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Ins and Outs of Closing Costs Where Both Buyers and Sellers Are on the Hook

When it comes to buying your first home, it's not over until it's over. And it’s the very end that can get you, if you aren’t careful. One factor that every homeowner has to deal with happens at the end of the home purchase process — closing costs. 

But what exactly are closing costs? And who pays them?

Closing costs are the processing fees that are paid to lenders when borrowers close on their loans. These mortgage loan costs are typically in the vicinity of 3% to 6% of the loan’s total balance. 

Examples of common types of closing costs include attorneys and inspection fees. Some of these costs have to do with the property. This kind of expense covers confirming the property's value through appraisal and looking through property records for a clear title. There are also closing costs associated with paperwork, such as the expenses for originating and underwriting mortgages. It should be noted, however, that closing costs are separate from the down payment.

Questions About These Costs

Key questions are: Who is responsible for these closing costs? Is it the seller or the buyer? Are closing costs split evenly between the seller and the buyer?

The bottom line is that closing costs are paid according to the purchase contract terms made between the buyer and seller. However, the specific amount that buyers are responsible for are usually negotiated as part of the home sale. But, the negotiating power will rely heavily on the type of market environment when the sale occurs.

According to Bankrate, the average closing costs in the U.S. for a single-family home in 2021 were $6,905. That total covers expenses such as the loan origination fee, processing fee, underwriting fee, etc.

Typically, the purchaser is the one who shoulders most of these costs. But, there are several fees that need to be accounted for, and there are instances when the seller might have to pay for some of these expenses as well. 

For instance, although the buyer is on the hook for most of the costs, the seller still has to pay for certain expenses, including local taxes and municipal fees. 

Examples of the items that the seller might have to be responsible for are the agent’s commission, transfer tax, HOA fees, and title insurance, among others. However, if the seller elects to pay for repairs by using escrowed money, they need to use the cash from the sale’s profits or their own pockets.

Mitigating Closing Cost Expenses

Indeed, a mortgage transaction is complicated with many moving parts. It is also a state-by-state assessment as some of the U.S. states and certain loan products necessitate specific inspections that go beyond the basic one that borrowers directly pay to their chosen home inspector.

In this light, borrowers need to see how they can mitigate the expenses related to closing costs. 

For instance, lenders might be able to offer their customers alternatives, including no-closing-cost loans, as well as lender credits to limit borrower expenses. But, these alternatives could raise mortgage interest rates and payments. Additionally, lenders might be able to waive certain fees or charge lower interest rates. Buyers should also look out for fees that are vaguely characterized, such as funding or delivery fees. 

Buyers can also shop around for the most favorable lenders' “Loan Estimate” forms. Closing costs are first itemized in these forms that lenders must provide within three business days after a mortgage application. 

Certain closing costs can be negotiated for better rates, such as pest inspections as well as title insurance and searches, among others. However, these might be more time-consuming. 

Another suggestion to avoid spending too much cash right away is to incorporate the closing costs into the mortgage loan. Even though lenders might charge more for this option, it would allow the borrower to get into the home with less cash up front.                                                                                   

Cost assistance programs are also available. Housing authorities usually provide down-payment and closing-cost programs to homeowners who meet certain criteria. These borrowers might be able to qualify for grants that are worth a percentage of the property’s price or even get another loan for these costs.

Even though closing costs might be expensive, there are ways to get around the expenses so that buyers can have access to their homes without compromising their financial health and unnecessarily prolonging the process.

Prospective borrowers in need of down payment assistance can connect with Arrive Home to learn more about the options available to help make homeownership a reality.

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