Who Pays Which Closing Costs on Real Estate?

3. Insurance Fees

Buyers nearly always purchase a property insurance policy to protect against fire, storm, and other damage. Known as homeowner’s insurance or landlord insurance, mortgage lenders require it, and responsible property owners buy a policy even if they buy the property in cash.

You can also choose to buy your own title insurance policy that protects you against future title problems.

If you buy a property with a Fannie Mae or Freddie Mac mortgage, such as by house hacking, and put down less than 20%, you will have to pay for private mortgage insurance (PMI). In addition to ongoing monthly payments, you must pay a fee up front. Federal Housing Administration (FHA), United States Department of Agriculture (USDA), or Veteran’s Affairs (VA) mortgages require an up-front payment of 1.75% and then will continue with a monthly payment for the mortgage insurance premium (MIP).

4. Taxes

The government always gets their share.

When a property changes hands, both state and local governments typically charge transfer taxes on it. Usually, both the buyer and seller pay a portion of these.

Local governments also charge recordation taxes and fees to record the new deed and mortgage note.

The buyer also becomes liable for their portion of the annual property tax bill, as of the day of settlement. In most cases, the seller has already paid for property taxes for the year, so the buyer owes prorated property taxes to reimburse the seller.

In some instances, property taxes are deductible within your federal income tax statement. However, this varies, so be sure to consult with a tax professional prior to purchasing to see how you will be financially affected.

Seller Closing Costs

Sellers owe their own set of costs during the property selling process as well.

1. Real Estate Commission

Generally, sellers pay 5-6% of the total purchase price to cover the average real estate agents’ commissions. The seller pays for both the listing agent’s fee and the buyer’s agent fee, normally around 3% to each.

2. Unpaid Bills & Taxes

The seller owes the local municipality for any unpaid water bills, fines, or other fees at the time of settlement.

Additionally, the seller must pay their portion of the year’s property taxes if that year’s tax bill has yet to be paid.

Seller Concessions

Most buyers would rather negotiate a seller concession than a lower purchase price. A seller concession occurs when the seller agrees to pay a certain amount of money to help the buyer cover closing costs.  The purchase price is mostly borrowed from a mortgage lender, while the closing costs must be paid for out of pocket.

Sellers don’t have to offer concessions, of course, but it can help them move their property faster. Consider it just another part of the sales negotiation — everything in real estate is negotiable!

While many sellers refuse to offer any help toward the buyer’s closing costs, seller concessions become far more common during buyer’s markets. In a seller’s market, sellers have little incentive to offer extra perks like money toward the buyer’s closing costs.

However, even if seller agrees to shoulder some of the closing costs, there are maximum amounts for concessions with different homeowner loans. Here are some of them:

While portfolio loans and other privately-held investment property loans don’t limit seller concessions, they’re far less common in investment property transactions between professional investors.