Closing costs are the bundle of fees associated with the buying or selling of a home. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.
Buyer Closing Costs: When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary depending on the type of loan and the terms of the purchase agreement. Some closing costs, especially those associated with the loan application, are actually paid in advance. Typical buyer closing costs include:
- The down payment
- Loan fees (points, application fee, credit report)
- Prepaid interest
- Inspection fees
- Mortgage insurance (typically 1 years premium plus an escrow of 2 months)
- Hazard insurance (typically 1 years premium plus an escrow of 2 months)
- Title insurance
- Documentary stamps on the note
Seller Closing Costs: If the seller has not yet paid off their home, their most important closing cost is satisfying the remaining loan balance. Before 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 at closing, before the seller receives any proceeds from the sale. Other seller closing costs can include:
- Broker's commission
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
Negotiating Closing Costs: Buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if the buyer is concerned about the condition of the plumbing, the seller may agree to pay the home inspection costs. The buyer may want to save on up-front expenditures, and so agrees 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 closing costs; just be sure all the terms are written on the purchase agreement.
Prorations: At the closing, certain costs are often prorated (or distributed) between buyer and seller. Property taxes are commonly prorated because they are typically paid at the end of the year assessed. If a house is sold in June, the sellers have lived there for half 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 and the sellers will credit the buyers for half the taxes at closing.
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