What are the closing costs when buying or selling a home?
When buying or selling a home, most people understand that there are fees associated with the transaction. The fees are referred to as “closing costs,” which are due when the transaction closes. Both buyers and sellers have fees they’re responsible for, and we’ll detail some of the more common closing costs associated with buying or selling a property.
Real Estate Closing Costs
The most significant expense most people are aware of are the real estate commissions. Generally, the seller is the one who pays these fees, which are typically six percent of the contracted price. Three percent goes to the agent who lists the house and helps market it for sale, and three percent goes to the agent who represents the buyers of the property.
While six percent is considered the norm, there are situations where commission percentages can adjust higher or lower. While many transactions involve the seller paying both real estate agent commissions, there are times when the buyer pays their share of the commission. It’s also been argued that buyers pay their REALTOR’s® commission.
While real estate agent commissions typically make up the lion’s share of closing costs, many other expenses are included at closing. These additional fees generally fall somewhere between two and five percent of the contracted price.
The document preparation fee is a fee paid to mortgage and title companies to create and execute the various legal documents associated with a transaction. Sometimes these fees are part of escrow fees.
Release Service Fees
These are fees that are paid when existing loans are paid off at closing.
Owners Title Policy
This closing cost is title insurance on the property to ensure no issues with the home’s title. You can read a previous Ask a REALTOR® where we dive deeper into title insurance.
The title company assesses this fee to ensure a clean title record and that there aren’t any liens on the property being financed. The search generally spans several government entities, including tax assessors, recorders, courts, etc.
These fees are paid to the title company or escrow company to set up an escrow account for earnest money. The costs collected cover document preparation, the transfer of funds, and the recording of the deed.
The buyer will owe the lender interest for the days they utilize the mortgage in the first month of ownership. If a loan closes on the 15th of a month, you’ll have to prepay either 15 or 16 days (depending on the month) of interest, based on the loan’s annual interest rate. People who close their loans at the end of the month save on interest.
The transaction fee is what a brokerage will charge for the transaction. Some agents pay the transaction fee on their client’s behalf, while others will pass the cost to their clients.
The survey fee is for any costs incurred for surveying property boundaries by a licensed land surveyor.
Most mortgage lenders require an appraisal of the property to identify its fair market value and make sure it’s worth the loan amount. The fee is paid to the company doing the assessment and is recouped at closing. Some properties will qualify for an appraisal waiver, which means this fee won’t be necessary.
Credit Report Fee
The lender charges a fee to pull your credit report. Sometimes this fee is waived if it’s included as part of the application fee paid to the lender.
Flood Certification Fee
A fee is charged to obtain a government-required document used to identify if the subject property is in a flood plain.
Tax Service Fee
A fee is collected and paid to a third-party service that monitors a tax account and alerts lenders to unpaid tax bills.
Since attorneys are not required to buy and sell real estate in Idaho, this fee won’t apply here. However, some states require attorneys to be involved in the transaction in other parts of the country.
Generally, attorney’s fees cover their time resolving title issues, preparing the closing documents, and facilitating the closing. Sometimes, attorneys conduct a “title exam” where they review the history of ownership, or chain of title, to make sure no one else has a claim to the subject property.
A lender charges the origination fee to procure a mortgage loan that generally covers operational costs. These fees are usually one percent of the loan amount but can vary.
“Points” that are paid to the lender at closing can lower the interest rate. Sometimes these points are added to the loan amount.
A lender imposes the application fee to cover costs associated with processing the loan and checking credit.
The processing fee covers the costs of processing the loan. This includes completing all the information on an application, verifying the data, creating documents, and managing the closing between underwriting and the title company.
A fee is charged to determine if the lender is willing to lend money to the loan applicant.
This fee covers the cost of delivering documents to different parties.
Wire Transfer Fee
The wire transfer fee covers the cost banks charge lenders who wire funds to the escrow account at closing.
Sometimes when moving into a new community that an HOA manages, the association requires a “transfer fee” to be paid to establish membership in the community.
When buying a property, the lender will require a pro-rated portion of the year’s property taxes to be included in the escrow account.
Once the closing is concluded, a mortgage and transaction is reported with the county, charging a fee to record the mortgage or deed of trust.
The Last Word
As you can see, there are many miscellaneous fees and expenses wrapped up in the closing costs of a property beyond just real estate commissions. Some of these fees can be negotiated with the entities providing the service. In addition to shopping around for a real estate agent, you can also shop around for a lender and a title company.
A good rule of thumb is to plan on around three percent of the property’s purchase price for all related closing costs beyond commissions.