Who is responsible for covering closing costs in Texas

What are Closing Costs

Closing costs are the fees and expenses associated with the purchase or sale of a home in the state of Texas.

These costs are paid by both the buyer and the seller and include various services and expenses related to the real estate transaction. 

Fun Fact from History: Did you know that back in the early 1900s, closing costs were a lot more affordable?

In fact, the average closing costs for a home purchase in the United States were only around 1-2% of the total purchase price. 

Fast forward to today, and closing costs have significantly increased.

In Texas, for example, the average closing costs usually range between 2-5% of the home’s purchase price. 

Closing Costs for Buyers

Credit Report Fee: Lenders often require a credit report to assess a buyer’s creditworthiness. The cost of obtaining this report is typically passed on to the buyer as a credit report fee.

Loan Application and Origination Fees: When obtaining a mortgage loan, buyers may be required to pay application and origination fees. These fees cover the administrative costs associated with processing the loan application.

Home Inspection: Buyers often hire a professional inspector to assess the condition of the property. This inspection fee is borne by the buyer and provides them with a comprehensive report on any potential issues or repairs needed.

Appraisal Fee: Lenders require a property appraisal to determine its market value. Buyers are responsible for paying this fee to ensure the property’s value aligns with the purchase price.

Home Inspection To ensure the property is in good condition and accurately valued, buyers often opt for a home inspection. These services come with a price tag, but they provide valuable insights into any potential issues with the property and its market value.

Land Survey

A land survey is performed to determine the property’s boundaries and identify any encroachments or discrepancies. 

Prepaid Costs

Buyers are also responsible for certain prepaid costs associated with the purchase. This may include prepaying property taxes, and interest on the loan from the closing date to the end of the month.

Discount Points

Buyers have the option to pay discount points, which can lower the interest rate on their mortgage. Each point typically costs 1% of the loan amount and can result in long-term savings on interest payments.

Seller’s Closing Costs

 While the buyer typically bears the majority of the financial burden when it comes to closing costs, sellers are not completely exempt from these expenses.

Let’s take a closer look at the closing costs sellers may encounter in a real estate transaction in Texas.

Homeowner Association Documents:

Sellers may need to obtain and provide necessary documents from their homeowner association, such as financial statements or association bylaws. The cost of acquiring these documents falls to the seller. These are called HOA transfer fees.

Real Estate Commission Fees: One of the most significant closing costs for sellers is usually the real estate commission fee.

Typically, sellers are responsible for paying the commission to their real estate agent or broker. The commission is usually a percentage of the total sales price and is negotiated between the seller and the agent.

Title Company Fees: In Texas, sellers are typically responsible for providing the title insurance policy to the buyer, which ensures that the buyer has a clear title to the property.  The costs associated with the title insurance policy are generally borne by the seller.

Additionally, the seller may also be responsible for other fees related to the title company, such as the title search and title examination fees.

Mortgage Payoff: Sellers must pay off their existing mortgage loan balance, including any accrued interest and early payment penalties.

Municipal Lien Searches: Before the closing takes place, it is common for sellers in Texas to conduct a municipal lien search.

This search ensures that there are no outstanding liens or claims on the property that may hinder the transfer of ownership. Sellers are typically responsible for the fees associated with the municipal lien search.

Home Warranty: While not mandatory, sellers in Texas may choose to provide a home warranty to the buyer as an added incentive.

This warranty generally covers certain appliances and home systems in the event of breakdowns or failures within a specified time frame.

Sellers should consider the cost of a home warranty when calculating their closing costs.

Other Miscellaneous Fees:  Apart from the aforementioned closing costs, sellers may also encounter other miscellaneous fees such as attorney fees, documentary stamp taxes, notary fees, and any outstanding taxes or assessments due on the property.

Prorated Property Taxes: Property taxes are prorated between the buyer and seller based on the closing date. Sellers are responsible for paying their portion of property taxes up until the closing date.

Reconveyance Fees: In Texas, the seller is generally responsible for any reconveyance or release fees associated with the property’s existing mortgage.

Typical Estimated Costs

Calculating closing costs in Texas can seem overwhelming.

Let’s take a hypothetical sales price of $300,000 and break down the various costs.

1. Loan Application and Origination Fees: These fees are charged by the lender to process your mortgage application and originate the loan.

They typically range from 0.5% to 1% of the loan amount, so for a $300,000 loan, you can expect to pay approximately $1,500 to $3,000.

2. Credit Report Fee: Lenders require a credit report to assess your creditworthiness. This fee usually ranges from $30 to $50.

3. Home Inspection and Appraisal: These costs can range from $300 to $600 for an inspection and $300 to $500 for an appraisal.

4. Land Survey: A land survey may be necessary to define property boundaries and confirm the absence of encroachments. The cost can vary but typically falls between $300 and $800.

5. Prepaid Costs: These include prepaid property taxes, homeowners insurance, and prepaid interest. The exact amounts depend on factors such as the closing date and annual tax rate. As an estimate, budget around $3,000 to cover these costs.

6. Title Insurance: Both the buyer and lender may require title insurance to protect against any potential issues with the property’s title.

Title insurance costs are based on the purchase price, but a general estimate is around $2,000 for a $300,000 property.

7. Discount Points: If you choose to pay discount points, you can lower your mortgage interest rate. Each point typically costs 1% of the loan amount. For instance, one discount point on a $300,000 loan would equal $3,000.

Seeking Professional Advice

Real estate transactions can be complex, with various fees and expenses involved.

It is recommended to consult with experts such as real estate agents, title companies, and attorneys who specialize in real estate law. 

The Role of a Real Estate Agent:

Real estate agents are highly knowledgeable professionals who can guide you through the entire home-buying process, including understanding closing costs.

They can provide insights on local market trends, negotiate on your behalf, and share their expertise on which costs are typically paid by buyers or sellers.

Importance of a Title Company:

A title company plays a vital role in validating the ownership of a property and conducting a title search to ensure there are no liens or encumbrances attached to it.

Getting title insurance from a reputable company is strongly recommended, as it protects both the buyer and the lender against any potential legal issues that may arise from the property’s ownership.

Legal Advice from an Attorney:

While it may not be required in all real estate transactions, consulting with a real estate attorney can give you added peace of mind.

An attorney can review legal documents, explain the terms and conditions, and ensure that your interests are protected throughout the closing process.

They can also provide insights on legal fees associated with the transaction, ensuring you have a clear understanding of any potential costs involved.

Final Thoughts

As a buyer, it’s essential to be prepared for the expenses associated with closing costs, such as appraisal fees, title fees, and lender fees.

By factoring these costs into your budget, you can avoid any surprises and ensure a smooth closing process.

For sellers, being aware of the closing costs you may be responsible for is equally important.

Expenses like real estate agent commissions, title insurance, and transfer taxes can impact your bottom line.

Knowing what to expect enables you to price your home appropriately and negotiate with prospective buyers confidently. 

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