Buyer, Seller, or Both—Who Pays the Closing Costs?

Preparing to sell a home can be expensive: Preparing a home to go on the market comes with the cost of repairs, updates, cleaning and staging. And of course buying one is a huge investment, too; buyers not only need to come up with a downpayment, but have to think about the cost of loan application fees and inspections. 

So when buyers and sellers reach an agreement, you might think all that’s left to do is sign some papers and trade a check for the house keys. But there are still more costs to consider. The seller is responsible for closing costs that, according to Zillow.com, average about 8% to 10% of the house’s sale price. The buyer needs to pay some costs at the closing too (though they are much less). On average, buyers will spend about 2% to 5% of the sales price.

At a home closing, the buyer and seller meet to finalize the process of transferring ownership of the house. This involves transferring money from the buyer to pay for the home and completing paperwork that pays off the seller’s mortgage and clears the title. Finally, the keys to the property are handed over and both sides breathe a sigh of relief.

Both the buyer and seller are responsible for certain administrative costs involved in the transfer. The buyer will need to be prepared to pay their portion at the closing. The amount the seller owes is simply deducted from the proceeds of the sale instead.

(The exception to this is if the seller is underwater on their mortgage, meaning they owe more than the home sale will pay. In this case, they will need to pay any closing costs with cash or a cashier’s check.)

The agents at Berkshire Hathaway HomeServices Select Properties have been through the closing process numerous times in the St. Louis area and can brief you on exactly what to expect.

The 8% to 10% of the home’s price that accounts for the seller’s portion of the closing costs is made up of various administrative and sales-related fees. All of these fees differ depending on where you live.

Agent commission. About 6% of the seller’s closing costs go toward commissions. The seller typically pays not only their own listing agent’s commission but the commission for the buyer’s agent too. On average, this amounts to about 3% of the house’s final sales price to each of the agents for a total of 6%.

Title Fees. In some states, title fees, also called transfer taxes are administrative charges to pass the house’s title from the seller to buyer. Missouri is one of the few states that does not enforce a real estate transfer tax. 

Title Insurance. Title insurance protects the buyer in case there are any liens or disputes about the house’s title. Even though this is for the benefit of the buyer, the seller typically pays this one-time cost.

Escrow Fee. An escrow account is a third-party account that holds all of the money until the transaction is complete and the property changes hands. Escrow fees may be charged as a flat fee or about 1% of the home sale. They’re comprised of various banking and office expenses such as notaries, copying documents, and fund transfer fees. Escrow fees are usually split equally by the buyer and seller.

Prorated Property Taxes. The seller must pay property taxes for the period of time from the last tax payment until the closing date. For example, if they occupy the house for six months of the new tax year, they are liable for half of the annual tax bill. This amount is due at closing. After that, the new owner takes over the tax burden.

Prepayment Penalties. The seller’s mortgage might contain a clause against paying off the mortgage before its term. This penalty is due at closing along with the mortgage payoff amount.

Prorated HOA Fees. In neighborhoods with Homeowners Associations, sellers may need to pay prorated dues. Just like property taxes, payment is required for the number of days the house was occupied by the seller. Some associations charge a transfer fee too, to switch membership to the new owner.

Credit Toward Closing Costs. Sometimes a seller will offer to pay some portion of the buyer’s closing costs as an incentive to complete the sale. Those amounts or percentages are due at the time of closing.

The seller is responsible for most of the closing costs, mostly due to the 6% for real estate agent commissions. Buyers’ costs add up to about 2% to 5% of the home’s cost as opposed to the 8% to 10% paid by sellers. So, with the exception of the commissions, buyers and sellers pay about the same amount. 

The buyer does have closing costs that they will need to pay at the closing meeting. They are mostly related to lending fees. 

Lender’s Administrative Fees. The buyer is responsible for several expenses charged by their lender. These may include a mortgage application fee, which sometimes includes a credit check or credit report fee and a home appraisal to verify the market value of the home. These services must be done, so if they are not lumped into one application fee, they will need to be paid separately. Other typical charges associated with the mortgage are for loan origination, underwriting, notaries, and recording fees.

Lender’s Title Insurance. The seller pays for title insurance that protects the buyer. The buyer pays for title insurance that protects the lender’s interest. It is similar to a title search but will show up as a separate line item. It assures the bank of the integrity of the title before they approve the mortgage.

Homeowner’s Insurance. At the time of closing, the buyer is sometimes required to pay the first year’s premiums for homeowner’s insurance.

Property Taxes and Mortgage Insurance. Two months’ worth of both property taxes and mortgage insurance payments may be payable at closing.

Escrow fees. Buyers are responsible for 50% of fees charged for the administration of the escrow account.

Other Buyer Costs. Although not technically a closing cost, the down payment for the home is also handed over at the closing meeting. Leading up to the purchase, the buyer must also pay for things like a home inspection, land survey, and pest inspection.

Most closing costs are for administrative and banking services and are non-negotiable. They are standard parts of the process with set flat fees or pre-determined percentages of the home sale price. 

There are a few things, however, that both buyers and sellers can do to lower closing costs:

Shop around for title and escrow companies with better rates. These do vary from company to company, so it is possible to find some cost savings.

Since sellers are solely responsible for commissions, that is their biggest opportunity to cut costs. When looking for a real estate agent, ask about their commission percentage. There may be some room for negotiating it down. There are also discount brokers whose fees are less. 

A note of caution though: brokers who charge less may not work as hard to sell your home. This might translate to fewer showings and open houses. Keep an eye out for these best qualities of a realtor.

Selling a home FSBO (for sale by owner) can avoid a listing agent’s commissions altogether. But the burden of working to market and show the house falls completely on the homeowner. It’s guaranteed to be more work for the seller and typically takes much longer to find a buyer.

Sellers may cringe at the idea of giving up some of the proceeds of their home sale to closing fees. They may have already spent a lot of money on home improvements and everything else that has prepared their house for the real estate market. On top of that, they still need to think about expenses associated with moving into their new home.

But closing costs are a necessary part of selling a house. These payments protect everyone involved in the transaction, ensuring that all real estate laws and regulations are by the book. The experienced real estate agents at Berkshire Hathaway HomeServices Select Properties can explain the purpose of each closing cost and guide you through the process.