The Ultimate Guide to Closing Costs in Texas: Who Pays

Last updated on November 10th, 2023 at 03:19 pm

1. 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. It’s important for both parties to understand these costs to avoid any surprises during the closing process on a house.

2. Buyer’s Closing Costs:

a. Title Insurance: Buyers typically pay for title insurance to protect their interests in the property. This insurance covers any potential issues with the property’s title, such as liens or ownership disputes.

b. 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.

c. 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.

d. 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.

3. Seller’s Closing Costs:

a. Real Estate Agent Commission: The seller typically pays the commission for both the buyer’s and seller’s real estate agents. This commission is a percentage of the final sale price and is negotiated between the seller and the agent.

b. Title Search and Insurance: Sellers are responsible for providing a clear title to the buyer. This involves conducting a title search and purchasing title insurance to protect the buyer from any potential title defects.

c. Transfer Fee: Homeowners associations (HOAs) in Texas often charge a transfer fee when a property changes ownership. Sellers are responsible for covering this fee unless otherwise negotiated.

d. Attorney Fee: Some sellers choose to hire an attorney to assist with the closing process. The attorney fee is typically the seller’s responsibility and covers legal representation and document preparation.

e. Recording and Survey Fees: The cost of recording the property deed with the county and obtaining a land survey may fall under the seller’s responsibility, depending on the terms of the purchase agreement.

4. Additional Costs:

a. Escrow Account: Buyers may need to establish an escrow account to cover property taxes and insurance premiums.

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. So, while we may not be able to turn back time to those cheaper closing costs, we can definitely help you navigate the process and make it less daunting.

Who is Responsible for Closing Costs in Texas

In the process of buying or selling a home in Texas, understanding who is responsible for covering the closing costs is crucial. Closing costs refer to the various fees and expenses that arise during the final stage of a real estate transaction. Let’s take a closer look at the breakdown of who typically pays for these costs in a Texas real estate deal.

1. Buyer’s Closing Costs:

Property Tax: The buyer is responsible for paying their portion of the property taxes, usually prorated based on the date of closing.

Title Company Fees: The buyer generally covers the fees associated with the title company, which conducts the title search, provides title insurance, and facilitates the closing process.

Mortgage-related Expenses: If the buyer is obtaining a mortgage loan, they will incur certain fees such as the loan application, credit report, appraisal, and loan origination fees. These expenses are typically paid by the buyer.

Attorney Fee: In some cases, buyers may choose to hire an attorney to review the legal aspects of the transaction. The attorney fee is the buyer’s responsibility.

2. Sellers Closing Costs:

Title Company Fees: Sellers may also be responsible for certain title company fees, such as the title search and the cost of preparing the deed.

Transfer Fee: If the property is located within a homeowners association (HOA), the seller might need to pay a transfer fee to the HOA for changing ownership.

Prorated Expenses: The seller is responsible for any expenses they accrued during their ownership of the property that has not yet been paid, such as property taxes or HOA fees.

It’s essential to note that closing costs can vary depending on the specifics of the real estate transaction, negotiations between the parties involved, and local market customs.

It’s common for buyers and sellers to negotiate and agree upon who will pay for certain closing costs, so the breakdown may not be rigid in every case.

How to Reduce Costs in Texas

When it comes to closing costs in a real estate transaction, buyers and sellers in Texas may find themselves faced with various expenses. However, there are strategies that can help reduce these costs and save money. In this section, we will explore several ways to minimize closing costs in Texas. 

1. Shop Around for the Best Mortgage Loan

Finding the right mortgage lender is crucial when trying to reduce closing costs. Different lenders have different fees and rates, so it’s important to shop around and compare offers. By obtaining multiple loan estimates and considering factors such as interest rates, origination fees, and discount points, buyers can choose the most cost-effective option that suits their needs.

2. Negotiate With the Seller

Buyers can negotiate with the seller to share or cover some of the closing costs. This can be achieved by including a provision in the purchase agreement that stipulates the seller’s contribution towards certain expenses or repairs. While there are limits on the amount sellers can contribute, this negotiation can provide significant savings for buyers.

3. Opt for a Cash Offer

Cash buyers have a distinct advantage when it comes to closing costs. When buyers use cash to purchase a property, they can avoid some of the fees associated with mortgage loans, such as origination fees, appraisal fees, and loan application fees. Additionally, cash buyers may have more negotiating power, as they are not contingent on securing financing.

4. Consider a Title Company or Attorney Fee Comparison

Title companies and attorneys play a crucial role in the closing process. Buyers have the option to choose either a title company or an attorney to handle their closing. It’s wise to compare fees and services offered by different providers to ensure you are getting the most competitive rate without compromising on quality.

5. Stay Informed About Homeowner’s Association (HOA) Fees

If the property you are purchasing is part of a homeowner’s association, it’s important to understand the associated fees. HOA fees can vary significantly, and they are often paid at closing. Being aware of these fees beforehand allows buyers to factor them into their budget and avoid any surprises during the closing process.

6. Request a Home Inspection in the Option Period 

While it may seem counterintuitive, a home inspection can actually help reduce closing costs. By conducting a thorough inspection during the option period, buyers can identify potential issues that might require costly repairs. With this knowledge, buyers can either negotiate with the seller to address these repairs

Other seller fees

Understanding these costs can help sellers navigate the financial aspect of selling a property more effectively. Here are the typical expenses that sellers are expected to bear in a Texas real estate transaction:

1. 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.

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

3. 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.

4. Outstanding Bills: Sellers should settle any outstanding bills related to the property, such as utility bills or HOA dues, before the house sale is finalized.

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

Other Buyer Closing Costs

Buyers should be aware of the various closing costs they may be responsible for. These expenses typically fall on the buyer’s side of the transaction and can vary depending on factors such as the purchase price and individual circumstances.

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.

Home Inspection and Appraisal

To ensure the property is in good condition and accurately valued, buyers often opt for a home inspection and appraisal. 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. While not always required, some lenders or buyers may choose to have a survey done, and the cost of the survey is typically paid for by the buyer.

Prepaid Costs

Buyers are also responsible for certain prepaid costs associated with the purchase. This may include prepaying property taxes, homeowners insurance premiums, 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.

It’s important for buyers to budget for these closing costs when planning their home purchase in Texas.

Shared Closing Costs in TX

In a real estate transaction in Texas, there are certain closing costs that are typically split between the buyer and seller. These shared costs help cover essential services and ensure a smooth transfer of ownership. Here are some of the common shared closing costs in Texas:

Escrow Fees

Escrow fees are charges associated with establishing an escrow account to hold funds and important documents throughout the closing process. This includes the fees for the services provided by the escrow agent or company.

Title Search and Title Insurance

A title search is conducted to verify the legal ownership of the property and to uncover any liens or claims against it. Title insurance protects both the buyer and seller in case any issues arise in the future regarding the property’s title.

Municipal Lien Search

A municipal lien search is performed to identify any outstanding debts or obligations on the property, such as unpaid taxes, utility bills, or fines. This ensures that the property is free from any encumbrances that could affect the transaction.

Prorated Property Taxes

Property taxes are typically prorated between the buyer and seller based on the time of the year when the transaction takes place. This ensures that each party pays their fair share of the property taxes for the portion of the year they owned the property.

Recording Fees

Recording fees are charges incurred for recording the new deed and other pertinent documents with the county clerk’s office. This process officially transfers the property ownership and ensures that the transaction is legally documented.

It’s important to note that the specific allocation of these shared closing costs can be negotiated between the buyer and seller during the transaction. However, it is generally customary for these costs to be divided based on local practices and customs in Texas.

How to Calculate Texas Closing Costs Example

Calculating closing costs in Texas can seem overwhelming, but with a step-by-step approach, you can get a clear understanding of the expenses involved. 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: It’s crucial to have a home inspection and appraisal to ensure the property’s condition and value. 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.

By adding up these expenses, you can estimate the total closing costs. However, it’s important to note that these figures are approximations, and actual costs may vary based on your specific transaction and location within Texas.

Final Thoughts

 By knowing the breakdown of these costs, you can make informed decisions and plan your finances accordingly. 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.