Who Pays Closing Costs: Buyer Or Seller?

Closing costs are an essential aspect of any real estate transaction. They refer to the fees paid during the settlement of a property sale. These costs can be quite significant, ranging from 3% to 8% of the total home purchase price.

As such, it’s essential to know who pays for the closing costs in Illinois, the buyer or the seller.

In this article, we will explore the different types of closing costs and determine who typically pays for them in Illinois.

A hand adding a coin to a stack of coins on either side of a wooden house. Buyers and sellers can both expect to pay a certain portion of closing costs on a house.

What are Closing Costs?

Closing costs are expenses incurred during a real estate transaction, and they cover a variety of items such as fees, taxes and charges. These costs are usually paid at the closing of the transaction, and they can vary significantly depending on the location and value of the property.

Closing costs can be divided into two categories: lender costs and third-party costs.

Lender costs include fees for originating and underwriting a mortgage loan.
Third-party costs, on the other hand, include expenses related to the title search, appraisal and home inspection of the property, among others.

Types of Closing costs

The following are some of the typical closing costs that buyers and sellers may encounter:

Lender Costs

Loan origination fee
Discount points
Credit report fee
Appraisal fee
Underwriting fee
Processing fee
Mortgage insurance premium (Private Mortgage Insurance)
VA funding fee
Tax service fee
Flood certification fee

Third-Party Costs

Appraisal fees
Title search fee
Title insurance
Survey fees
Attorney fee
Home inspection fees
Homeowners Association (HOA) fees
Escrow fees
Recording fees
Transfer taxes
Courier fees

Who pays the closing costs?

The responsibility for paying closing costs in Illinois can vary depending on the real estate contract terms and negotiations between the buyer and the seller.

A chart prepared by Adler & Herbach that breaks down the closing costs for both buyers and sellers on a $500,000 house in Illinois.

However, it’s essential to note that both parties usually pay some portion of the closing costs.

Does the Seller Pay Closing Costs?

In Illinois, it’s customary for the seller to pay for the following closing costs:

Real estate agent commission

A fee paid to the agent who assists in the sale or purchase of the property. This fee is typically a percentage of the total sale price.

County tax proration

A calculation of the property taxes that are owed at the time of the sale. This calculation ensures that both the buyer and the seller are paying their fair share of property taxes based on the time that they own the property.

Chicago water and zoning certificate

In Chicago, it is also common to require a water certificate and a zoning certificate, which are certifications that the property is up to code with respect to its water and zoning regulations.

Survey fees

Fees for a professional surveyor to measure and map the property boundaries.

Owner’s Title Insurance

A type of insurance that protects the buyer from any potential claims against the property’s title.

Transfer taxes (County, State and City)

Transfer taxes are taxes paid by the buyer when ownership of a property is transferred from one party to another. These taxes are typically imposed by the state, county, and/or city government and are calculated as a percentage of the sale price of the property.

Attorney fees

Fees for legal services provided by an attorney to ensure that the transaction is legally sound and to protect the interests of the parties involved.

Average Closing Costs For Sellers

As a seller in Illinois, you can expect to pay anywhere from 5% to 8% of the sale price in closing costs. These costs can include items such as transfer taxes, attorney fees, title fees and real estate commissions.

One of the most significant costs for sellers is the commission paid to real estate brokers, which typically amounts to 5% to 6% of the sale price. However, this commission can be negotiated with the seller’s agent.

A real estate agent hands over a key to new homeowners after they've closed on a house. Buyers can expect to pay a certain portion of closing costs.

Does the Buyer Pay Closing Costs?

The buyer typically pays for the following closing costs:

Loan origination fees:

These are fees charged by the lender for processing a loan application and setting up a loan. They are usually expressed as a percentage of the loan amount.

Appraisal fees:

An appraisal is an evaluation of the property’s value, and the fee to cover the cost of it is charged to the borrower.

Credit report fees:

Lenders require a credit report to determine a borrower’s creditworthiness, and the fee for obtaining this report is charged to the borrower.

Prepaid Interest:

This refers to the interest that accrues between the date of the loan closing and the end of the first month of the loan term.

Homeowner’s insurance:

Lenders require borrowers to carry homeowner’s insurance to protect the property and the lender’s investment in the property.

Lender’s Title insurance:

Title insurance protects the lender’s interest in the property and is required by most lenders.

Policy endorsement:

Endorsements are additions to the title insurance policy that provide additional coverage beyond the basic policy.

Transfer tax (City):

Fees charged by the government when ownership of the property is transferred from one party to another. In some cases (including the City of Chicago), the city may charge a transfer tax in addition to the county or state transfer tax.

Attorney fees:

The buyer may choose to hire an attorney to review the closing documents and ensure that their interests are protected. In that case, the buyer’s attorney’s fees are paid by the buyer.

Home inspection fees:

A home inspection is an evaluation of the property’s condition, and the fee for this evaluation is charged to the buyer.

Mortgage insurance premiums:

Mortgage insurance is required for some loans, particularly those with low down payments, and the fee is charged to the borrower to cover the cost of this insurance.

Recording fee (Mortgage):

A fee charged by the county recorder’s office to record the mortgage lien on the property.

Closing fee:

A fee charged by the title company or closing agent for conducting the closing.

It’s worth noting that while these expenses are traditionally paid by the buyer, some of them can be negotiable, and the responsibility for paying them can shift depending on the terms of the real estate contract.

What are closing costs for the buyer?

Buyers in Illinois should budget for closing costs that can range from 3% to 4% of the home’s purchase price. These costs include all the items discussed above such as appraisal fees, inspection fees, title insurance and lender fees. It’s important to note that the buyer will also need funds for the down payment and other upfront expenses such as prepaid taxes and insurance.

Game pieces representing different sides of the negotiation table in a real estate transaction.

What is Negotiable in Closing costs?

In Illinois, some of the closing costs are negotiable, and the parties involved can agree to shift the responsibility for paying them. For instance, the buyer and the seller can agree to split the cost of title insurance or escrow fees.

It’s essential to consult with a real estate attorney or a qualified real estate professional to ensure the negotiations are legal and reasonable.

Additionally, some lenders offer programs that can help reduce or waive some closing costs. For instance, a lender may offer a no-closing-cost mortgage, which allows the borrower to finance the closing costs into the loan.

What is a no-closing-cost mortgage?

A home loan where you don’t have to pay any of the upfront fees normally associated with getting a mortgage. Things like loan origination fees, appraisal fees and title insurance fees are covered by the lender instead. Sounds pretty good, right?

But here’s the catch: the lender will often roll those fees into your loan balance or charge you a slightly higher interest rate. That means you might end up paying more in the long run, even if you don’t have to fork over a lot of cash at the beginning.

One thing to keep in mind is that you’ll still be on the hook for other closing costs, like prepaid interest, property taxes, and homeowner’s insurance. Those costs won’t be covered by the lender.

So, while a no closing cost mortgage can be a good option for some people, it’s not necessarily the best choice for everyone. Be sure to do your research and figure out what makes sense for your specific situation.

How to Reduce closing costs?

As exciting as it is to buy a home, the process can be quite overwhelming. One of the things that can make it more challenging is the closing costs associated with the transaction.

The good news is that there are ways to reduce closing costs.

Shop Around for Lenders

The fees charged by lenders vary, so it is worth taking the time to compare different lenders to find the one that offers the best rates and fees. You can start by getting quotes from at least three different lenders and comparing the closing costs of each.

Negotiate with the Seller

Some sellers may be willing to pay a portion of the closing costs to close the deal. This is especially true in a buyer’s market where there is less competition for homes.

If you’re working with a real estate agent, they can help you negotiate with the seller to reduce the closing costs.

Look for Discounts

Some lenders offer discounts on closing costs for certain groups, such as military veterans or first-time homebuyers. You can ask your lender if they offer any discounts and if you qualify for them.

Some lenders may offer promotions from time to time that can reduce your closing costs. Keep an eye out for these promotions and take advantage of them if you can.

Choose a No-Closing-Cost Mortgage

These mortgages allow you to roll the closing costs into the mortgage itself, so you don’t have to pay anything upfront. However, keep in mind that this can increase your monthly payments, and you will end up paying more interest over the life of the loan.

Ask for a Loan Estimate

A loan estimate is a document that lenders are required to provide to borrowers within three business days of applying for a loan. It details the loan terms and estimated closing costs.

Be sure to review the loan estimate carefully and ask your lender about any fees or charges that you don’t understand. This can help you identify any unnecessary fees and negotiate with the lender to reduce or eliminate them.

Close at the End of the Month

The interest on your mortgage is prorated from the day of closing until the end of the month. If you close at the beginning of the month, you will have to pay more interest upfront.

By closing at the end of the month, you can reduce the amount of prepaid interest you have to pay at closing.

Avoid Unnecessary Fees

Finally, one of the best ways to reduce closing costs is to avoid unnecessary fees. For example, you can save money by doing some of the work yourself, such as shopping around for homeowners insurance.

You can also ask your lender to waive certain fees, such as application fees or processing fees.

The Bottom Line

In Illinois, both buyers and sellers typically share the responsibility of paying closing costs, with the seller covering some of the expenses, including real estate agent commissions, title insurance, transfer taxes and seller’s attorney fees.

The buyer is usually responsible for other expenses, including loan origination fees, appraisal fees and prepaid property taxes.

However, some of these costs can be negotiable, and there are several ways to reduce the overall cost of closing, such as shopping around for the best rates and fees, negotiating with the seller, and taking advantage of lender programs.

FAQs About Who Pays Closing Costs

Who Pays Closing Costs On A VA Loan?

In a transaction being financed with a VA loan, the borrower (buyer) will generally be responsible for a VA funding fee between 1.4% and 2.3% of the loan amount. Some veterans, such as those receiving compensation for a service-connected disability, are exempt from this fee.

While this funding fee might seem like a lot, there are several benefits that come with a VA loan that may make it the most attractive option if you are an eligible veteran. First, unlike most lender-related fees, the VA funding fee may be rolled into the loan rather than paid up front.

Moreover, many fees normally charged by lenders, such as application and processing fees, rate lock fee and document fees, are limited or not allowed under the VA program.

Finally, because of the VA fee limitations, you may be able to negotiate with the seller to have them pay some fees that are normally paid for by the buyer. For these reasons, a VA loan may be a great option for an eligible veteran buyer.

Who Pays Closing Costs In A Cash Sale?

In a cash sale transaction, where the buyer does not need a mortgage or outside financing, the buyer can skip all of the lender-related costs.

Moreover, in the Chicagoland area, the closing or escrow fee is typically split between buyer and seller on a cash sale, which reduces the buyer’s closing costs even more.

The remaining costs that the buyer will need to pay include the Property Inspection, Municipal Transfer Taxes (if applicable), Recording fees and possibly some escrow agency service fees.

The seller, in a cash transaction, will cover the bulk of the closing costs, including:
1. Real estate commissions and HOA fees
2. 50% of the Escrow or Closing Fee
3. Title Premiums
4. Survey
5. Transfer Taxes
6. Title Company Service Fees

The exact amount and breakdown of closing costs will depend on your specific situation and contract terms, so reviewing them carefully before signing anything is important.

What Are Seller Concessions And How Can They Help?

Seller concessions involve an agreement between the buyer and seller in a real estate transaction in which the seller offers to cover a portion of the buyer’s closing costs.

This can be particularly helpful for buyers who lack sufficient closing funds or those who seek ways to minimize their upfront expenses.

In Illinois, closing costs can be substantial, as they include fees for title insurance, appraisal, loan origination, real estate commission and other related costs. By offering seller concessions, sellers can make their property more appealing to potential buyers, facilitating a quicker sale.

Seller concessions are subject to negotiation and must be agreed upon by both parties. Moreover, there might be limits on the amount of concessions a seller can offer, depending on the buyer’s loan type.

Seller concessions can serve as a valuable tool for both buyers and sellers, helping to bridge the gap in closing costs and making the transaction more feasible for all parties involved.

Author
Recent Posts

Uri Adler

Real estate attorney at Adler & Herbach

Born and raised in Chicago, Uri has worked in Illinois real estate for the past twenty years. In addition to his law practice, Uri has held executive roles in a variety of companies including real estate investment, management and title insurance. Uri obtained his Doctor of Law (JD), graduating Cum Laude, from DePaul University College of Law.