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Real Estate Closing Costs Explained

by Brandon Cornett

Real estate closing costs are fees that must be paid at a real estate closing (also known as "settlement"). The buyer pays for some closing costs, while the seller is responsible for others. Though real estate closings differ from state to state, there are certain costs that apply in most situations. Here is a guide to those closing costs:

Prior to your real estate closing, your mortgage lender should give you an itemized list of closing costs associated with your mortgage loan. This list is supposed to be all-inclusive, but sometimes it is not. Closing costs that are commonly "left out" of this list include: attorney fees (if any), tax adjustments, title insurance gratuity, oil adjustments, and other real estate closing adjustments.

If you receive a list of real estate closing costs with any of these items missing, ask your lender about them. Request a detailed list of ALL possible adjustments and fees you might incur during your real estate closing process.

Closing costs can be paid by the home buyer or seller, depending on what type of cost it is. For example, the seller usually pays a sales tax or conveyance tax. And in some cases, the seller might even pay some of the buyer's closing costs. When the seller pays closing costs on behalf of the buyer, it is known as a "seller's concession."

The Seller's Concession

A seller’s concession helps the buyers finance their closing costs. Basically, the closing costs are estimated in advance, and that amount is added to the sales price of the house. The seller then pays the closing costs of the buyer with these extra funds.

An Example of Seller's Concession
Let's say that the sale price of a particular home is $150,000. Let's further assume that the actual mortgage amount is $135,000, and the estimated closing costs are $6,000. In this scenario, a seller's concession might adjust the figures in the contract to a sale price of $156,000 and a mortgage of $141,000. So in essence, the extra $6,000 that the seller earns would be used to cover the buyer's closing costs. Of course, these kinds of details would need to be spelled out in the real estate contract.

Financing Closing Costs

Some mortgage lenders will allow home buyers to finance closing costs without having to use a seller’s concession. This is a good way for buyers to minimize their out-of-pocket expenses. If this idea appeals to you, talk to your lender about options for financing your closing costs. Just keep in mind that you will be paying interest on this higher loan amount.

The key to a successful real estate closing is to be informed and prepared. Maintain a list of anticipated closing costs, and compare it to the list provided by your mortgage lender prior to the real estate closing. Ask your lender if there are any other adjustments you should plan for, other than what's outlined in their list of closing costs.

Most lenders give accurate estimates for closing costs. But there are some lenders who do a less accurate job, and there's always the possibility for human error. Rather than accept the closing cost estimate at face value, dig deeper until you are confident the estimate you received encompasses all closing costs.

Related article: Who is Responsible for Closing Costs

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Brandon Cornett is the editor of Home Buying Institute.