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Don’t Get Caught Off Guard: Who Pays Closing Costs for a First-Time Home Buying Journey?

closing costs first home

Have you finally found your dream home and are ready to make an offer? Before you do, you should consider one of the most significant financial aspects of buying a home: the closing costs. You and the seller pay these fees at the end of the transaction. It’s one of the things that usually catches first-time home buyers by surprise. Knowing the costs and when they’re required allows you to budget and avoid being caught off-guard. 

In this post, I will guide you through everything you need to know about closing costs regarding first-time home buying.

Introduction to First-Time Home Buying

Purchasing your first home is a significant investment and one of your most important decisions. As a first-time homebuyer, the process can be overwhelming, and there are many aspects to consider before making the final decision. One of the most crucial factors to consider is the closing costs.

What are Closing Costs?

Closing costs are the expenses the buyer and seller pay to third parties to help facilitate the home’s sale. These costs are paid at the closing. These expenses can include various fees, such as appraisal fees, title insurance fees, attorney fees, and more. The total cost of the closing fees can vary depending on the property’s purchase price and the home’s location.

The costs typically range from 2% to 5% of the home’s purchase price, with an average of $6,837 for an average single-family home (according to 2021 data). These costs vary based on several factors, such as the size of the home, the down payment amount, the type of loan, and what can be negotiated with the seller. 

It is important to note that closing costs differ from a down payment. A down payment is a percentage of the property’s purchase price paid upfront while closing costs are due at the closing.

Understanding Who Pays for Closing Costs

In most home sales, the buyer and seller are responsible for paying some closing costs. However, the specific breakdown of these fees can vary depending on the terms of the sale and your location. As a buyer, you typically pay for expenses such as:

  • The appraisal fee
  • The credit report fee
  • The title search fee
  • The title insurance fee
  • The attorney fee (if applicable)
  • The recording fee
  • The transfer tax (if applicable)

The seller, on the other hand, typically pays for:

  • The commission for their real estate agent
  • The transfer tax (if applicable)

What’s Included in Closing Costs?

Closing costs can vary depending on the home’s location and the property’s purchase price. To get a good idea, for single-family homes in 2021, the state with the highest average closing costs with taxes was the District of Columbia, with $29,888, and the state with the lowest average closing costs with taxes was Missouri, with $2,061. 

In the same year, the state with the highest average closing costs without taxes was New York, with $6,168, and the state with the lowest average closing costs without taxes was Indiana, with $2,200. The following are some of the common fees you incur for closing costs:

Appraisal Fee

You pay An appraisal fee to a licensed appraiser who evaluates the property’s value. This fee can vary depending on the home’s location, but it typically ranges from $300 to $500.

Credit Report Fee

You incur this fee for a credit bureau to provide your credit history and score. This fee ranges from $25 to $50.

Title Search Fee

You pay this fee to a title company that searches public records to verify the ownership of the property. You can expect to pay $300 to $600.

Attorney Fees

In some states, you require an attorney to be present at the closing. These fees vary depending on the lawyer’s billing rate but typically range from $500 to $1,500.

Transfer Taxes

The state or local government will charge a tax when the title to the property is transferred from one owner to another. The transfer taxes can vary depending on the property’s location, but they typically range from 0.01% to 4% of the purchase price.

Tips to Reduce Your Closing Costs

Closing costs can add up quickly and become a significant hurdle to finalizing your purchase. Fortunately, you can deploy some tactics to reduce your closing costs.

  1. Shop Around for Lenders

Shopping around for lenders is essential to managing your costs. Different lenders offer different fees, and comparing them can help you find the best deal. You can request a loan estimate form from each lender, showing you an itemized list of costs, including your loan amount, interest rate, and monthly payments.

  1. Negotiate with the Seller

Sometimes, the seller may be willing to pay some closing costs to close the deal. For example, you can ask the seller to cover the appraisal cost or some of the inspections. However, keep in mind that the seller is not obligated to pay any of the closing costs.  

  1. Ask the Lender for a Closing Cost Estimate

Before closing, ask your lender for a closing cost estimate. This estimate can help you understand what fees you will be responsible for and help you budget accordingly. You will want to know any rebates or credits that can lower closing costs.

  1. Negotiating Closing Costs with the Seller

Negotiating with the seller is an effective way to reduce your overall costs. However, this may come with some trade-offs. For example, if you ask the seller to pay some of your closing costs, they may ask you to increase your offer price or accept a higher interest rate. 

You may also need more room to negotiate other aspects of the sale, such as repairs or contingencies. Therefore, it is essential to weigh the trade-offs from the negotiations and decide what is best for your situation. You can also consult with your real estate agent or attorney to help in negotiations with the seller.

Programs That Can Help with Closing Costs

You can access federal, state, and local programs that help first-time homebuyers with closing costs. These programs vary depending on the state and the location of the home. The best-known of these programs are:

FHA Loans 

The Federal Housing Administration (FHA) offers loans with lower down payment requirements and can help with closing costs. The FHA allows sellers, builders, and lenders to pay some of the borrower’s closing costs, such as the appraisal, credit report, or title expenses.

VA Loans 

If you are a veteran or in active-duty military service, you can access a VA loan to help with closing costs. The VA limits the fees lenders can charge borrowers and allows sellers to pay all of a buyer’s mortgage-related closing costs and up to 4% of the purchase price in concessions.

USDA Loans 

USDA loans are available to low- and moderate-income borrowers in rural areas and can help with closing costs. The USDA allows sellers to pay up to 6% of the sales price toward the buyer’s reasonable closing costs.

HUD Programs 

The U.S. Department of Housing and Urban Development offers loans to help close costs, especially for first-time homebuyers and those with low-to-moderate incomes. Some of the HUD programs are:

  • Good Neighbor Next Door: You can get a 50% discount on HUD-owned homes, which are for eligible public servants, such as teachers, firefighters, and police officers. It allows buyers to finance their closing costs through their mortgage.
  • HOME Investment Partnerships Program: This program grants states and localities to fund various housing activities, including down payment and closing cost assistance for low-income homebuyers.
  • Community Development Block Grant Program: This program supports community development projects, including homeownership assistance for low- and moderate-income households.  

Common Mistakes to Avoid When Dealing with Closing Costs

Dealing with closing costs can be overwhelming, and there are several common mistakes that first-time homebuyers can make. Some of the most common mistakes include:

  1. Failing to Shop Around for Lenders

Failing to shop around for lenders can result in higher fees and closing costs.

  1. Not Negotiating with the Seller

Not negotiating with the seller can result in higher closing costs than necessary.

  1. Failing to Budget for Closing Costs

You must budget for closing costs to avoid leaving you in a financial bind.

Final Thoughts on First-Time Home Buying and Closing Costs

Closing costs don’t have to be a deal-breaker when buying a home. You can avoid surprises and make your first-time home-buying journey successful by understanding who pays for what and budgeting accordingly. You can also save on closing costs by shopping around for the best lenders, negotiating with the seller, and taking advantage of programs available to first-time homebuyers. 

The tips here will help you achieve your dream of home ownership. But don’t just take our word for it! See how easy and affordable it can be to buy your first home. 

Check out this Ultimate Home Buying Guide, the best course in town for first-time home buyers. You’ll get access to expert guidance, our homebuyer’s toolkit, and an industry insider brief. 

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