Red Sign Guide to Closing Cost

Budgeting for a home purchase involves more than just accounting for your down payment. As a buyer, you’ll also encounter a variety of fees that ensure a smooth transaction and cover essential services. Some fees are tied to the property itself, while others are required to close and fund your loan.

If you’re selling, the majority of your closing costs will relate to real estate agent commissions, though the buyer may negotiate for you to cover some of their closing costs.

What Are Closing Costs?

Closing costs are the fees associated with finalizing your home purchase. These costs cover services provided by your lender and third parties like appraisal, inspection, and title companies. While most closing costs are typically paid by the buyer, sellers also cover specific expenses.

How Much Are Closing Costs?

• Buyer Closing Costs: Buyers can expect to pay between 2% and 5% of the home’s purchase price in closing costs. For example, on a $300,000 home, closing costs might range from $6,000 to $15,000.
• Seller Closing Costs: Sellers usually pay higher closing costs, which include real estate agent commissions and other fees. These costs typically range from 8% to 10% of the home’s sale price. Standard seller closing costs include agent commissions, transfer taxes, property taxes, attorney fees, and other related charges. Of this, 2% to 4% often goes toward fees and taxes.

Several factors impact the total closing costs for both buyers and sellers. Buyers’ costs depend on their loan program, loan size, and lender practices. Sellers’ costs are influenced by negotiated terms, such as agent commissions and concessions.

Who Pays Closing Costs—the Buyer or the Seller?

Both buyers and sellers pay closing costs, though sellers generally cover a larger share. Buyers can anticipate paying 2% to 5% of the purchase price, largely for lender-related fees. Sellers’ costs often include agent commissions and additional fees or taxes, totaling 8% to 10% of the sale price.

For sellers, these expenses are typically deducted from the proceeds of the sale, so bringing cash to closing is rare.

When Are Closing Costs Due?

Closing costs are typically due on the day of closing, when ownership of the property is transferred from the seller to the buyer. Money is usually wired to the appropriate parties or paid via a cashier’s check.

However, some costs are due before the closing day. These include home inspections, certifications, and land surveys, which are generally paid for when the service is completed. While a home inspection is often optional, it's a common choice for buyers. In some cases, the seller may share the cost of certain inspections or surveys.

Important Note:

While earnest money is not technically a closing cost, it plays a key role in your overall payment on closing day. Typically, earnest money is a deposit of 1% to 3% of the offer price made when submitting an offer. This deposit shows the seller that you’re a serious buyer, and it’s held in a third-party account until closing, where it’s applied to your down payment.

Closing Costs for Buyers

When you're buying a home, closing costs are a combination of one-time fees and initial installments for recurring costs that you'll pay alongside your monthly mortgage. For instance, your homeowner's insurance premium is a recurring cost. You’ll typically pay the first year's premium at closing, and afterward, it will either be paid out-of-pocket or through an escrow account, where you’ll add funds monthly.

Keep in mind that each lender and closing agent bundles closing costs differently. Some may combine certain fees—like recording, courier, and notary fees—into a single line item called "administrative fees."

Here's a breakdown of typical homebuyer closing costs:

One-Time Fees:

• Appraisal fee
• Application fee
• Home inspection fee (plus optional reinspection if the seller makes improvements during the transaction)
• Credit report and credit supplement fees
• Mortgage origination fee
• Lender’s policy title insurance (plus optional owner’s policy title insurance)
• Escrow fee
• Closing attorney fee (in some states)
• Courier fee
• Bank processing fee
• Recording fee
• Notary fee
• Loan discount points
• Homeowners association transfer fees

Recurring Fees:

• Homeowners insurance
• Property taxes and tax servicing fees (including a prepaid lump sum)
• Mortgage insurance (for down payments less than 20% of the purchase price)
• Flood certification fee (in some areas)

Closing Costs for Cash Buyers

Cash buyers still incur some costs, such as notary fees, property taxes, recording fees, and other local, county, and state charges. However, unlike buyers using financing, cash buyers won’t face mortgage-related fees. Many cash buyers also choose to pay for appraisals, inspections, and owner’s title insurance.

Closing Costs for Sellers

Sellers generally cover the buyer's and listing agent's commissions, transfer fees, and their own attorney costs. However, local rules may vary, and many of these fees can be negotiated during the contract process.

Common closing costs for sellers include:

• Agent commission
• Transfer tax
• Title insurance
• Escrow and closing fees
• Prorated property taxes
• HOA fees
• Credits toward closing costs
• Attorney’s fees

How to Estimate Closing Costs

To estimate your closing costs, start by reviewing the Loan Estimate provided by your lender during the loan application process. If you're not yet ready to apply for a loan but want a rough idea of what you can afford, use Zillow’s Affordability Calculator. A simple way to estimate is to multiply the home’s sale price by 2% for a minimum estimate, or 5% for the higher end of potential closing costs.

Closing Cost Estimates Fluctuate

It's important to note that your closing costs can change before you close on your home. Early figures are often estimates, and things like fluctuating interest rates, paying for discount points, or renegotiating terms after your inspection can all cause shifts in costs. If any significant changes arise, your lender will provide a revised Loan Estimate.

At least three days before closing, you’ll receive a Closing Disclosure Statement from your lender. Be sure to review it carefully and compare it to your Loan Estimate. Ask your lender to explain any discrepancies. Remember, there are limits to how much fees can increase between the Loan Estimate and Closing Disclosure, so you should not encounter any surprises.

Paying close attention to both documents will help you prepare for the total cash you'll need at closing and when it will be due.

How to Avoid Closing Costs

While it’s impossible to completely avoid closing costs when buying or refinancing a home, there are several strategies to minimize what you pay. Here are some practical steps you can take upfront to reduce your closing costs:

1. Shop for Lenders with Low Fees

Before you choose a lender, take the time to shop around for the best deal. Many of the fees lenders charge are negotiable, so it’s worth asking for a breakdown of origination fees. You may even want to request that the lender separate bundled fees into individual line items. This way, you can compare different lenders and negotiate on fees, especially for things like "document prep" or "courier fees," which are often negotiable.

2. Ask the Seller to Cover Some of Your Closing Costs

As a buyer, you can ask the seller to contribute toward your closing costs as part of the negotiation process. Seller concessions are quite common—according to the Zillow Group Consumer Housing Trends Report 2020, 85% of sellers offer some form of trade-off to facilitate the sale. This is especially helpful if you’re low on cash after making your down payment. Seller concessions are most effective when there’s a surplus of sellers competing for a limited pool of buyers.

Keep in mind that lenders have specific regulations about which closing costs the seller can cover and how much they can contribute. Be sure to consult your lender about the limits and guidelines for your particular loan program.

3. Apply for First-Time Buyer Assistance Programs

First-time homebuyers often struggle to cover both the down payment and closing costs since they don’t have proceeds from a previous home sale to use. Fortunately, many assistance programs are available for first-time buyers, and some loan types—such as VA loans—offer additional perks. These programs can help you reduce the financial burden of closing costs.

4. Use a No Closing Cost Loan

While a "no closing cost loan" may sound appealing, it’s more accurate to describe it as a "no upfront closing cost loan." Instead of paying closing costs out-of-pocket at closing, this type of loan allows you to roll the charges into your total loan amount. However, be aware that the lender may increase your interest rate to cover the upfront costs or include the fees in your mortgage balance, which means you’ll end up paying interest on them over the life of the loan.

Mortgage-Related Closing Costs

Closing costs can vary significantly depending on the type of loan you choose. Here’s a breakdown of what you might pay based on different loan types:

• Closing Costs on an FHA Loan: FHA loans typically have closing costs ranging from 2% to 6% of the home sale price. This includes an up-front mortgage insurance premium (UFMIP) paid at closing, and you’ll continue to make monthly mortgage insurance premium (MIP) payments throughout the loan or until you refinance with 20% equity. Sellers can contribute up to 6% of the home’s appraised value or purchase price—whichever is lower—toward the buyer’s closing costs.
• Closing Costs on a Conventional Loan: Conventional loan closing costs typically range between 2% and 5% of the purchase price. If your down payment is less than 20%, you'll also pay private mortgage insurance (PMI) until you reach a loan-to-value ratio (LTV) of 78%, at which point you can request to have PMI discontinued. Sellers can cover closing costs based on your down payment amount. If you put down 25% or more, the seller can contribute up to 9% of the total loan amount. For down payments between 10% and 24%, they can contribute up to 6%, and for less than 10%, they can pay up to 3% of the loan amount.
• Closing Costs on a VA Loan: VA loan closing costs generally range from 1% to 5% of the total loan amount. The wide range is primarily due to the VA funding fee, which is used in place of PMI or MIP. The funding fee can vary from 0.5% to 3.6%, depending on factors like whether you’ve used your VA benefits before or the type of home you're purchasing. Sellers can contribute up to 4% of the total loan amount to cover closing costs, but they cannot pay for loan discount points.
• Closing Costs on a USDA Loan: USDA loan closing costs range from 3% to 6% of the total loan amount, including a guarantee fee of 1% of the loan amount. USDA loans do not require PMI. Sellers can cover up to 6% of the home sale price in buyer closing costs.

What’s Included in Closing Costs?

When you first receive your Good Faith Estimate or Closing Disclosure Statement, the list of individual line items can be overwhelming. Here’s a breakdown of the most common closing costs you may encounter:

Application Fee

This fee covers the cost of processing your mortgage application, which may include a credit check and home appraisal, depending on the lender. Not all lenders charge an application fee, so it’s worth asking if it can be discounted or waived.

Appraisal

Lenders require a home appraisal as part of the underwriting process before approving a mortgage. Appraisal fees typically range from $300 to $450, though they may vary based on the location and size of the property. The lender hires an appraiser to determine the home’s fair market value, and the buyer generally pays this fee at closing. 

In some cases, you may need to pay for a reinspection if the seller makes repairs that affect the home’s value. Reinspection fees typically cost around $300.

Attorney Fee

In many states, a closing attorney must oversee the home-buying process. This attorney is not representing either the buyer or the seller but is responsible for ensuring the legality of the closing process. The cost is usually split between the buyer and seller, with settlement costs ranging from $500 to $1,500, depending on your location.

In 21 states and Washington, D.C., a closing attorney is required. These states include Alabama, Connecticut, Delaware, Florida, Georgia, Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and West Virginia. In these areas, the closing attorney typically replaces the need for an escrow company.

A private real estate attorney is an optional cost for buyers who need specialized advice on contract-related issues beyond what the agent can provide. These attorneys charge by the hour, and fees vary depending on their experience and services.

Credit Report Fee 

Lenders charge a credit report fee, typically around $30, to obtain your credit report from the three major credit bureaus.

Credit Supplement Fee

During the underwriting process, lenders may charge a credit supplement fee to verify that your loan application details are current. This includes confirming balances and payment histories. While not always required, it is common when the initial credit report is older. Fees generally range from $15 to $100, depending on the number of items requiring verification.

Documentation Fees

Several institutions need to process documentation during a home purchase. Common documentation fees include:

• Bank Processing Fee: Typically $25 to $100 for processing loan documentation.
• Courier Fee: Costs around $20 per courier trip to send documents to the necessary parties.
• Notary Fee: Notaries charge about $100 for closing paperwork, with additional fees for travel.
• Recording Fee: Typically around $50, this fee is paid to the county to record the transaction publicly.

Escrow Deposit for Property Taxes and/or Mortgage Insurance

At closing, buyers may need to fund an escrow account that will pay for ongoing costs like property taxes or mortgage insurance. If your down payment is less than 20%, this is generally a requirement. The initial deposit will cover the first two months of property taxes and insurance.

Escrow Fee or Closing Fee

This fee is paid to the title or escrow company that manages the closing process. Escrow companies act as neutral third parties, holding funds and distributing them as needed during the transaction. Escrow fees usually range around 1% of the home sale price and are often split between the buyer and seller, though this is negotiable.

FHA Up-Front Mortgage Insurance Premium (UFMIP)

If you're using an FHA loan, you'll need to pay an upfront mortgage insurance premium at closing. This fee is typically 1.75% of the base loan amount and can be rolled into the loan, although you'll pay interest on the premium if you do so.

Flood Zone Determination Fee

This fee is paid to a third-party service that determines whether the property is located in a flood zone. If the property is in a flood zone, you will need to purchase flood insurance. The flood zone determination fee is generally small, but flood insurance can be costly.

Home Inspection

A home inspection is a common part of the home-buying process. It allows buyers to assess the home’s condition before finalizing the purchase. Home inspection costs usually range from $250 to $700, depending on the size and complexity of the property. The buyer typically pays for the inspection at the time of service, not at closing.

Homeowners Association (HOA) Transfer Fee

If the property is part of a homeowners association (HOA), there may be a transfer fee to cover the cost of changing the property ownership records. This fee typically costs around $200. Additionally, you may need to make a prorated payment for your first HOA dues at closing.

Homeowners Insurance Premium

Most loan programs require buyers to purchase homeowners insurance. The premium is typically paid either annually or semi-annually, though it can also be paid monthly through your escrow account. The cost of homeowners insurance varies based on coverage and property size.

Lender’s Policy Title Insurance

Title insurance protects the lender in case of title defects or issues that arise after the closing. It is usually a required cost for lenders but optional for buyers. This insurance is often a one-time fee paid at closing, typically costing between $500 and $3,500, depending on the loan amount and property location.

Lead-Based Paint Inspection

If you are purchasing a home built before 1978, especially with a government-backed loan, you may need to have a lead-based paint inspection. While optional, some buyers opt for this inspection, which typically costs between $250 and $450.

Loan Discount Points

Some buyers choose to pay "loan discount points" at closing to lower their interest rate. Each point costs 1% of the loan amount and typically reduces the interest rate by about 0.25%. Not all buyers choose this option, but it can be beneficial if you plan to stay in the home for a long time.

Mortgage Insurance Premium (MIP)

For buyers with an FHA loan, mortgage insurance premiums (MIP) are required for the life of the loan or until you refinance to a conventional loan with 20% equity. These premiums are paid monthly and are part of the overall cost of the loan.

Owner’s Policy Title Insurance

Owner’s title insurance is optional for buyers and protects against future claims on the property’s title. While the seller often covers this, it can be negotiated in the contract. The cost for owner’s title insurance varies based on the location and size of the property.

Origination Fee

The origination fee is one of the largest line items in closing costs, covering the lender’s administrative expenses in processing your loan. It is typically 1% of the loan amount, but you may find lenders who offer lower origination fees or no origination fee at all.

Pest Inspection

A pest inspection is sometimes required by lenders, particularly for government-backed loans. This inspection looks for pests like termites or dry rot. If not included in the standard home inspection, it is a separate cost, typically around $100.

Prepaid Interest

Since you’ll likely close on a home after the first of the month, you’ll need to prepay interest that will accrue on your loan from the closing date to the end of the month. Your lender will calculate this cost using the daily interest rate, multiplying it by the number of days between closing and the first mortgage payment.

Private Mortgage Insurance (PMI)

If your down payment is less than 20%, your lender will require you to pay private mortgage insurance (PMI) to protect their investment. You may be charged a one-time application fee for PMI at closing. Then, you'll make monthly PMI payments, usually via your lender’s escrow account, until you’ve gained enough equity (typically 20% or more) in the home.

Property Taxes

Property taxes are prorated based on the closing date. Buyers either pay property taxes annually, biannually, or have them included in their monthly mortgage payments via an escrow account. If you are paying taxes via escrow, the amount is added to your monthly mortgage payment, which your servicer then pays on your behalf.

Survey Fee

A property survey is often required by lenders or local regulations to verify property lines and assess features like shared fences. While the buyer typically covers the survey cost, it’s sometimes negotiable with the seller. The average cost of a survey is around $500, though this can be higher for larger properties.

Title Search Fee

A title search ensures that the property you're buying has a clean title, meaning no one else has claims to it. This is usually done by a title or escrow company and typically costs under $100.

Transfer Taxes

Transfer taxes are imposed by local, county, or state governments when a property changes ownership. These taxes may be a flat fee or a percentage of the sale price and can vary widely depending on the location. Be prepared for this cost, which can range from a few hundred to several thousand dollars.

Underwriting Fee

This fee covers the cost of evaluating and processing your loan application. It includes researching whether you qualify for the loan. The underwriting fee can range from $400 to $900, though in some cases, it may be bundled with the origination fee.

VA Funding Fee

If you’re using a VA loan, a funding fee is required. This fee ranges from 0.5% to 3.6% of the loan amount, depending on the details of the loan. You can pay the VA funding fee at closing, or you may have the option to roll it into your loan, adding it to your total mortgage balance.