Who is responsible for covering closing costs in Texas

What are Closing Costs

Closing costs are fees and expenses that a home buyer or seller of the house has to incur while buying or selling a home in Texas.

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

Fun Fact from History: Remember, back in the early 1900s, closing costs were way less expensive.

In fact, across the United States, the average closing costs for a home purchase were only about 1-2% of the overall purchase price.

Fast forward to today, and closing costs have dramatically risen.

For example, in Texas, the average closing costs typically run between 2-5% of the home’s purchase price.

Closing Costs Buyers typically pay

Credit Report Fee: Most lenders require that a credit report be prepared to assess the creditworthiness of the buyer. These fees are usually passed on to the buyer.

Loan Application and Origination Fees: Sometimes, a buyer pays application and origination fees for availing himself of a mortgage loan.

These fees provide for the expense of processing a loan application.

Home Inspection: Many buyers will hire an independent inspection of the home to assess its condition.

This is typically paid for by the buyer and delivers a written report regarding any latent deficiencies or work that should be done.

The lender hires an appraiser who gives an estimated value of the property.

The appraisal fee is paid by the buyer, but it works to protect him/her by ensuring that the value of the property is the same as that of the purchase.

Home Inspection: The buyer contracts a home inspector to investigate the condition of the property and ensure correct valuation.

These can be very expensive but do give the buyer a detailed report about any defects that may have been found that need repair,  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.

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 buyer. These are the HOA transfer fees.

Closing Costs Seller’s normally pay 

The seller, however, does not get off scot-free either, even though the closing costs are to be borne by the buyer.

Now, let’s review some of the common closing costs that sellers will have to pay in an average Texas real estate transaction.

Realtor/Broker Commission: The most important of the closing costs to be incurred by the seller is the commission payable to his real estate agent/broker.

Commission is almost always a percentage of the entire sales price and it is normally negotiable with the seller.

The commission amount is almost always 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 the buyer has a clean title to the property.

The title insurance policy fees are typically charged to the seller.

Other seller-paid title company fees include the title search fee and the title examination fee.

Mortgage Payoff: The seller will be required to pay off the principal outstanding mortgage loan amount, along with the accrued interest and penalties for early payment.

Municipal Lien Searches: Sellers typically obtain a municipal lien search before closing in Texas.

This is done so that the ownership of the property being transferred does not have any outstanding liens or claims on the same.

The municipal lien search fee is usually paid by the sellers.

Home Warranty: This is a nice thing to present to the buyer as an added value to purchasing the home, although it is not necessary.

A home warranty typically covers certain appliances and home systems in case these break down or fail within a certain period of time.

The costs of a home warranty should also be factored 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 which are outstanding.

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

Reconveyance Charges: Typically, in Texas, the seller will be obligated to pay the costs of the reconveyance or release of the existing mortgage.

Typical Estimated Costs
Figuring the closing costs in Texas may be overwhelming.

Let’s assume a sale price of $300,000 to give a general breakdown of the various costs.

1. Loan application and origination fees: These are fees associated with processing your mortgage loan application and originating the loan.

They generally amount to 0.5 percent to 1 percent of the money loaned to you, so on a $300,000 loan, you would pay approximately $1,500 to $3,000.

2. Credit Report Fee: One will charge you for a credit report, which the lender requires while verifying your creditworthiness. It is generally in the range of $30 to $50.

3. Home Inspection and Appraisal: Both these range from $300 to $600 for an inspection and $300 to $500 for an appraisal.

4. Land Survey: This may be required to demarcate the property lines and ascertain that there are no encroachments. This cost varies, although it is usually within the $300 to $800 range.

5. Prepaid Costs: These are prepaid property taxes, homeowners insurance, and prepaid interest.

The amounts are decided by the closing date and annual tax rate. A rough estimate to include in your budget would be $3,000.

6. Title Insurance: Both the buyer and lender may need title insurance to protect against any possible problems with the property’s title.

The cost of title insurance is based on the purchase price, although it will probably be approximately $2,000 for a $300,000 property.

7. Discount Points: You can buy discount points to reduce your mortgage interest rate.

Typically, one point is equivalent to 1% of your loan amount. In this case, one discount point on a $300,000 loan would be $3,000.

Consulting a Professional
Real estate transactions can become an awful lot complicated with a host of fees and other expenses.

So, it is desirable to seek the help of professionals such as real estate agents, title companies, and attorneys specializing in real estate law.

Real Estate Agent’s Job:
Real estate agents are knowledgeable professionals who can guide you through the whole process of buying a home, as well as understanding closing costs.

They can also provide you with local market trends, negotiate on your behalf, and give you their experience about which costs a buyer or seller is normally responsible for.

Why You Will Need a Title Company:
One of the very important roles that a title company will play is verifying the ownership of a property and conducting a title search to ensure no liens or encumbrances are attached against it.

Title insurance from a reputable company is highly recommended. This will help safeguard the buyer and the lender from potential legal hassles related to the ownership of the property.

Consulting an Attorney for Legal Advice:
A real estate attorney need not be contacted in all transactions of a real estate deal, but they can certainly give peace of mind.

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

They can further advise on legal fees that may be attached to the transaction so that you will know any possible fees which may be involved.

Final Thoughts

As a buyer or cash investor, 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 in, you avoid any surprises and ensure a smooth closing process.

For sellers, it’s equally important to know which closing costs you could be responsible for.

Things like real estate agent commissions, title insurance, and transfer taxes can add up and lower your profit.

You’re able to appropriately price your home, then, and have confidence in your negotiations with potential buyers for the sale of your home when you know what to expect.