyers and sellers usually pay them, though the exact breakdown depends on the loan type, local customs, and the terms of the purchase contract.

Closing costs are one of the most common surprises for home buyers, especially first-time buyers.  Many people focus on the down payment and forget that there are additional fees required to finalize the transaction.  Understanding who pays closing costs can help you budget more confidently and avoid surprises at the closing table.

What Are Closing Costs?

Closing costs are the fees and expenses paid to complete a real estate transaction.  These costs cover services provided by lenders, title companies, government agencies, and other third parties involved in the transaction.

Technically, mortgage professionals separate these expenses into two categories: closing costs and prepaids.  For simplicity, this article uses the term "closing costs" the same way most consumers do, meaning the total expenses due at closing aside from the down payment.

Common closing costs include:

• Loan origination fees
• Appraisal fees
• Credit report fees
• Title insurance
• Escrow fees
• Recording fees
• Property taxes
• Homeowners insurance
• Prepaid interest
• Attorney fees (in some states)

Who Pays Closing Costs?

In most real estate transactions, both the buyer and seller have expenses associated with closing.

Buyers often pay:

• Lender fees
• Appraisal fees
• Credit report fees
• Title-related fees
• Recording fees
• Prepaid interest
• Escrow account set up (prepaid property taxes and homeowners' insurance)

Sellers often pay:

• Real estate agent commissions
• Transfer taxes (where applicable)
• Owner's title insurance (where customary)
• Property tax prorations
• HOA transfer fees

What Are Seller Concessions?

Seller concessions occur when a seller agrees to pay a portion of the buyer's closing costs.  This can help buyers reduce the amount of cash needed upfront at closing.  There are limits to how much a seller can contribute based on the loan type and down payment amount.

Can Closing Costs Be Rolled Into the Loan?

For refinance transactions, borrowers can often roll closing costs into the new loan balance instead of paying them out of pocket.  This is not the case for home purchases, however.  Buyers can explore options such as lender credits or seller-paid closing costs (seller concessions) to reduce out-of-pocket expenses at closing.

How Much Should Buyers Budget for Closing Costs?

While every transaction is different, a common rule of thumb is to budget 2% to 5% of the home's purchase price for closing-related expenses.

The exact amount depends on factors such as your loan program, property taxes, homeowners' insurance, and the timing of your closing date.

If you are planning to buy a home (or refinance), Galaxy Lending Group can help you understand your financing options and estimate your closing costs so you know exactly what to expect before you start house hunting.