If you’ve never been through a real estate closing before, you might imagine convening around a large table where, at the end of escrow, you’re presented with an itemized list of big expenses required to close the deal.
But that’s not always the reality. While people still do meet around a table at the closing, today some closings happen virtually. The buyers and sellers can sign the necessary documents remotely and wire money for the closing.
More importantly, it’s unlikely that a buyer or seller would show up to closing without any idea of what their costs will be. If you’re new to real estate, or haven’t bought or sold in a while, here’s what you need to know about closing costs.
Buyers have more costs, but usually pay less than sellers
In a closing, both buyers and sellers have costs. Usually, the buyer is faced with more line-item expenses than the seller. For starters, most buyers are getting loans to make the purchase; many of the charges stem from the loan.
A buyer should receive a “Truth in Lending” statement early on in the sale process. This document spells out all the approximate costs the buyer will face when making the purchase, so there aren’t any surprises at closing. Some buyers use the “Truth in Lending” statement to shop for different lenders, interest rates and costs.
Aside from the costs of getting a loan or buying a home, some expenses, such as property taxes or homeowners association dues, are pro-rated and paid at the time of closing. For example, if you’re buying a home and you close toward the end of the property tax period, you’ll likely need to pay the balance of taxes upfront. The same holds true for pre-paid loan interest. If you close toward the end of the month, the lender may ask for the first month’s payment upfront.
Typically, buyers getting a loan will see some of the following costs:
- Appraisal fee
- Origination fee
- Pre-paid interest
- Pre-paid insurance
- Flood certification fee
- Tax servicing fee
- Credit report fee
- Bank processing fee
- Recording fee
- Notary fee
- Title insurance
Be sure to go through these fees line by line with your mortgage professional to understand exactly what they are and how they apply to your loan.
Sellers pay the commission
For sellers, there are always fewer line items on an estimated closing statement. But the seller generally bears the biggest brunt of the fees: the real estate commission.
The commission is based on a percentage of the total sale price, so it tends to be the biggest fee. In addition to the real estate commission, sellers may have to pay the balance of their property taxes, if they haven’t done so already.
There’s some room for negotiation
All fees and charges can be negotiated during the real state transaction. For buyers, coming up with an extra 1 to 2 percent in closing costs can be a bigger deal than a $5,000 reduction in the purchase price. A credit for $5,000 to go toward closing costs will be a much bigger bang for your buck for the buyer. The price reduction won’t amount to much more than a few dollars per month over the length of the home loan. Saving $5,000 at the closing will be money right back in the buyer’s pocket.