Who Pays Closing Costs for a Real Estate Transaction in 2023?

Published on July 8th, 2023

Navigating the world of real estate transactions can be overwhelming, especially when it comes to the financial aspects. One of the most important elements to understand is closing costs, as they can significantly impact both buyers and sellers. In this blog post, we’ll shed light on who pays closing costs and how they are divided in a real estate transaction in 2023.

We’ll provide a comprehensive overview of the different types of closing costs, factors affecting them, and the typical share of closing costs for both buyers and sellers. Additionally, we’ll discuss strategies for negotiating closing costs and explore various closing cost assistance programs. By the end of this blog post, you’ll have a solid understanding of closing costs and how they affect your bottom line in a real estate transaction.

Takeaways For Closing Cost

• Closing costs are fees and expenses associated with a real estate transaction, which can be split between buyers and sellers.

• As a buyer, you may expect to cover 2-5% of the home’s purchase price in closing costs. As a seller up to 6%.

• Negotiating closing costs offers strategies for buyers & sellers such as seller concessions & shopping around for lenders.



Closing Costs, What are They?

Closing costs are additional fees and expenses involved in a real estate transaction, typically paid by both buyers and sellers. They are a critical aspect of any property purchase or sale, as they can amount to a significant portion of the transaction value. Understanding the average closing costs, including seller closing costs, can help both parties better prepare for the financial aspects of the transaction, including how to cover closing costs. Sellers usually have to pay closing costs between 6-10% of the total price of the house at closing, while buyers pay slightly less, typically between 2-5%. In some cases, one party pays closing costs for the other as part of the negotiation process.

These costs are necessary for various parties involved in the transaction, such as the mortgage company, real estate agent, attorney, and local government. They can include loan fees, appraisal fees, title insurance, and property taxes.



It’s important to be aware of closing costs and their impact on your finances, whether you’re a buyer or a seller. Being well-informed about these costs can help you negotiate a more favorable deal and avoid surprises at the closing table.

Types of Closing Costs

There are several types of closing costs that buyers and sellers may encounter during a real estate transaction. Loan fees, for example, can include credit reporting fees, pest inspection fees, and title insurance. Appraisal fees are charged for evaluating a property’s market value, which is essential for determining the appropriate loan amount.

Title insurance is another crucial closing cost, as it protects the buyer and lender against potential legal claims from previous property owners. There are two types of title insurance: lender’s title insurance, which safeguards the lender from any loss due to title claims, and owner’s title insurance, which protects the buyer.

In addition to these, property taxes can also be a significant component of closing costs, especially for buyers closing at the beginning of the year in states with high property taxes.

Factors Affecting Closing Costs

Closing costs can vary depending on several factors. The purchase price of the property is one of the primary determinants, as it directly affects the amount of taxes, insurance premiums, and other fees. The type of loan also plays a role, as different loans have unique costs and requirements. For example, an FHA loan may have an upfront mortgage insurance premium, while a conventional loan may not.

The geographic location of the property is another factor that can impact closing costs. Local property taxes and transfer taxes can vary significantly from one area to another. Additionally, some costs are negotiable, such as:

• Transfer tax
• Title insurance
• Property tax
• Escrow fees

Being aware of these factors can help you better understand and anticipate the closing costs associated with your specific real estate transaction.

As a buyer, you’re typically responsible for covering 2-5% of the home’s purchase price in closing costs. These costs can be divided into two main categories: loan-related costs and insurance and property expenses.

It’s essential to understand these costs and be prepared for them, as they can have a significant impact on your bottom line.

Loan-Related Costs

Loan-related costs are fees and charges associated with obtaining a mortgage. One of the most common loan-related costs is the origination fee, which is charged by the lender for administering the loan. Another loan-related cost is the discount points, which are fees paid to the lender to lower the interest rate of the loan. Paying discount points can result in a lower monthly mortgage payment, but it also increases your upfront costs.

Additionally, there are credit reporting fees, which are charged by the lender to obtain a credit report. This report is used to assess your creditworthiness and determine the loan terms and interest rate you qualify for. It’s crucial to be aware of these loan-related costs and factor them into your budget when preparing for your real estate transaction.

Insurance and Property Expenses

Insurance and property expenses are another component of the buyer’s share of closing costs. These expenses include homeowners insurance, which is a policy that protects you and the lender in case of damage to the property. Homeowners insurance is typically required by lenders and can vary in cost depending on the property’s location, size, and other factors.

Title insurance is another insurance cost that buyers need to cover. As mentioned earlier, it protects both the buyer and the lender against potential legal claims from previous property owners. Property taxes are also part of the buyer’s closing costs, as they are usually prorated based on the closing date and the local tax rate.

Being aware of these insurance and property expenses can help you budget appropriately and avoid surprises when it’s time to close on your new home.

The Seller's Share of Closing Costs

As a seller, you can expect to pay around 5-6% of the home’s purchase price in closing costs. These costs mainly consist of:

• Real estate agent commissions
• Transfer taxes
• Title fees
• Escrow fees

It’s essential to consider these costs when pricing your property and planning your real estate transaction.

Real Estate Agent Commissions

One of the most significant closing costs for sellers is the real estate agent commission. This commission is typically around 6% of the sales price and is split between the buyer’s and the seller’s agents. For example, if you sell your home for $500,000, you might pay a total commission of $30,000, with $15,000 going to your agent and $15,000 to the buyer’s agent.

Real estate agent commissions can be negotiable, but keep in mind that lowering the commission may result in less interest from buyer’s agents, as they may prioritize showing properties with higher commissions. It’s essential to weigh the potential savings against the potential impact on your property’s exposure and sale price.

Other Seller Costs

In addition to real estate agent commissions, sellers may also be responsible for other closing costs. These can include transfer taxes, which are taxes imposed by state or local government upon the transfer of property from one owner to another. Transfer taxes can vary widely depending on the location and value of your property.

Title fees are another potential seller’s cost, as they cover the charges incurred by the title company for the preparation and recording of the deed and other documents associated with the property transfer. Escrow fees are also possible, as they cover the cost of the escrow company’s services in facilitating the closing process.

It’s crucial to be aware of these additional costs and factor them into your overall financial planning for your real estate transaction.

Negotiating Closing Costs: Strategies for Buyers and Sellers

Both buyers and sellers can employ various strategies to negotiate closing costs, potentially saving thousands of dollars in the process. These strategies include seller concessions and shopping around for lenders, which can help reduce the burden of closing costs for both parties. By understanding these tactics and knowing when to use them, you can maximize your savings and make the most of your real estate transaction.

Seller concessions, for example, can help buyers reduce their closing costs by having the seller cover some expenses, such as:

• Property taxes
• Attorney fees
• Appraisal inspections
• Mortgage discount points

On the other hand, shopping around for lenders can help buyers find lower closing costs and better loan terms by comparing offers from different lenders. Both of these strategies can lead to significant savings, but it’s essential to approach them with a clear understanding of the market and your negotiation leverage.

Seller Concessions

Seller concessions can be an effective way for buyers to reduce their closing costs. These concessions involve the seller agreeing to cover certain expenses, such as:

• Property taxes
• Attorney fees
• Appraisal inspections
• Mortgage discount points

In exchange, the buyer may offer a higher purchase price or agree to other terms that are favorable to the seller.

It’s essential to approach seller concessions strategically, as they can impact the appraisal process and the overall transaction. To request and obtain a seller concession, it’s helpful to have your real estate agent research recent sales of comparable properties that have included seller concessions. This information can help you determine how much of a concession to request and increase the likelihood of a successful negotiation.

Shopping Around for Lenders

Another strategy for reducing closing costs is shopping around for lenders. By requesting quotes from multiple lenders, buyers can compare the closing costs and loan terms each lender offers. This comparison can help buyers identify the most favorable loan terms and potentially save thousands of dollars in the long run.

To shop around for lenders effectively, buyers should gather quotes from at least three different lenders and analyze the loan estimates they receive. This analysis should include comparing interest rates, closing costs, and other loan terms and conditions. By taking the time to research and compare different lenders, buyers can potentially save money on their closing costs and secure a mortgage with the best possible terms for their financial situation.



Closing Cost Assistance Programs

For buyers who need help covering their upfront closing costs, closing cost assistance programs can provide much-needed financial aid. These programs come in various forms, including down payment assistance programs and gift money rules and guidelines.

By understanding and utilizing these programs, buyers can potentially save thousands of dollars on their closing costs and make homeownership more attainable.

Down Payment Assistance Programs

Down payment assistance programs are designed to help buyers with their closing costs and down payment expenses. These programs typically offer repayable loans or deferred-payment junior loans, which can provide financial aid in the form of grants, loans, or tax incentives. Generally, down payment assistance programs are reserved for first-time homebuyers who meet specific income and credit requirements.

By taking advantage of down payment assistance programs, buyers can significantly reduce their upfront costs and make homeownership more achievable. It’s essential to research and apply for these programs early in the home buying process, as they often have limited funding and can be competitive.

To find a suitable down payment assistance program, buyers should consult with their real estate agent, lender, or local housing agency.



Gift Money Rules and Guidelines

Gift money can be another valuable source of closing cost assistance for buyers. This type of financial aid involves the buyer receiving a sum of money from family or loved ones, which can be used to cover the down payment and closing costs. However, there are specific rules and guidelines that must be followed when using gift money for a real estate transaction.

For example, the money must be a genuine gift and not a loan that the buyer is expected to repay. Additionally, proper documentation is required to prove the source of the funds and the donor’s relationship to the buyer.

By understanding and adhering to these rules and guidelines, buyers can successfully use gift money to reduce their closing costs and achieve homeownership more affordably.

Closing costs can vary depending on the type of loan you choose. For example, FHA loans typically require an upfront mortgage insurance premium (UFMIP), while VA loans necessitate funding fees at closing.

It’s essential to understand the closing costs associated with your specific loan type, as this can help you plan and budget for your real estate transaction more effectively.

FHA Loans and Upfront Mortgage Insurance Premiums

FHA loans, which are insured by the Federal Housing Administration, require an upfront mortgage insurance premium (UFMIP) to be paid at closing, as opposed to private mortgage insurance. This premium is calculated as 1.75% of the base loan amount and can be paid in cash or rolled into the loan amount. For example, if you’re borrowing $100,000 for an FHA loan, your UFMIP would amount to $1,750.



It’s important to remember that the UFMIP is in addition to your other closing costs, so be sure to factor this expense into your budget when considering an FHA loan. While these loans can be more accessible for borrowers with lower credit scores or smaller down payments, they also come with additional costs that should be taken into account.

VA Loans and Funding Fees

VA loans, which are backed by the Department of Veterans Affairs, require a one-time funding fee to be paid at closing. This fee, which is a percentage of the loan amount, varies depending on the borrower’s military status, down payment, and whether it’s their first VA loan or a subsequent one. For first-time homebuyers, the funding fee typically amounts to 2.3% of the loan amount, while for those who have previously obtained a VA loan, it’s 3.6%.

The good news is that the funding fee can be rolled into the loan amount, meaning you don’t have to pay it upfront at closing. This can help reduce your out-of-pocket expenses, but it’s essential to consider the long-term impact of adding this fee to your loan balance and how it might affect your monthly payments and overall loan cost.

In conclusion, closing costs are an essential aspect of real estate transactions that both buyers and sellers need to understand and plan for. These costs can vary depending on the type of loan, property location, and other factors. By understanding the different types of closing costs, negotiating strategies, and assistance programs available, you can better navigate the financial aspects of your real estate transaction and make well-informed decisions.

Whether you’re a first-time homebuyer or an experienced seller, being prepared for closing costs is crucial for a successful real estate transaction. Keep these insights in mind as you embark on your home buying or selling journey, and you’ll be better equipped to navigate the financial complexities of the real estate world in 2023.



Frequently Asked Questions

Who pays most of the closing costs?

Buyers typically pay between 2 and 5 percent of the home’s purchase price in closing costs, whereas sellers usually pay 6 to 10 percent of the home’s sale price.

As such, buyers are generally responsible for the majority of the closing costs.

Are the sellers likely to pay closing costs?

Seller closing costs are typically 6-10% of the home’s sale price, while buyers typically pay 2-5%. Sellers usually cover their end of local taxes and municipal fees, however buyers typically pay these out of pocket.

Therefore, it is likely that sellers will have to pay closing costs.

What are some common loan-related closing costs?

Common loan-related closing costs include origination fees, discount points, and credit reporting fees.

How can I negotiate closing costs as a buyer?

Negotiating closing costs as a buyer can be done by requesting seller concessions or comparing lenders to find the best terms and rates.

By asking for seller concessions, buyers can reduce the amount of money they need to bring to the closing table. This can be done by asking the seller to pay for certain closing costs, such as title insurance or transfer costs.

What are seller concessions and how can they help me save on closing costs?

Seller concessions can be a great way to reduce your closing costs, as the seller may agree to cover property taxes, attorney fees, and appraisal inspections.

These concessions can be a great way to make the purchase of a home more affordable, as they can reduce the amount of money you need to bring to the closing table.