Why does a home seller sell a home? Why do you want to sell a home? Of course, apart from secondary reasons like moving to a new city or upgrading to a better home, the primary reason to sell a home for you would most probably be to make some good money out of it, right? And when you set out to calculate how much money you’ll make from the home sale, you must factor in the closing costs, which most sellers forget to account for.
The closing costs come at the end of the sale and you are most likely to deal with them unless you sell your house to one of the companies that buy houses for cash. It might not be clear to you which cost you are paying for what service or legality. This piece aims to make you aware of the 13 types of closing costs involved in a real estate transaction so that you are in the know.
What do closing costs mean?
Let us first understand closing. It is the last leg in a home selling process when documents and money change hands and the ownership of your property is transferred to the buyer. A successful closing is a closing where both you and the buyer fulfill the contract agreements.
Closing costs are the charges and fees a seller and a buyer need to pay while finalizing a house purchase. Both parties pay the costs to the service providers who help them make the transaction. Typically, the buyer’s closing costs are lesser than the seller’s and in some cases, a seller offers to pay even for the buyer’s closing costs.
While the seller’s closing costs include realtor commissions and ownership transfer fees, the buyer’s closing costs are homeowner’s insurance, mortgage insurance, property taxes, appraisal fees, etc. It is during the negotiations that a buyer can ask you to cover some of their closing costs.
During the closing, you are required to clear the title by paying off all loans on your property, and the buyer and her lender need to wire you the transfer money to cover the balance that is owed on the home purchase. A third party called an escrow company facilitates the closing by ensuring that the money, documents, and other items required to close the sale are proper.
How much closing costs to expect?
Closing costs can range anywhere between 3% to 6% of your home’s sale price. For example, if you buy a USD 300,000 house, your seller closing costs could range from USD 9,000 to USD 18,000. The final closing fees are dependent on your loan type, state, and lender. It is important that you pay close attention to closing fees.
The US States with the highest average closing costs are the District of Columbia, New York, Maryland, Delaware, Washington State, and Pennsylvania. Also, Indiana, Montana, Iowa, South Dakota, and Kentucky are the states with the lowest average closing costs.
What is the process of closing a home sale?
The home buyer’s lender has to by law provide the buyer with a loan estimate in under three business days after getting the mortgage loan application. This is a key document that outlines the loan details and the estimated closing costs. You can see some fluctuations in the figure on the closing day but there must not be any big surprises.
Before the closing, the lender provides the buyer with a closing disclosure form which includes the original estimated closing cost and the final closing cost. At the time of closing, if you see any new fees not mentioned originally on the loan estimate making your closing costs significantly higher, you must seek immediate clarification with your lender or agent.
Are closing costs necessary?
A buyer has to make multiple payments like an earnest money deposit, a sizable mortgage payment for many years, and a down payment. So, the question may naturally arise in a home buyer’s mind—Is it necessary to pay closing costs?
A real estate transaction is a complex process that involves many players and has multiple moving parts. Some states need to undertake certain additional inspections apart from the basic inspection. Then there are transfer taxes, property taxes, insurance coverage, and many additional fees you’ll find in the list below.
Also, a seller like you has to pay both your and the buyer agent’s commissions, which is another 5 to 6 percent of the home’s sale price. Your closing costs are normally deducted from the proceeds you’d make on the sale of the home. If you have low equity, you may even need to cover these expenses out of pocket. Your net proceeds from the home sale are the amount of money you walk out with after paying all these costs.
13 closing costs in a real estate transaction
Here are the top different types of closing costs you can expect in a real estate transaction:
Title search cost
The title search is important as it ensures that you are the rightful owner of the property. It also makes sure that there are no outstanding claims against your home. The average title search cost is USD 300 to USD 600.
Title insurance cost
You and the buyer can get your own title insurance policies. It can help protect you in case there is a title problem after closing. The average title insurance cost is USD 1,000.
Home inspection cost
Home inspection makes sure there are no major issues with a home’s structure. It costs about USD 300 to USD 500.
An appraisal report verifies if your property is worth as much as the buyer is borrowing from the lender. It costs USD 450 to USD 650.
For buyers to get loans, it is a prerequisite in many states to get a survey that shows the property’s legal boundaries. It costs between USD 350 to USD 500.
Credit report cost
The lender who is disbursing a loan to the buyer runs a credit report on her with the major credit reporting bureau. The report costs between USD 20 to USD 50 and it has to be borne by the buyer.
Loan payoff costs
Loan payoff cost includes prepaid interest and loan origination fees, and assumption and application fees. They make up around 0.5% to 1.5% of the home’s sale price.
Mortgage payoff cost
If you owe anything on your home’s mortgage, you will have to pay the mortgage payoff or prepayment penalty cost at closing. Some lenders even charge a penalty for your paying off a loan before the end of the term. The buyer has to check that with her lender for the cost amount.
Outstanding amounts owed on the property
Outstanding amounts on the property include utility bills, property taxes, HOA dues, homeowners insurance, etc. The amounts are prorated as per the closing date and depend on your property.
As per your local and state laws, you might be charged taxes for the transfer. They are calculated based on local laws and your property’s value. You can get information about your local tax rates on your county and state taxing authority’s website.
Your title agent, escrow agent, or attorney files the deed transferring your property to the buyer’s name with an appropriate county office. The recording fee depends on your county.
Settlement or attorney fee
You have to pay a settlement fee to the escrow or title agent handling your closing. In case an attorney is handling your closing, attorney fees are to be paid. The attorney fee is around USD 150 to USD 500 and the settlement fee is USD 2 per USD 1,000 in sales price.
Any additional state requirements
You have to check with your attorney or agent for state-specific additional requirements like a flood certification or a septic system certificate.
To sum it up
Your closing cost can vary depending on the above items, especially your agent commission, title fees, and loan payoff costs. Alternatively, you can sell your home FSBO and hire a good flat fee MLS service like Houzeo to save the real estate agent commission cost.
You would have to pay up your part of the closing cost unless you are selling your property to one of the companies that buy houses for cash. Hopefully, you would now have a better idea of the closing costs so that you can sell your home with confidence.
Read more interesting articles at insaneyards