Closing is one of the most exciting parts of a home sale. The search is over, you’re excited to make your new house feel like home, and this is the last step. Closing refers to the part of a home sale when the ownership of the property changes hands, transferring the title of the home from the seller to the buyer.
As much as it can be an exciting time, closing can also be confusing or even intimidating. Getting everything in order involves a lot of paperwork and fees. It’s common for total closing costs, including title insurance and various fees associated with the purchase of a property, to add up to thousands of dollars.
It can be helpful to get clear on who typically pays for which closing costs early on in the home-buying process, so you’re prepared to cover your portion from the start.
Are You Required to Buy Title Insurance?
If you’re feeling anxious about how to pay for closing costs on a house, you may be wondering if any items on the long list of fees are optional.
The cost of title insurance is typically part of overall closing costs. There are two
types of title insurance policy: lender’s title insurance and owner’s title insurance. The lender’s policy protects the lender who issues the mortgage or other financing loan. The owner’s policy protects the new homeowner against any claims or title defects that may be discovered after they purchase their home.
Lender’s title insurance is typically required. If you’re getting a
mortgage to buy your home, you’re likely locked into buying a lender’s title insurance policy because your bank wants to ensure it’ll get its money back.
The owner’s title insurance policy is optional, but it’s still generally a wise purchase. Title insurance protects a homeowner against potential issues that may only be discovered after closing on the home. Liens, relatives of former owners who claim to have legal interest in the property, encumbrances or other issues could be costly—or even threaten your claim to your home. An owner’s title insurance policy generally costs somewhere from a few hundred dollars to $2,000 as a one-time premium charge, and the protection lasts for as long as you (and often your heirs) own the property.
Another point in favor of getting an owner’s title insurance policy is that often, the seller ultimately covers the cost. In many (although not all) standard agreements, the buyer’s escrow funds initially cover both the lender’s and owner’s policies, and the seller’s final settlement agreement includes covering the cost of the owner’s policy. Why does the seller buy title insurance for the owner? Here are a few possible reasons:
- As a show of good faith or to sweeten the deal
- To protect the buyer’s equity
- To ensure that if an issue comes up later, the buyer can resolve it through the title insurance company instead of contacting the seller or taking legal action to resolve a cloud on the title
Who pays for the owner’s title insurance policy can depend a lot on local customs in your state (or even the region in your state) and the current housing market, so having the seller cover this cost isn’t guaranteed, but it happens more often than you might think.
What Do Closing Costs Include?
Closing costs can make up about 2‒5 percent of the value of the home, so a $500,000 home could cost $10,000‒$25,000 in closing costs. A home purchase often
involves many more parties than the buyer and seller. Real estate agents, lenders, attorneys, inspectors, title insurance companies and others play a part in helping the sale go through smoothly.
Here’s what’s commonly included in closing costs:
- Attorney fees: Real estate attorneys ensure documents are legal and accurate, and will explain closing steps for you.
- Home appraisal and survey: Assesses the fair market value of the property, which can affect your property taxes.
- Home inspection: Buyers may set a contingency to proceed with a home purchase only if an inspection comes back clear of major issues or damage.
- Loan origination and escrow fees: Includes processing and underwriting the loan.
- Lenders’ service fees
- Credit report fees
- Title search: The title search investigates records on the property to make sure the seller has full legal rights to sell the property.
- Title insurance policies: Lenders typically require a lender’s policy, and it often makes sense for buyers to have an owner’s title insurance policy as well.
- Taxes: The seller often pays certain taxes, including prorated property taxes and possibly also a transfer tax.
The buyer usually pays most of these closing costs. Sometimes it’s possible to ask the seller to cover part of the costs (either as a percentage or a set dollar amount), but sellers are already responsible for a number of costs on their end, such as agent commissions, prorated property taxes, HOA fees and other expenses. Whether they’ll agree to take on some closing costs may come down to factors such as whether buyers or sellers have more leverage in your current housing market.
Escrow fees are often split evenly between the buyer and seller, although this may also be possible to negotiate depending on your circumstances.
How to Lower Closing Costs
Most closing costs and fees aren’t optional,
but that doesn’t mean there’s no room to lower costs. Here are some ways you could try to edge down your upfront payment.
- Compare costs: Get quotes from multiple lenders not only for mortgage rates but closing costs and service fees. Some lenders may match another lender’s closing costs.
- Find your own providers: If you find inspectors or companies who offer a title search at a lower rate than the provider listed on your loan agreement, see if it makes sense to go with an alternate provider.
- Review your loan estimate: If there are fees that seem unnecessary or appear to duplicate charges for overlapping services, negotiate with your lender to remove some of these charges.
- Negotiate with the seller: This may depend heavily on your housing market, but if you have some leverage, you may be able to ask the seller to skim a little off the sale price of the home or cover a portion of closing costs.
If you’re in the market for
a house, set aside some savings to put toward closing costs and title insurance. You can list which fees you’ll probably need to cover and estimate the cost range for your share. The more prepared you feel, the more smoothly you can navigate the closing process and have an easier move into a new home.