How do Real Estate Closing Costs work?
Real estate closing costs are the grouped fees associated with the buying or selling a home, which most real estate professinoals call “closing costs.” Certain fees are generally assigned to either the buyer or the seller, and other costs are negotiable or dictated by the customs of your closing location.
Buyer Closing Costs (typical)
When a home buyer is getting a home mortgage (home loan), the lender is required to provide a good-faith estimate of the projected closing costs. The fees vary according to several factors that can change based on many factors that include the type of property, locality, and the type of loan applied for (FHA, VA, Conventional, etc), and also by the terms of the purchase agreement. Some of the closing costs, many of which are associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:
- Loan fees (points, application fee, credit report)
- Inspection fees (we suggest you get an inspection for your protection!)
- Prepaid interest
- Mortgage insurance
- Hazard insurance
- Title insurance
- Documentary stamps on the note
- And most importantly for closing day, the down payment
Seller Closing Costs (typical)
If the seller has not yet paid for the house in full, the seller’s most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller’s lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale. Other seller closing costs can include:
- Property taxes (prorated)
- Transfer taxes
- Broker’s commission
- Documentary Stamps on the Deed
- Title insurance
Negotiating Closing Costs
In addition to the sales price, buyers and sellers can frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the electrical wiring on an older home, the seller may agree to pay for the home inspection. On new construction, it’s also becoming common for buyer’s closing costs to be completely covered.
Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller’s full asking price in return for the seller paying all the allowable closing costs. There’s no right or wrong way to negotiate your closing costs; just be sure the terms are written and easily understood within the purchase agreement. The purchase and sale agreement are the final word, and it must agree with your understanding of what has been negotiated.
Upon closing, some costs are prorated (alloted by percentage) between buyer and seller. The most common prorations come in the form of property taxes. That’s because property taxes typically are paid at the end of the year for which they were assessed.
In this case, if a house is sold in April, the sellers will have lived in the house for one quarter of the year, but the bill for the taxes won’t come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for one quarter of the taxes for the year at closing.
Have questions? Central Florida Title is a Florida title insurance and real estate closing company located in Florida. Talk to a professional about how your closing can be as smooth as possible. Call us today at 407.303.7878 to setup your real estate closing!