Paying closing costs on a home purchase involves either taking out a mortgage or making a cash payment on the home. When using a mortgage, the buyer covers most or all of the closing costs. Is it the same in a cash sale? Who pays closing costs in a cash sale?
Who Pays Closing Costs In a Cash Sale?
The buyer pays closing costs in a cash sale. Unlike a mortgage sale, there’s no need to pay closing costs to a mortgage lender. However, the buyer will need to cover other costs like property inspection, survey, title insurance, and notary costs. Occasionally, the seller might decide to cover other fees such as recording fees, but it’s not expected from them. There will be seller based closing costs as well such as taxes, HOA, and title insurance.
What Comprises Closing Costs?
Closing costs are the expenditures that are necessary before the actual property purchase price is paid. This includes expenses like the earnest money deposit, title insurance, and title search fees, escrow fees, and property taxes amongst others.
According to The Motley Fool, average closing costs in 2020 were $5,749. However, some factors affect this figure such as home value and location. Here are the individual costs that sum up to the total closing cost:
Earnest Money Deposit
This is a deposit alongside your offer to show “good faith” or strong intentions about purchasing the property. It usually remains in escrow until closing. The amount paid as EMD varies based on two main factors:
- Terms in your purchase agreement or;
- Economic factors like the market demand of properties in that area.
On average, it ranges between 2% to 5% of the purchase price. Determining the specific amount to deposit as earnest money requires the professional guidance of a realtor from an agency like AZ Flat Fee. This is because if you’re looking to put up a competitive offer, you need your agent’s expertise to determine costs in that situation.
Your earnest deposit isn’t a separate fee. Rather, it is added to your payment during closing.
An appraisal is done by the buyer to ensure that he’s getting a great deal. Requesting an appraisal and including it in the purchase agreement is vital to ensuring that you’re not overcharged for the property. Appraisal fees usually range between $300 and $400.
The duration might take a manner of minutes and may last hours as well. For the report, the appraiser might have to work on it for a few days. Getting an accurate report depends on two main factors:
- Ease of finding recent home sales to compare to on the part of the appraiser
- Local market activity level
If the appraiser concludes that the house is worth less than the asking price, the buyer would have to decide whether to go ahead with the purchase or renegotiate the price. This might shift the timeline for closing forward.
A title company usually holds the escrow fee, also known as the closing fee. This independent third party usually takes charge of the paperwork, transfer of title, deed recording as well as proper disbursing of the monies that change hands through the transaction.
The escrow fee is usually calculated in percentage rather than having buyers pay a fixed sum. The percentage varies based on:
- Title company
On average, it could range from around 1% to 2%. This implies that a $300,000 home would see escrow fees between $3,000 to $6,000. The escrow account protects funds through the transaction process and can be likened to a savings account.
Title Insurance & Title Search Fees
Title insurance fee, which costs around $1,000 per policy on average is a safeguard for unexpected title problems that may come after you have taken possession of the property. It is a one-time fee.
Most states also require that you acquire a title search to verify from public records that the property is legally owned by the seller. For a single-family home, a title search could cost anywhere between $75 and $250.
In addition to verifying property ownership, you would also be privy to information such as possible outstanding mortgage or deeds, as well as possible undisclosed claims like wills and liens. Any of these can affect the sales process. At this stage, your AZ Flat Fee realtor knows what to look out for and you would not have to go through the hassle alone.
At closing, buyers are required to pay the total annual premium on their homeowner’s insurance. Homeowners policy costs vary based on factors like:
- Deductibles to calculate on premium
- Location of home
- Coverage amounts
- Size and value of the home
Your new home might be located in a location that is prone to an earthquake or flooding, and your policy might require the inclusion of coverage to protect against these potential dangers.
You might have to pay property taxes as a part of your closing costs despite your cash offer. Usually, states may charge an upfront property tax payment for 6 months or even a year.
Since the seller would have probably transferred ownership at this point, the buyer would have to refund the owner his unused property taxes. To get the figure to be paid, the total amount paid as property taxes divided the number of days left in the year.
Purchasing a property located in a community that has a homeowners association might require you to pay some transfer fees. Excluding the annual dues which you would be asked to pay, there would be the costs of recording and distributing documents and paperwork by the HOA board.
Are Closing Costs Cheaper When Paying Cash?
On the surface, this might appear to be the case. However, it might not be accurate in all situations. As a cash buyer you save money that would have gone to the lender as part of closing costs, but you will still incur other costs required and or negotiated. From the seller standpoint, closing costs should be essentially the same regardless of whether someone buys the home for cash or with a loan.
A cash purchase doesn’t eliminate closing costs. However, there is the upside of saving money that would have gone to a lender. Also, zero monthly mortgage payments. This can be a win and help a buyer save money.