Who Pays Closing Costs When Buying a Home?

First-time buyers who are unfamiliar with the home buying process are often shocked by the amount of closing costs they must pay. The various fees, charges and taxes can easily add up to thousands of dollars. This is above and beyond the amount you have to pay for a down payment.

But who pays closing costs when buying a home? Does the buyer pay everything, or do the costs get divided between buyer and seller? Is it negotiable? These are some of the questions we will address in this tutorial.

What Do Closing Costs Include?

When you buy a house, you will encounter a dizzying array of mortgage-related fees. Basically, anytime someone performs some kind of administrative task, there will be a fee associated with it. The bank will charge a fee when they "originate" the loan, which is required just to get your foot in the door. They will also charge fees for various stages of the mortgage underwriting and approval process.

You can see a more complete list of closing costs on this page.

Aside from VA loans, the buyer will almost always have closing costs to pay. But the seller has certain costs to pay as well. Sellers are usually responsible for the real estate agent's commission (if applicable), title transfer fees, prorated taxes and utilities.

Can the Buyer Ask the Seller to Pay These Costs?

I've explained that both parties usually have certain costs to pay during a home purchase. The buyer typically pays for any fees relating to their mortgage loan, and the seller typically pays the agent's commission and various fees relating to the transfer of property.

With that being said, closing costs are often just as negotiable as anything else in the real estate world. So yes, the buyer can ask the seller to pay for the buyer's closing costs. This is referred to as a seller concession, by the way.

The question is: How will this affect the chances of your offer being accepted? This is where you really have to know your real estate market. If you're in a sellers' market (where there are fewer homes for sale but plenty of buyers), you should be careful about asking for seller concessions. If you're in a situation where there are multiple offers, asking the seller to pay your closing costs could be a problem.

Think about it from the seller's perspective. If they get two offers for the same amount, and one buyer is asking them to pay the closing costs, which offer do you think they're going to accept? It's a no-brainer. The seller will net more money by going with the offer that doesn't ask them to pay the buyer's closing costs.

On the other hand, you will have more negotiating power in a buyers' market. This is where there are plenty of homes for sale but few buyers to go around. In this kind of market, sellers are more desperate to sell their houses. So they are willing to make certain concessions they wouldn't otherwise make. It's common for sellers to offer a 3% concession in a buyers' market. This means the seller is willing to contribute 3% of the purchase price toward the buyer's closing costs. This may or may not cover your total costs, but it can certainly be a helpful contribution.

So before you ask a seller to pay your closing costs, you need to consider the type of market you are in. If you're using a real estate agent, you will want to run all of this by them as well. Your agent's input can be especially helpful in this area. If they have asked for seller concessions in the past, they can tell you what kind of responses they've gotten. For example, if your agent tells you that sellers are almost always willing to contribute 3%, then it might be a good idea to ask for that amount. On the flip side, if your agent says that most sellers are laughing at this kind of request, you should leave it out of your offer.

Allowances Vary, Based on Lender and Loan

When trying to figure out who pays closing costs, you must also consider the type of loan you are using. Different mortgage programs have different stipulations about who can pay for what.

For example, FHA loans limit a seller's concession to 3% of the purchase price. This means the seller's contribution to the buyer's closing costs cannot exceed 3% of the sale amount. The FHA used to allow seller concessions up to 6%, but they lowered the amount in 2010. So you might still encounter some outdated information online that talks about 6% seller concessions on FHA loans. Just know the current limit is 3%.

For a VA loan, the seller is allowed to cover all of the buyer's closing costs. VA loans also have the benefit of no down payment for the buyer. The combination of these is commonly referred to as the VA "no-no" mortgage, which means the buyer pays no closing costs and no down payment.

As for conventional loans (that are not backed by the government), you will have to ask your mortgage lender who can pay for what regarding closing costs. Depending on where you live and which lender you use, there may be certain restrictions on the amount sellers can contribute. Some lenders will allow the seller to pay 6% of the sale amount toward the buyer's closing costs. In other states, or with a different lender, the limit might be set at 3% for seller concessions.

If you're concerned about who pays closing costs, or if you feel you cannot afford them, be sure to ask about this at the time you apply for the loan. It will prevent any unpleasant surprises down the road. The lender might tell you they have no limitations on what the seller can contribute to your closing costs, and that it's simply up to what you can negotiate during the offer process. Or they might tell you that your loan program has certain limitations on seller concessions. Just find out up front, so you can plan accordingly.

And keep in mind there is no guarantee that a seller is going to pay your closing costs. Even if your loan program allows for seller concessions, the homeowner might tell you to take a hike. It happens all the time. And that's why you need to understand the type of real estate market you're in before you start asking for concessions. It's all about bargaining power.

This article explains who pays closing costs when buying a home. If you would like to learn more about the home buying process, I recommend using the search tool located at the top of this website. We have hundreds of articles relating to mortgage loans, purchase agreements, and other things discussed in this article. The search tool is the easiest way to find the information you need. Good luck with your home buying process.