Closing Costs Explained: Who Pays What in a Real Estate Transaction

On the buyer side, closing costs generally run 2–5% of the loan amount and cover a mix of lender fees and third-party service fees. Lender fees include loan origination, underwriting, and credit report charges. Third-party fees include the appraisal, title search, lender's title insurance, escrow or settlement fees, recording fees, and prepaid items like homeowner's insurance and property tax reserves. Prepaid interest — the interest that accrues between closing day and the end of the month — also shows up here and often surprises buyers who didn't know it existed. The exact mix varies by loan type: FHA loans carry an upfront mortgage insurance premium; VA loans have a funding fee (though many veterans are exempt); conventional loans may have PMI if the down payment is under 20%.

Sellers tend to have a shorter list but a bigger total number. The largest line item has historically been real estate commissions — though the post-NAR settlement landscape has made this more variable and negotiable than it used to be. Beyond commissions, sellers typically pay the owner's title insurance policy (in most markets), transfer taxes or excise taxes (which vary significantly by state and county), HOA transfer fees and resale certificate costs if applicable, any seller concessions negotiated in the contract, prorated property taxes, and any outstanding liens or judgments that need to be cleared before title transfers. In some markets, the seller also pays the escrow fee; in others it's split. Knowing your local custom matters — and so does reading the contract to confirm what's actually agreed to.

A seller concession is an agreement by the seller to credit the buyer a specified dollar amount toward their closing costs. It's written into the purchase agreement and reduces the seller's net proceeds at closing. Concessions are most common in buyer's markets or when a buyer is cash-constrained — they have enough for the down payment but are stretched thin on closing costs. For the seller, agreeing to a concession can mean the difference between a deal that closes and one that falls through. The catch: loan programs cap how much sellers can contribute. Conventional loans cap seller concessions at 3% of the purchase price when the down payment is under 10%, and up to 6% with a larger down payment. FHA and VA loans have their own limits. Always verify before writing the concession amount into the contract.

Buyers are entitled to a Loan Estimate from their lender within three business days of submitting a loan application — but by then, they may already be under contract. As the agent, you should be able to give a rough estimate early in the conversation. A ballpark: 2–3% of the purchase price is a reasonable starting estimate for buyers using conventional financing in most markets. Add another 0.5–1% if the buyer has an FHA or VA loan. For sellers, a rough estimate is total agent compensation plus 1–2% for taxes, title, and fees. These numbers are approximates. The actual Loan Estimate and closing disclosure will be more precise. Your job is to make sure your client isn't walking into closing with a number in their head that's $8,000 off reality.

Sometimes a buyer gets the Loan Estimate and the closing costs are higher than expected — or the seller can't cover a concession that would make the deal work. Here's what to look at: First, can the buyer roll costs into the rate by taking a slightly higher interest rate in exchange for lender credits? This is called a no-closing-cost loan and doesn't eliminate the costs — it just shifts who pays them. Second, can a seller concession be renegotiated? If the initial offer didn't include one and the buyer is short, it may be worth a conversation. Third, are any fees on the Loan Estimate out of line? Buyers have the right to shop for title and settlement services; sometimes switching providers saves meaningful money. Fourth, is there a down payment assistance program the buyer qualifies for that also covers closing costs? Local housing finance agencies often have programs that agents overlook.