Who Pays Closing Costs When Buying a Home?
Question: Who typically pays the closing costs on a house, the buyer or the seller? Answer: It varies, and it largely depends on what kind of real estate market you are in. The two parties can pay their own respective fees and charges, or the seller can agree to pay some of the buyer's costs.
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. And this is above and beyond the amount you have to pay for a down payment.
But who pays closing costs when buying a house? 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 wide variety 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.
Home buyers almost always have closing costs to pay (with a few exceptions). 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?
Both parties -- buyers and sellers -- usually have certain costs they must 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. You might also encounter the term "seller contribution." These terms are interchangeable.
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.
Did you know? Mortgage lenders are sometimes willing to pay some or all of the buyer's closing costs, in exchange for charging a higher mortgage rate on the loan. Here's more on that.
Think about it from the seller's perspective. If they receive two offers for the same amount -- and only 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 typically more motivated 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. Note: Sellers are not required to pay 3% toward a buyer's closing costs. It is simply a common practice in slower real estate markets.
Key takeaway for home buyers: Before you ask a seller to pay your closing costs on a house purchase, you should consider the type of housing market you are in. Asking too much from a seller could cause that home to slip through your fingers.
Ask Your Agent About Who Typically Pays What
Your real estate agent can tell you who typically pays which closing costs in your area. So seek their advice. This is one of the benefits of having an experienced agent on your side. If your agent has asked for seller concessions in the past, he or she can tell you what kind of responses they've received.
For example, if your real estate agent tells you that sellers are almost always willing to contribute 3% to the buyer's costs, then it might be a good idea to ask for it. On the flip side, if your agent says that most sellers are turning their noses up at such requests, you might want to leave it out of your offer.
Allowances Vary, Based on Lender and Loan Type
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 generally limit a seller's concession to 6% of the purchase price. This means the seller's contribution to the buyer's closing costs cannot exceed 6% of the sale amount in most cases. (Note: This limit has changed in the past. Years ago, it was lowered from 6% to 3%, and then increased back to 6%. So you might encounter some outdated information online. Just know that the current limit is 6%, as of 2019.
Here's what HUD Handbook 4000.1 says about the seller paying the buyer's closing costs on FHA loans:
"Interested Parties [including the seller] may contribute up to 6 percent of the sales price toward the Borrower’s origination fees, other closing costs and discount points. The 6 percent limit also includes: Interested Party payment for permanent and temporary interest rate buydowns, and other payment supplements; payments of mortgage interest for fixed rate Mortgages; Mortgage Payment protection insurance; and payment of the UFMIP."
So, who pays closing costs when an FHA loan is used? It's negotiable! The buyer and seller can each pay their respective costs, or the seller can contribute a portion (up to 6%) toward the home buyer's costs.
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. This combination is commonly referred to as the VA "no-no" mortgage, which means the buyer pays no closing costs and no down payment. But again, it's all negotiable. THe seller doesn't have to make such a contribution -- they're simply allowed to do so. That's a key distinction.
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. Or there might be no limit. It varies.
If you're concerned about who pays closing costs, or if you feel you cannot afford them, be sure to ask about it when 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 depends on what you 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 such concessions, the homeowner might still turn you down. It happens. And that's why you need to understand the type of real estate market you're in.