CLOSING COSTS: Who Pays Closing Costs?

Closing Costs
Photo Credit: clever real estate

When you buy a house, you need to bring more than just your down payment to the closing table. You must cover closing costs (CC) in order for your lender to provide loan services. Closing costs can be a little tricky to understand. There are a lot of things to think about when figuring it out, and we’ll cover everything from how to calculate them to how much they usually cost, including the average percentage of conventional closing costs.

Many first-time homebuyers underestimate the number of Closing Costs they will have to pay. Some people might not be aware that there are ways to reduce or waive the amount you will pay.

We’ll also give you some advice on how to avoid paying the closing costs.

What Are Closing Costs?

These are the expenses you incur when completing a real estate transaction, regardless of whether you’re refinancing your mortgage or purchasing a new home.

Being financially prepared for this expense is crucial because these costs can range from 2 to 5 percent of the mortgage balance.

Some closing costs are associated with the property, such as an appraisal to confirm its value and a search of the property records to ensure a clear title, while others are associated with the paperwork, such as lawyer fees and the cost of originating and underwriting the loan.

You typically need a cashier’s check (not a personal check) to pay the CC, which are separate from the down payment.

Who Pays Closing Costs?

Closing costs are paid by buyers and sellers. But most of them are usually paid by the buyer.

Closing cost help, also known as seller concessions, is something you can discuss with a seller. If you are having difficulty raising the funds required for closing, seller concessions can be very beneficial.

The amount of CC that sellers may contribute is subject to a limit. Depending on your mortgage type, occupancy, and down payment, sellers can only contribute up to a specific percentage of the home’s value.

How to Calculate Closing Costs

Many factors, including your credit score, your down payment, the location of the property you are purchasing, and the type of mortgage lender you choose, all play a role in CC. This will help you to calculate the closing costs value.

Most lenders advise estimating your CC to be between 1 percent and 5 percent of the cost of your home. You can expect to pay between $3,000 and $15,000 in CC for a $300,000 home purchase. To get a more precise estimate that considers your location and down payment, you can also use an online closing costs calculator to calculate.

How Much for Closing Costs?

Your CC is determined by three important factors.

  • The home’s cost
  • Where it is located, and finally
  • Whether you’re purchasing or refinancing

Closing costs can account for 3–6% of the loan amount. This means that if you take out a $200,000 mortgage, then CC should be between $6,000 and $12,000.

They do not include your down payment in the CC, which can be negotiated. The seller might cover your CC in full or in part. Therefore, be aware that the market you are in may influence your negotiating position.

Conventional Loan Closing Costs

The seller concession limits for conventional loans closing costs are broken down below. The percentage displayed is based on the appraised value or purchase price, whichever is lower.

For primary residences:

  • Down payments of 25% or more: 9%
  • Down payments of 10 – 24.99%: 6%
  • Down payments less than 10%: 3%

For second homes:

  • Down payments of 25% or more: 9%
  • Down payments of 10 – 24.99%: 6%

The maximum amount of seller concessions for conventional loan closing costs for any down payment on an investment property is 2%.

Average Closing Costs Percentage

According to real estate data company Closing Corp, the typical closing costs for purchasing a single-family home were $6,837 as of the first half of 2022.

The typical refinance closing costs came to $2,398. However, those costs vary across the nation, in part because of tax variations. For instance, the average CC paid by homebuyers in Washington, D.C. was $30,352.

Delaware came in second and New York came in third, with an average CC exceeding $17,000. The three states in the middle of the country with the lowest CC were Missouri ($2,102), Indiana ($2,193), and North Dakota ($2,321).

According to Closing Corp, these are the typical average closing costs percentage for each state:    

StateAverage Home Sales PriceAverage Total Closing Costs With TaxesAverage Total Closing Costs Without TaxesPercentage Of Sales Price (With Taxes)
Alabama$209,562$2,994$2,6291.43%
Alaska$347,089$3,576$3,5761.03%
Arizona$395,395$3,876$3,8760.98%
Arkansas$197,137$2,608$2,0711.32%
California$779,838$8,219$5,7731.05%
Colorado$520,372$3,895$3,8120.75%
Connecticut$418,948$8,849$4,1312.11%
Delaware$313,899$17,831$3,8485.68%
Florida$368,560$8,551$4,4842.32%
Georgia$283,380$3,768$2,8591.33%
Hawaii$777,764$7,559$5,9770.97%
Idaho$402,043$4,101$4,1011.02%
Illinois$282,433$5,987$4,7912.12%
Indiana$229,867$2,193$2,1930.95%
Iowa$202,620$2,774$2,3681.37%
Kansas$275,764$2,793$2,7931.01%
Kentucky$194,879$2,556$2,1941.21%
Louisiana$220,594$3,629$3,3011.65%
Maine$320,185$4,400$2,8481.37%
Maryland$386,810$12,056$3,9753.12%
Massachusetts$592,875$7,095$4,4791.20%
Michigan$200,331$5,704$3,5012.85%
Minnesota$282,664$4,054$2,6271.43%
Mississippi$266,367$2,799$2,7991.05%
Missouri$238,276$2,102$2,1020.88%
Montana$381,220$3,055$3,0550.80%
Nebraska$220,266$2,764$2,1941.25%
Nevada$410,263$6,504$4,3281.59%
New Hampshire$332,880$8,162$2,7952.45%
New Jersey$447,175$7,966$4,2041.78%
New Mexico$306,594$3,489$3,4891.14%
New York$520,460$17,582$6,3013.38%
North Carolina$296,206$2,970$2,4251%
North Dakota$240,774$2,321$2,3210.96%
Ohio$202,147$4,256$3,3762.11%
Oklahoma$177,778$2,938$2,5491.65%
Oregon$448,156$4,392$3,9350.98%
Pennsylvania$236,906$9,753$3,2414.12%
Rhode Island$392,302$4,683$3,0531.19%
South Carolina$295,186$3,437$2,4951.16%
South Dakota$208,904$3,064$2,8061.47%
Tennessee$262,382$3,869$2,6551.47%
Texas$294,899$3,946$3,9461.34%
Utah$465,574$4,751$4,7511.02%
Vermont$287,233$6,269$3,1922.18%
Virginia$358,930$6,373$3,4621.78%
Washington D.C.$753,631$30,352$6,5244.03%
Washington$557,455$13,910$4,8042.50%
West Virginia$190,948$3,393$2,4681.78%
Wisconsin$225,039$3,424$2,6581.52%
Wyoming$337,354$2,510$2,5100.74%

How to Get Closing Costs Waived

Because a portion of the CC is produced by third parties, lenders cannot waive them. However, lenders can help you find strategies to reduce or even get rid of your out-of-pocket CC.

The CC is not entirely eliminated by these tactics. They are just ways to avoid having to bring the money needed to pay for these costs to the table of negotiations.

#1. Lender Pays for the Closing Costs

Lenders have actual expenses that must be covered. They will use their own funds if they cover your CC. If the lender can raise the interest rate on the loan, that is one way they will cover your CC. The lender can make more money if the interest rate is higher. They can use the extra money to offset and cover your closing expenses.

#2. Seller Pays for the Closing Costs

Most loan programs permit the seller to pay a portion of the CC. Depending on how fiercely competitive the market is, it might be simpler or harder to persuade the seller to contribute to your CC. Offering a higher price for the house in exchange for a closing cost credit is one way to go about it. Your lender and real estate agent can assist you with this.

#3. Roll the Closing Costs Into the Loan

If you have enough equity in your home to cover the closing costs, you can typically roll them into the loan amount when refinancing. This means you are financing the CC. There are some circumstances where you may finance a portion of the CC when making a purchase.

You can postpone paying the CC at closing by using these tactics. You can never actually get the CC waived in full.

Conclusion

In my opinion, this article has covered everything you need to know about closing costs, from how to calculate them to what the average percentage of conventional CC is.

When you close on a loan, your lender will charge you for closing costs as well as processing fees. An average mortgage loan’s CC range from 3 to 6 percent of the total loan balance.

Your state’s laws, the type of loan you have, the value of your home, and the CC you will pay all come into play. Depending on the terms of the sale agreement, the seller may also be required to cover closing expenses.

Negotiating with your lender may enable you to reduce your CC.

A no-closing-cost loan or a request for partial payment from the seller are other options you may consider. Make sure you go over everything you need to bring to closing, including your funds.

Closing Costs FAQs

How Can I estimate closing costs?

When looking for a home, be prepared to include closing costs in your budget as they range from 3 to 6 percent of the loan balance. Ask your lender and real estate agent about the local property taxes and any other state-imposed charges.

When do I pay closing costs?

Most home loans require you to pay your closing costs in person at your closing meeting. Your down payment and any closing costs are paid to your lender during the closing process.

What is the Average Closing Costs Percentage?

The Average Closing Costs Percentage according to real estate data company Closing Corp, for purchasing a single-family home were $6,837 as of the first half of 2022.

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