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: Most lenders require the buyer to have a credit report done to gauge the creditworthiness of the buyer. Typically, this fee is passed on to the buyer.

Loan Application and Origination Fees: At times, the buyer pays application and origination fees to secure a mortgage loan. These fees cover the cost of processing a loan application.

Home Inspection: Many buyers hire a professional to inspect the home to determine its condition. This inspection fee falls on the buyer and offers a written report on any concealed deficiencies or work that needs to be done.

Appraisal Fee: Appraisers are used by the lender to determine the value of the property. Buyers pay for the appraisal fee to ensure that the value of the property matches that of the purchase.

Home Inspection: To ensure that the property is in proper condition and correctly valued, buyers have the option of hiring a home inspector. 

These can be expensive, but they provide the buyer with a detailed report on any found defects and the fair market value of the home.

Land Survey

A land survey is done to determine the property’s boundaries and the presence of any encroachments or discrepancies. 

Prepaid Costs

Some buyer fees include prepaid costs for property taxes and the interest on the loan from the closing date to the end of the month.

Discount Points

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

Seller’s Closing Costs

Although  the financial burden of closing costs falls on the buyer, sellers are not totally exempt from closing costs.

Now let’s take a look at some of the closing costs that the sellers will be responsible for in a real estate transaction in Texas.

Required Documents from Homeowner Association:

The homeowner association financial statements or the association bylaws are some of the documents that sellers will have to request and provide the buyer. Cost of providing these documents is paid for by the seller. These are the HOA transfer fees.

Commission to Realtor/Broker: One of the most significant closing costs for the seller is usually the commission to their real estate agent or broker.

Commission is usually a percentage of the whole sales price and it is usually negotiable with the seller.  The commission amount is usually charged to the seller.

Title Company Fees: In Texas, the sellers are typically obligated to provide the buyer with a title insurance policy to ensure that the buyer has a clean title to the property.  The title insurance policy fees are typically charged to the seller.

The sellers may also be responsible for other title company fees, such as the title search and title examination fees.

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

Municipal Lien Searches: Prior to the closing, it is customary for the sellers in Texas to perform a municipal lien search.

The municipal lien search is to make sure that there are no outstanding liens or claims on the property that would interfere with the transfer of ownership.

 The sellers are usually responsible for the municipal lien search fees.

Home Warranty: The home warranty is a nice thing to give the buyer as an added benefit, although it is not mandatory.

Typically, the home warranty covers certain appliances and home systems in case these break down or fail within a set timeframe.

The costs of a home warranty should also be incorporated into a seller’s closing costs.

Other Miscellaneous Charges: Other closing costs for the seller may include attorney fees, documentary stamp taxes, notary fees, and any property taxes or assessments that are outstanding.

Prorated Property Taxes: The property taxes have to be prorated up to the date of closing between the buyer and seller. Up to the date of closing, the seller is liable for his share of the property taxes.

Reconveyance Charges: In Texas, it is common for the seller to have to pay the costs of the reconveyance or release of the 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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