Who Pays Closing Costs: Our Complete Guide

Congratulations on making the decision to buy or sell a home! It's an exciting time. Whether you're buying/selling for the first time or looking to flip one of countless properties that you've invested in, it's good to remember who pays closing costs in this situation. It may seem like a minor part of the overall equation,  but the people responsible for facilitating the sale of the property are bound by the laws and the traditions of real estate. Their services cost money that must be paid in the here and now once the time comes.

Who Pays Closing Costs and How?

Traditionally the buyer pays for most of the closing costs. But as with everything in a real estate deal, all is negotiable. There are strings attached on either side. Whether it be how long the house has been sitting on the market, how eager the buyer or seller is to close, or how good the real estate agents are at coming to a compromise, all these issues can affect the decision-making process.

When closing on a house, the buyer will normally pay all closing costs except for the real estate agent's commission fee, the prorated taxes and utilities, and the title transfer fees. In some cases, though, if the seller has extra leverage they can even roll these fees into the contract and pass them on to the buyer through inflating the selling price of the property. This covers those costs because the buyer is actually paying a higher asking price than they maybe would have otherwise.

What Are Closing Costs When Buying?

Knowing what the closing costs are when considering the sale of a property is an important part of the process. They're mostly costs related to the creation of a mortgage, though if the property is being bought with cold hard cash, this can de-complicate the process a bit. There are a lot of administrative tasks that must be completed during this loan creation process. So every time someone carries out a task that contributes to an ultimate loan agreement, there will be a fee associated with its execution.

In addition to the first 'origination fee,' there will also be fees associated with the loan 'approval process.' There's also a cost associated with mortgage underwriting. Mortgage underwriting is simply a process the bank or lender uses to evaluate the risk associated with lending a prospective buyer the money needed to buy a particular property. If the buyer meets all the requirements for the type of mortgage being pursued, then they will happily green-light the loan.

Do Banks Cover Some Fees?

Building with glass windows

Image via pexels

In some cases, to make their mortgages more attractive to prospective borrowers, banks will offer to cover some of these costs themselves. It's great when you can say that it's the bank who pays closing costs, since usually they are usually the last entity that will be fronting anything but a loan itself. But the market for home loans has gotten increasingly competitive in recent years, so using these cost covering tools to advertise more attractive terms is something that buyers can look for when they need to save a bit of money in this process.

Final Loan Considerations

Financial Loan

Image via ​pexels​

After securing preliminary approval with a lender, the underwriting process begins. The underwriter will make the final call of whether you're approved or not. Some of the factors at play that can determine if you'll qualify include your payment history, credit score, and debt to asset ratio, amongst a host of other elements on your financial track record.

In order for the underwriter to have full confidence in your ability to pay back the loan, you'll have to provide a series of supporting documentation. These include things like providing tax returns or W-2s, bank statements, and pay stubs proving your current/past employment. Once you have these things together and turned in, it will take anywhere from two to three days to a little over a week to finish.

Who Pays Closing Costs Related to the Final Sale?

Cheque

Image via pexels

On the seller's side of things there are already many preparations that need to be made when getting a house ready to sell. These mainly involve giving buyers confidence that the house they're looking to buy will be a great investment. Fortunately, there are a number of professionals who can officially certify certain aspects of the property's overall favorability, which can lend to this confidence. But what's involved?

The Seller's Responsibility

Seller handshaking hands customer

Image via  unsplash

So who pays closing costs in the realm of finalizing a property's certifications? In this case, it's usually the seller. These are things that would make sense for the seller to cover. After all, the property has either been taken care of well by the current owners or it hasn't. So it's in the best interest of the seller to prove themselves here and stand by their property through covering the cost of having it evaluated.

The Appraisal

A beautiful home

Image via ​pexels​

The seller must make sure their home is appraised properly. An appraisal is an unbiased estimate of the 'fair-market' value of a given home. Lenders will require this information during the loan approval process, so it helps if the seller has already taken care of this in advance. Banks will be more likely to approve a mortgage if they believe that the home's final sale matches what the market truly reflects.

But how is an appraisal made? There are a number of factors, and they all can affect who pays closing costs and who doesn't. Most appraisals focus on these areas: location, the quality and condition of construction, and other amenities or special features the home offers. The person appraising the house remains as objective as possible throughout the process and must not be related in any way to either the buyer or the seller to prevent a conflict of interest.

Real Estate Agent Fees

A seller smiling

Image via ​pexels​

These fees can be high or low depending on the realtors involved, their reputation, and what your original agreement with them states. Usually the fee a seller will pay to their real-estate agent will be anywhere between 5-6 percent of the final selling price, but sometimes these fees can be higher.
The buyer's real estate also gets a commission for helping facilitate that end of the deal.

Most of the time the buyer pays these fees, but depending on the terms of the agreement the seller could potentially pay this fee as well. In any and all instances where the seller pays for something that the buyer traditionally pays for, it is referred to in contracts as either 'seller contribution' or 'seller concessions.' So be sure to watch out for that when looking over contracts.

Title Transfer, Taxes, Utilities, and Moving Costs

Money

Image via ​pexels​

These costs essentially smooth the transition from the seller to the buyer based on when the closing actually happens. Usually this means that the seller will pay up until the end of the month any utilities, taxes, and the cost of the lawyer that will actually legally transfer the title of property from one party to another. These fees are relatively small when compared to the other costs involved in a given sale.

Moving expenses, on the other hand, can be very costly and must be considered in advance of the final closing date. A common mistake that sellers make is not to account for these additional costs. Maybe storage units will be needed. The movers that you use will most likely charge more based on how far away they're moving every material thing that you own. It's very rare that a seller can get away with moving out and selling a property without hiring professionals, but sometimes it can be done if it's a short distance. Don't count on that option though.

The Value of a Good Real Estate Agent

Real State Agent

Image via ​pexels​

A good real estate agent will take a specific interest in your goals and provide a hands-on approach throughout the process. This includes being a source of knowledge when it comes to asking who pays closing costs or what kind of assets will affect a higher or lower price. Good real estate agents are also 'vision makers,' presenting a positive view of the future for all parties involved. This helps a sale go through more smoothly, so that when the question of who pays closing costs comes up, it's not a headache to try to sort out.

Final Market Considerations

For sale house sign

Image via ​pexels​

The size and scope of a given market area will also determine who will have more leverage in terms of who pays closing costs and when. For example, if the there are primarily sellers in a given area and very few buyers, then it's considered a buyer's market and the buyer will have more leverage when negotiating.

However, if property values are high and there are very few properties for sale, this bodes well for the seller. It also bodes well if there are a large number of people trying to move into that area. In this case it is considered a seller's market and the seller of a given property will have more power in the negotiating process.

Conclusion

So when determining who pays closing costs it's important to make sure that you have all of the information. Without this, choosing who pays closing costs will be harder. Remember that knowledge is power and you'll end up coming out of the process with a positive outcome.