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Buying or selling a home for the first time can be full of surprises. That’s because it’s not as simple as finding the house you’d like to purchase, or as the seller, finding an interested buyer.
One of the biggest surprises buyers and sellers face are closing costs. These are costs paid by the buyer and seller when the real estate transaction takes place.
What are closing costs?
Closing costs are fees that are paid at a real estate closing when the property title is transferred from the seller to the buyer. These costs are incurred by either the buyer or seller (or both) and vary widely based on where you live, the selling price, and the of mortgage loan you have.
What do closing costs cover?
Below is a list of typical buyer and seller closing fees paid in Texas. Keep in mind that some of these fees may vary or might even be avoided. For instance, if the buyer gets a no-closing-cost mortgage, or if the buyer negotiates with the seller to cover some of their closing fees.
Buyer Closing Costs:
- One-half of the escrow fee
- Lender’s title insurance policy premium
- Property taxes (prorated from closing date till the end of the year)
- Recording fees for all documents in buyers’ names
- Homeowner’s insurance premium for the first year
- Inspection fees
- All mortgage loan fees (except those required by the lender for seller to pay)
- Home Owner Association (HOA) transfer fee (depending on the contract, may be paid by seller)
Seller Closing Costs:
- One-half of the escrow fee
- Work orders
- Buyer’s title insurance premium
- Real estate agent commissions
- Any judgments, tax liens, etc. against the seller
- Home warranty (according to contact, but it’s typical for a Seller to pay toward one in Texas)
- Any unpaid HOA dues
- HOA Resale Disclosure fees and HOA transfer fee (according to contract)
- Any loan fees required by the buyer’s lender
- Recording charges to clear all documents of record against seller
- The payoff of loans in seller’s name (or existing loan balance being assumed by buyer), including interest accrued, re-conveyance fees, and pre-payment penalties
How are closing costs determined?
Closing costs are primarily determined by the home’s purchase price and the type of mortgage loan. In total, sellers can expect to pay about 8% of the closing costs, in which the most significant costs go towards title insurance and realtor commissions. Buyers can expect to pay about 2%, inclusive of the loan origination and financing fees, homeowners insurance, and prorated property taxes, on top of the other standard closing fees.
Some closing costs are negotiable between the buyer and seller, or negotiable between the buyer and lender.
Lenders are required to provide home buyers with a good faith estimate within three days of applying for a mortgage, so buyers know before the closing, what their costs will be. However, this is just an estimate, and some fees can increase up to 10% at the time of the closing.
How are property taxes prorated at the closing?
Just like Federal income taxes, property taxes in Texas are paid for the previous year. The entire tax bill is paid between October 1st of the tax year and January 31st of the following calendar year.
Therefore, if the closing takes place before October 1st, the seller would be charged from the beginning of the year through the closing date, and the buyer would be credited for the same period.
If the closing takes place after October 1st when official tax figures are released, title companies would charge the buyer and the seller their prorated tax amounts and pay the taxes directly on their behalf. This assures the title company that taxes have been paid when issuing the mortgage lender their title insurance policy.
How are HOA dues prorated at the closing?
HOA dues are typically paid at the beginning of the year and are prorated just like real estate taxes. The only difference is that HOA dues are a debit to the buyer and a credit to the seller, based on the closing date, assuming that the seller had already paid the dues for the full 12 months.
What are the title fees at a closing?
The Texas Department of Insurance (TDI) regulates title insurance premium rates, which are based on the property’s sale value. Therefore, Texas title agents must charge the same premium for all properties of equal value.
TDI provides a chart for determining title insurance basic premium rates, which includes the costs for title examination, closing fees, and issuing the policy. This premium is paid only once at the closing, usually by the seller on behalf of the buyer. If buying a new construction home, the buyer would likely pay for their owner’s policy instead of the builder.
Additionally, title agents may charge for tax certificates, escrow fees, recording fees, and delivery expenses, and these expenses can vary between agents.
The buyer usually pays for the cost of the loan policy issued to their mortgage lender. Loan policies cost less than owner’s policies, and both are one-time premium payments, which are made at the closing.
How do closing costs in Texas compare to other states?
According to a 2017 Bankrate.com survey of 10 lenders in each state, average closing costs for a $200,000 home with a 20% down payment in Texas were just under $2,200. More than half of the 50 states also had average closing costs that fell the $2,000 – $2,249 range for the same home price and down payment.
How can you estimate closing costs?
Buyers and sellers can use an online closing costs calculator to get an estimate of all the fees they’ll need to pay. Click here for an estimate on seller closing costs in Texas, and here for buyer closing costs.
What do sellers need to have for the closing?
Sellers will need to have the following to prepare for the closing:
- Proposed closing date
- Amount you owe in taxes for the year. If you don’t know yet, use last year’s amount as an estimate
- Amount of your HOA dues
- Balance due on your mortgage
- Amount of realtor commissions owed
- Who is paying the title insurance policy fee per the contract (it’s typically the seller in Texas)
- Cost of the home warranty, if applicable (usually paid by the seller)
Do FHA and VA loans have any additional or special closing costs?
If the buyer has an FHA loan, they’ll be required to pay the up-front mortgage insurance premium (UPMIP) of 1.75% of the base loan amount. They can also roll this into the cost of the loan if preferred.
If the buyer is using a VA loan, they may be required to pay a VA funding fee at closing or roll this fee into the cost of the loan. This fee is a percentage of the loan amount that the VA assesses to fund the VA home loan program. However, some borrowers may be exempt from this fee. The rate depends on the type of service and down payment amount.
Are closing costs tax deductible?
Some, but not all, closing costs are tax deductible, as long as you provide a list of itemized deductions on the 1040 form. According to the IRS, the following are deductible costs:
- Sales tax issued at closing
- Property taxes paid at closing
- Mortgage interest paid when cost was settled
- Real estate taxes that were paid for by the mortgage lender
- Prepaid Interest (interest accrued between closing and the date of the first mortgage payment) paid at the closing
- Loan origination fees (also referred to as “points”), which are written as a percentage of the borrowed money
What are the closing costs when refinancing?
How much you can expect to pay in closing costs when refinancing your existing mortgage is dependent on certain factors. For example, where you live, your credit rating, loan type, and how much equity you have in your home will all affect your closing costs. Generally speaking, you can expect to pay most of the same fees you did when you closed on your first mortgage — average closing costs when refinancing range from 3% to 6% of the loan amount.
How can I sell my home without having to pay any closing costs?
Want to sell your home and pay zero in closing costs? AMI can help. We can make you a cash offer on your home and cover all closing costs. A cash offer would allow you to sell your home quickly, pay no realtor commissions, title insurance, or any other closing fees, while also avoiding the time and hassles involved when trying to sell your home on the traditional real estate market.
Simply fill out this form to receive a no-obligation offer, regardless of what condition your home is in. If you accept our offer, we can close in 10 days or less.