Who Pays Closing Costs on a Home: Negotiating Mortgage Fees

Couple paying mortgage closing costs with agent holding toy home

Finding the home of your dreams is hard enough. Funding the home of your dreams can be just as a difficult. Let’s this be your roadmap to who pays the closing costs on a home.

Non-negotiable closing costs

There’s no such thing as a zero-fee mortgage. Any lender that tries to convince you otherwise is either lying or distorting the process of rolling the cash value of closing costs into the overall balance of the mortgage you’ll be paying monthly. Be careful if you choose to go this route: $1,000 compounded monthly at today’s 4.25% average rate for a 30-year mortgage rises to $3,570.65 over the life of the loan.

More often you’ll be on the hook for several thousand dollars in closing costs of one form or another. Expect to pay these fees every time:

  • Title search or exam fees for checking and filing the necessary paperwork with the government.
  • Title insurance to ensure the lender doesn’t get stuck paying for unfiled paperwork to bring the property into compliance with state, federal, and local laws.
  • Property tax because Uncle Sam gets his cut regardless of where you live. (But you’ll pay more if you live in a high-rent area.)
  • Flood determination which you’ll pay if you live in an area that’s prone to floodings, such as parts of Florida and Louisiana.
  • Credit report fee because your lender has a right to understand your credit score and history before lending you money.
  • Attorney fees because some states mandate an attorney be present when signing closing documents, and attorneys aren’t free.
  • Prepaid interest because if you have a mortgage, you need to pay interest. What you’ll pay up front depends on the day of the month in which you close and move in. The later in the month, the less interest you’ll pay upfront.

Specific mortgage fees

Some fees depend on the product you’re using. For example, applicants with bad credit may need a mortgage backed by the Federal Housing Authority (FHA), but that product comes with an upfront mortgage insurance commitment equal to roughly 2.25% of the financed amount. It also includes a monthly fee. Similarly, active duty military and veterans who qualify for a VA loan may have to pay a VA funding fee. This may be up to 3.3% of the total loan amount.

Don’t get too frightened by these fees. Wounded warriors with a disability rating may be eligible to waive the VA funding fee. And while the FHA payments are non-negotiable, your lender may have options for reducing your out-of-pocket commitment to insurance premiums.

Negotiable closing costs

When negotiating a home sale, your lender will provide you with what’s called a Loan Estimate. The Loan Estimate tells you important details about the loan you have requested, including your interest rate, monthly payment, and total closing costs for the loan. It also includes a section illustrating "services you can shop for." So, if you don't like some of the fees you're seeing (survey fee, title search, pest inspection fee, etc.), choose another service provider. The service itself is required, but the person or business that's been identified by the lender can be replaced by someone you choose.

Other fees are either optional or unnecessary. Or, there’s wide discretion in how they get levied. Be vigilant in negotiating these closing costs on a home:

  • Origination fees because they’re entirely at the discretion of your lender, and designed to create a bit of profit padding in the event the total loan amount is too low to make writing the loan worthwhile.
  • Appraisal fees, which are technically mandatory. Why list it then? The price you pay for an appraisal is negotiable. Don’t let your lender stick you with a high-priced appraiser who charges a premium for a 15-minute walk-through. Also: ask for a copy of the appraisal. And ask if you can pay at closing time rather than upfront.
  • Home inspection fees because these sometimes get added in for refinancings but only apply to purchases. If you’re buying a pre-existing home, the buyer may choose not to pay for a home inspection and the seller may choose not to offer one.
  • Escrow is also optional if you’re getting a conventional mortgage. Just be careful. Choosing not to pay taxes and insurance monthly doesn’t remove the obligation of paying those fees. You’ll just have to pay them directly at the appropriate time of year.
  • Application fees because they’re another way lenders maneuver to get a little extra cash from every deal. And they’re probably making plenty of profit already.

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Seller paid closing costs

Seller paid closing costs, otherwise know as seller concessions, are paid toward the closing on your behalf. Seller concessions allow you to legally roll closing expenses into your home loan.

Say the home seller wants to net $300,000 on the sale of their home. Provided you have the down payment covered, are approved for a home loan, and the home appraises for a higher value, the seller may consider an offer of $305,000, allowing $5,000 to go toward the buyer's closing costs. This helps the buyer because they need $5,000 less at closing (instead, that amount is financed into their home loan). It helps the seller because they're still getting the dollar amount they want. Just be sure to follow lender and loan program guidelines. FHA loans allow sellers to contribute up to 6% toward closing costs; VA loans allow 4%, and conventional loans permit 3% to 6%.

Another approach to consider: negotiate with the seller to lower the price of the home. This helps the buyer by offsetting what's being paid in closing costs on a home. Though, there is no real benefit to the seller.

Weird closing costs you might have to pay if…

Sometimes you’ll pay fees for largely inexplicable reasons. Take real estate transfer taxes, which are usually (but not always) paid when a property changes hands and a new title issued. If you live in one of these 37 states or the District of Columbia, you may be on the hook for a transfer tax.

What you’ll pay varies on where you live. Here in Colorado, fees tend to max out under $200. But in Washington state, you could pay 1.28% of the sale price of your home plus local taxes. So, if you live in Seattle and sell a primary residence for $500,000, over $6,000 of your expected proceeds could find their way to the government instead. Sound maddening? You bet it is.

Remember the bottom line

Fees are inevitable; you’ll pay them wherever you live and whatever property you’re buying or selling. So, take time to enjoy the process! Burdening yourself with the stress of nitpicking every fee on your Closing Disclosure (the lender must supply this to you) can suck the joy out of home buying.

Pick your spots. Save as much as you can. And then focus on closing your loan and getting the keys. Because as soon as you go through that front door, who paid closing costs on a home won’t matter as much as closing the deal to get your dream home.