Closing Costs: Who Pays and How to Reduce Them
- Phoenix S. Ayotte, Esq.
- Sep 24
- 8 min read
Congratulations! You made or accepted an offer for a property. You may have heard about "closing costs," but what are they, exactly? And how much more money will you need to shell out?
When purchasing or selling a home, the focus often rests on headline numbers: the listing price, the mortgage amount, or the down payment. However, another major component that significantly affects the final cost of a real estate transaction is often overlooked: closing costs. These are essential fees and expenses incurred to finalize the sale of a home. Both buyers and sellers encounter closing costs, but the division of these expenses and the opportunities to reduce them vary depending on the details of the transaction.
Understanding closing costs can empower buyers and sellers to negotiate better terms and budget more accurately. Typically included are lender fees, third-party service charges, prepaid items like taxes and insurance, and other miscellaneous fees that can collectively add thousands of dollars to the transaction. Fortunately, many of these fees are negotiable or can be minimized with careful planning and research.
What Are Closing Costs?
Closing costs are the fees and expenses paid to finalize a real estate transaction. They cover services like appraisals, title searches, insurance, and legal work. On average, buyers pay 2–6% of the home’s purchase price in closing costs, while sellers typically pay 1–5%, including agent commissions.
Both parties should review these costs early to avoid surprises. Below, we’ll dissect the major categories and explain who is usually responsible for each.
Closing Costs Breakdown
Closing costs can be broadly categorized into three main areas: lender fees, third-party fees, and prepaid items. Let’s explore each category in detail to understand what makes up these costs.
Lender Fees
Lender fees are the charges imposed by your mortgage lender for processing and underwriting your loan. These fees can include:
Origination Fees: This fee compensates the lender for setting up the loan. It often ranges from 0.5% to 1% of the loan amount and can vary based on the lender and the complexity of the loan.
Underwriting Fees: Underwriting involves the detailed review of your financial information to assess your ability to repay the loan. This fee covers the cost of this thorough evaluation.
Credit Report Fees: Lenders charge this fee to pull your credit report, which is essential for assessing your creditworthiness and determining loan terms.
These lender fees can differ significantly between providers, making it crucial to compare multiple lenders to find the most favorable rates and terms.
**Note, if you are taking out a loan to finance your purchase, many of the closing costs are wrapped into the loan and become part of your monthly mortgage payment. However, you usually still have to bring some liquid funds to closing. This is called your "cash to close." You need a good estimate from your lender and title company—at the beginning of your transaction—so you can prepare these funds. However, you will NOT know the final number until right before your closing date—so stay flexible.
Third-Party Fees and Transaction Taxes
Third-party fees cover services provided by professionals outside of your mortgage lender. These can include:
Appraisal Fees: An appraisal, often costing between $300 to $600, is required by lenders to ensure the home’s value matches the loan amount.
Title Insurance: Title insurance protects against potential ownership disputes. Lender’s title insurance is required, and buyers are advised to also secure owner’s title insurance for their own protection.
Escrow/Settlement Fees: The settlement agent (usually a title company or law firm) manages the transfer of funds and drafting/recordation of documents, ensuring both parties meet their obligations in order to finalize the transaction. Fees which are commonly noted on the settlement statement are:
Title Search and Examination
Commitment/Binder/Policy preparation and compliance
Closing Protection Letters (lender requires these)
Legal document review/drafting fees
Shipping/recordation/notary fees
Survey Fees: In some states, a property survey is necessary to confirm property boundaries, which can cost anywhere from $350 to $1,000
Transfer and Recordation Taxes: The government taxes every conveyance of real property- hey, the land records department has to be paid somehow! You will see recording taxes, transfer taxes, and some jurisdiction-specific taxes on your settlement statement - all based upon the value of your transaction (sales price.)
SOME of the above taxes and fees can be negotiated or reduced by shopping around for service providers instead of defaulting to the lender's or seller’s preferred choices. This means, compare quotes from multiple title companies and lenders. Regarding the taxes, don't bother- they aren't budging.
Prepaid Items
Prepaid items are future expenses that must be paid up front at closing. These include:
Property Taxes: Buyers typically prepay property taxes from the closing date to the end of the current tax period.
Homeowners Insurance: Lenders generally require buyers to pay the first year's premium at closing to ensure coverage is in place immediately.
Mortgage Insurance: Buyers who put less than 20% down may need to prepay private mortgage insurance (PMI), which protects the lender in case of default.
HOA/Condo Association Dues: A buyer will need to pay in advance for HOA/Condo Association dues, if required by the seller and/or the Association. Most associations also have an initial contribution fee, a move-in fee, a document prep fee, or more.
Prepaid Interest: Interest that accrues between the closing date and the first mortgage payment is paid upfront.
Who Pays What?
The division of closing costs varies by transaction, but generally:
Buyers cover lender fees, appraisal fees, prepaid taxes, insurance, title searches, and more.
Sellers typically pay real estate agent commissions, transfer taxes, and sometimes owner’s title insurance, depending on state customs.
Shared Costs may include attorney fees, escrow charges, and HOA transfer fees.
Negotiation Strategies to Lower Closing Costs
Closing costs can be negotiated and, in some cases, significantly reduced if buyers and sellers employ strategic approaches.
Seller Concessions and Loan Type Limits
A primary strategy for reducing closing costs is negotiating seller concessions. Seller concessions occur when the seller agrees to pay for some of the buyer’s closing costs to facilitate the sale. However, the allowable amount varies based on the type of loan:
Conventional Loans: Seller concessions can cover up to 3% of the loan amount if the buyer makes a down payment of less than 10%. This increases to 6% for down payments between 10% to 24.99%, and up to 9% for down payments of 25% or more.
FHA Loans: Sellers can contribute up to 6% of the home’s price.
VA Loans: Seller concessions can cover up to 4% of the loan amount, in addition to specific costs like the VA funding fee.
Being aware of these limits allows buyers to negotiate within the allowable range and maximize the seller's contribution.
Identifying and Challenging Unnecessary or Inflated Fees
Not all fees are set in stone. Buyers can often reduce costs by:
Reviewing the Loan Estimate: This document, provided by the lender within three days of the loan application, offers a detailed breakdown of fees. Buyers should scrutinize this for any questionable charges.
Shopping for Third-Party Services: Services like title insurance, inspections, and escrow can often be sourced independently at lower rates.
Questioning Excessive Lender Fees: Some lenders add extra charges that can be challenged or negotiated.
Timing the Closing: Closing near the end of the month can reduce the prepaid interest required, resulting in significant savings.
By actively reviewing and negotiating these fees, buyers can potentially save hundreds or even thousands of dollars.
State-Specific Closing Cost Variations
Closing costs and the associated processes vary significantly across different states, influenced by local customs and legal requirements.
Attorney States vs. Escrow States
Attorney States: In attorney states, it is legally required for a real estate attorney to be involved in the transaction. These attorneys oversee the entire process, draft and review all closing documents, and often manage the disbursement of funds. States like New York, South Carolina, and parts of Maryland operate under this model. In these states, attorney involvement ensures a higher level of legal scrutiny but can also lead to higher closing costs due to legal fees.
Escrow States: In escrow states, the closing process is typically managed by a neutral third party, such as an escrow agent or title company. This agent handles all documentation, funds, and the transfer of ownership without requiring direct attorney involvement. States like California, Arizona, and Virginia generally follow this model, offering a more streamlined and often less costly closing process.
Knowing whether your state is an attorney or escrow state can help you budget for the appropriate professional fees.
Customary Cost Splits by State
Every state has its own customs regarding who pays specific closing costs. For example:
Washington, D.C.: In D.C., buyers typically pay for the majority of the closing costs, including lender fees, title insurance (both lender's and owner's policies), and recordation taxes. Sellers generally cover the cost of transfer taxes, real estate agent commissions, and their own legal fees if applicable.
Maryland: Buyers in Maryland customarily pay for the lender’s title insurance, their own legal representation, and recordation taxes. Sellers usually pay the transfer taxes and the real estate agent commissions. In some counties, the division of transfer and recordation taxes may vary, but it is often split equally between both parties unless negotiated otherwise.
Virginia: In Virginia, buyers are responsible for lender fees, title insurance, recordation taxes, and closing fees charged by the settlement agent. Sellers typically pay for deed preparation, grantor taxes, and real estate agent commissions. Virginia is also known for its more flexible negotiation space when it comes to splitting closing costs.
How to Prepare for Closing Costs
Get a Loan Estimate Early – Lenders must provide this within three days of application.
Get a quote from the settlement agent for the additional closing fees from their end.
Review the Closing Disclosure – Compare it to the Loan Estimate for discrepancies.
Consult a Real Estate Attorney – Especially in complex transactions or high-risk markets.
Budget for Additional Fees – Some costs (like HOA transfers) may arise at the last minute.
Final Tips for Managing Closing Costs
Managing closing costs effectively requires preparation and awareness. Here are additional strategies to keep in mind:
Compare Multiple Lenders: Lender fees can vary widely. By requesting loan estimates from several lenders, you can compare interest rates, origination fees, and closing costs to find the best deal.
Look for Assistance Programs: First-time homebuyers and low-to-moderate income buyers may qualify for local, state, or federal programs that offer grants or low-interest loans to cover closing costs.
Negotiate Realtor Commissions: Sellers can sometimes negotiate lower real estate agent commissions, especially in high-value transactions.
Request Closing Cost Credits: Buyers can ask sellers to offer closing cost credits, particularly if the home inspection reveals issues that need repair.
Being proactive in these areas can lead to significant cost savings and smoother transactions.
Plan Ahead and Negotiate
Closing costs are an unavoidable part of real estate transactions, but with the right knowledge and strategies, they can be managed and even reduced. Whether you are a buyer or a seller, understanding the breakdown of closing costs, who typically pays for each item, and how to negotiate effectively can lead to substantial financial benefits.
By comparing lenders, shopping for third-party services, understanding state-specific requirements, and exploring assistance programs, you can better control your out-of-pocket expenses. Informed preparation is key to minimizing surprises and ensuring a successful, cost-effective closing process.
Need Expert Guidance?
If you’re in Virginia, Maryland, or Washington, D.C. (DMV) and need a lawyer to guide you through your real estate closing, Phoenix S. Ayotte, Esq. of Future Counsel is here to help! We don’t just review documents—we assist with every step of the closing process to ensure your transaction is smooth, your costs are transparent, and your interests are fully protected. Whether you’re buying your first home or managing a complex sale, we’ll provide clear, personalized guidance from start to finish.
