Who Covers Closing Costs, Buyers or Sellers?

When a house is conveyed from one party to another, the buyer is not simply purchasing property. Buyers pay for borrowed money, legal representations and warranties, evaluation services and myriad inspections. In short, the conveyance is bigger than the house itself -- and more costly. Yet there are circumstances that would be appropriate for seller-paid fees. More than these, there are times when the seller needs to pick up some settlement charges just to make the deal work. Few things are etched in granite when it comes to who pays what. Still, there are some rules of thumb to observe.

Typical Closing Costs

While each transaction has unique aspects, certain closing costs are common to almost all of them. Some charges, such as appraisal and inspection fees, relate to the condition of the structure and property value. Others concern the land and its improvements: title insurance and searches; homeowners' and flood insurance premiums; and property taxes due and escrowed. Many line items on the settlement statement indicate lender costs. These include application and origination fees; prepaid interest (i.e. covering the period from the closing date to month's end); points discounting the rate; and any monies due to mortgage brokers. Mortgage insurance might also be paid up front.

Does the Buyer Pay All These Amounts?

Indeed, it would seem that most of these charges are for services to the purchaser. It is the buyer who needs a mortgage. The buyer, too, becomes the taxpayer and insurance customer. The purchaser must know that there are no outstanding liens attached to the property and that the chain of title runs clearly to the seller. Furthermore, the state of the property affects the new owner more than the previous one. On the face of it, the only closing fee applicable to the seller would be the realtor's commission.

Why Would the Seller Pay for Closing Costs?

Sometimes it is right and proper for the seller to cover some of the fees charged at settlement. On other occasions, it is simply expedient. If urgency reigns -- the seller already bought a new house with a mortgage -- covering some closing costs can move the sale to settlement faster. Should there be needed repairs that the seller does not want to make, assuming some of the closing expenses offsets the price the buyer will have to pay for rehabilitation or improvement. Even willingness to help with closing costs expands the number of interested buyers.

Are There Limits to Amounts Paid by Sellers?

Generally, the rules governing seller-paid costs are based on the lesser of the sales price or the appraised property value. The actual percentage depends on the loan type and down payment amount. For conventional loans, if the down payment is between 10 and 25 percent, the seller can advance six percent of costs. So, if a house sells for $310,000 -- with an appraised value of $325,000 -- a buyer who brings 11 percent to the table can receive up to $18,600 toward the costs of closing. Government-backed loans, e.g. FHA, VA and USDA, have their own parameters.

Are There Drawbacks when Sellers Pay?

For sellers, paying closing costs reduce -- often sharply -- the amount of proceeds taken from closing. From the buyer's perspective, while a concession is a relief at closing, it is often rolled into the mortgage amount, making monthly payments more expensive. In essence, seller-paid closing costs are a sort of bow to reality that is far from optimal. At the same time, they can keep deals from falling through.