CLOSING COSTS - WHO PAYS THEM?

This is a common question I get: Does the buyer or the seller pay the closing costs? The answer is that each party has its own responsibilities and customary fees, even if some items can be negotiated in a contract for either party to pay. 

THE BUYER'S TYPICAL CLOSING COSTS

This is separated in three distinct ways. A+B+C = Total due at closing.

• A. Down Payment: (typically a minimum of 5% for conventional financing, 3.5% for FHA financing, 0% for VA or USDA financing and 20% for investor financing)
• B. One-time Closing Costs: these are one-time fees charged by a variety of different parties in order to transfer the title and other items into the buyer's name, including title fees, recording fees & homeowner association transfer fees if they apply. 
• C. Prepaid Taxes and Insurance: in order to establish an escrow fund for your mortgage company to pay end of year taxes, you are typically charged a few months worth of prorated property taxes plus you will have to purchase a homeowner's policy (for a full year) in advance, plus a few extra months prorated to establish funds for your mortgage company to pay this when it comes due again the next year.

The prepaid taxes and insurance part of the closing closing cost equation is often initially overlooked by buyers but the amount is usually a substantial part of the overall total. Remember: taxes are paid in arrears and homeowner's insurance is paid in advance. 

Sometimes a buyer will ask the seller to cover a specific amount or a percentage of their closings costs as part of the negotiation, this is a common arrangement that helps the buyer roll some costs into the mortgage, saving cash for closing (or moving expenses, new furniture or whatever else.)

THE SELLER'S TYPICAL CLOSING COSTS

• Brokerage Compensation: while not set in stone, the seller will typically cover the compensation of the listing broker and the buyer's broker. Each fee is set within a broker's listing agreement and a buyer representation agreement so this may vary. 
• Owner's Title Insurance Policy: this ensures clear title from the seller to the buyer. The fee amount is set by the state based on the sale price of the home. 
• Taxes: prorated taxes from the beginning of the year until closing day will be due. If you escrow taxes in a mortgage payment, the funds in your account will NOT be used for this. Instead, you will receive an escrow refund check from your mortgage company about 2-3 weeks after closing, reimbursing you for roughly the same amount. It's also important to note that you will receive a prorated homeowner's insurance refund for the number of days left in your policy since you pay a one year premium in advance. Calculating this amount depends on the date when the premium was paid for the year and your refund check will come from your insurance company. 
• One-Time Closing Fees: escrow/title fees and other minor one-time fees. 
• Home Warranty/Residential Service Contract: basically an insurance policy covering major home components for one year after purchase, protecting both seller and buyer in the event an item unexpectedly breaks down. Typically, this is negotiated in a contract for the seller to pay but not always. 

Again, these are items that are customarily paid by each party but most things in a real estate contract are negotiable.