The closing process in a real estate transaction finalizes the terms of an agreement between the buyer and seller, leading to the transfer of the property’s title. This step of the buying/selling process comes with its own set of costs. Before a buyer can hold the keys to their new home, and before a seller can celebrate the sale of their property, closing costs must be paid.

What are closing costs?

The term “closing costs” refers to the various expenses, taxes, and fees paid by both the buyer and the seller to finalize a real estate transaction. The purchase agreement—signed by both parties—will dictate the terms of how the closing costs are paid, but there are some standards about who pays what.

In general, buyers can expect to pay about 2-5% of the total purchase price in closing costs, while sellers’ costs can range anywhere from about 6-10%; the difference being that buyers are using extra cash to pay for their closing costs while the amount sellers owe is typically deducted from the proceeds of the sale of their home. Note—these percentages may vary depending on property taxes, insurance rates, and other factors involved in the transaction.

Closing Costs for Buyers

Typical mortgage-related closing costs for buyers include an application fee, an underwriting fee, and prepaid interest (the accrued interest cost between your settlement date and first monthly payment). If you make less that a 20% down payment on the home, you can expect to pay your lender for private mortgage insurance (PMI), as well.

Two main property-related closing costs for buyers are the appraisal and the home inspection. Lenders will require an appraisal to double-check that the value of the property matches your mortgage loan amount, which will typically cost you a few hundred dollars. A home inspection provides the buyer with a clear understanding of the home’s condition and what repairs need to be made, either in the future or before closing. In competitive markets (a seller’s market), it’s more common for sellers to conduct pre-listing inspections and for buyers to waive the inspection contingency to make their offer more appealing. Buyers will also pay a variety of title, insurance, attorney, escrow, and property tax fees to finalize the home purchase. Usually, your lender will require you to purchase homeowners insurance before settlement to protect against insured disasters that may occur on the property.

These are just some of the costs inherent in the closing process for buyers, which are a fraction of the total costs of buying a home. Working with a Buyer’s Agent will help you stay organized as you navigate through these crucial final steps of your home purchase.

Closing Costs for Sellers

The seller will pay the agent commissions on the sale, typically to both the buyer’s agent and the listing agent. Agent commissions usually come in at around 4-6% of the sale price of the home. Other closing costs for sellers may include attorney fees, title insurance, a transfer tax, and the home’s property taxes for the current year if they have not yet been paid. The terms of the agreement will spell out what the seller is additionally responsible for, including HOA fees if applicable and any escrow money promised to the buyer.

Typically, escrow fees are shared between the buyer and seller, which cover the costs of distributing the funds involved in the transaction. In buyer’s markets, it’s more common for sellers to agree to pay for a portion of the closing costs—what is known as “seller concessions.” A common example of a seller concession is when the seller agrees to pay for repairs discovered during the buyer’s home inspection.

So, whether you’re buying or selling a home, it’s important to remember that a series of fees and payments must be completed to finalize the transaction.

Making the leap from renter to homeowner doesn’t happen overnight; it requires steady planning to put yourself in a good position to buy your first home. Prospective first-time home buyers can often feel like they’re waiting for a sign to indicate they’re ready to start making offers, when really, it’s a combination of factors. Here are seven signs that you’re ready to buy a home.

1. You Know Which Homes You Can Afford

To know whether you’re ready to buy, you need to identify your price range. If you’re unhappy with your pre-approval, or need more money for your desired location, there are ways you can increase your buying power. Once you know which homes you can afford, you can work with your agent to find the right home and prepare an offer.

2. You Understand Your Local Market Conditions

The dynamics of the market in which you’re buying will play a role in determining whether you’re ready to buy. The local market conditions will dictate what kinds of offers you can expect to compete against, what tactics other buyers may employ, and whether the buyer or seller will have the leverage during negotiations. Therefore, it’s important to understand the difference between a buyer’s market and a seller’s market so you and your agent can strategize accordingly.

3. You’re Comfortable with the Responsibilities of Being a Homeowner

Having a mortgage instead of paying rent isn’t the only difference between owning a home and renting. You’ll be responsible for maintaining the property, making repairs, and completing remodeling projects. That doesn’t always mean you can’t predict a future need. The best way to prepare for unexpected projects on any home is to get a home inspection before you buy so that you know every inch of the property and can start to save for larger expenses that might come down the road.

4. You Have Funds Available for Home Buying Costs

The costs of buying a home are more than just your down payment and monthly mortgage. Before you move into your new home, you’ll have to pay closing costs, moving expenses, and appraisal and inspection fees, to name a few. Property taxes can sometimes be part of the mortgage and depending on the time of year may need to be paid before you move in. Once you’re settled, homeowners insurance will enter the fold. If you can afford these costs, it’s a sign that you are ready to buy.

5. You’re Making Progress on Your Debt

Having zero debt is not a realistic expectation for every first-time home buyer. But, if you have a plan in place for paying off your outstanding debt and can show evidence of the progress you’re making, it will strengthen your buying credibility. Lenders will factor this into their assessment of your financial health during the pre-approval process.

6. You Have a Strategy for the Down Payment

It is true that lenders view a twenty percent down payment as favorable and won’t require you to purchase private mortgage insurance (PMI), but it’s not game over if you can’t make a lump sum payment of that size. With a lower-than-twenty percent down payment, you may incur higher interest and fees over the life of the loan, which could put a greater strain on your finances long-term than waiting until you can pay more principal down. Whichever route you choose, make sure you have a solid plan in place to repay your loan.

7. Your Life Aligns with Buying a Home

Buying a home means you’ll be putting down roots, so it’s important that you and your household are ready to establish yourselves in one area before you buy. There’s financial logic behind this line of thinking, as well; in general, the longer you stay in one home, the more equity you’ll build. Career and income stability also play a role in determining whether you’re ready to buy. Landing a job with long-term prospects may be just the thing you need to green-light your decision to buy your first home.

Finding your dream home may not be easy, but there are things you can do to make it easier, like creating a “Must-Haves” list and a “Nice-To-Haves” list. These lists allow serious homebuyers to save time, energy, and ultimately, money as they prepare to buy a home.

A Must-Have List is exactly what it sounds like, a checklist of the details that are non-negotiable for your new home. It’s essential to sit down and think about the things you need in order to feel comfortable there for the next 7-13 years.

Your “Nice-To-Haves” list is a checklist of details that you’d like to have, but you can live without. This list is great for those things that you’ve always dreamed of but may be out of reach for reasons such as your budget or location. This list may include things like fireplaces or gas appliances, a pool, or other non-essential items.

Your “Must-Haves” list focuses your search and helps your agent narrow down which homes are worth your time. Your “Nice-to-Haves” list will help you determine what you’re willing to sacrifice, which will ultimately solidify your must-haves.

These lists can also help manage your expectations regarding price. Take your lists to your real estate agent, along with your pre-approval from a lender, and you’ll be able to work together to determine what is a reasonable ask within your budget and your desired location.

Creating Your “Must-Haves” List

The first step is to think about the essentials. If things like location and number of bedrooms and bathrooms are a priority, then you’ll want to include them in your must-haves. Consider where you live now and use that as a starting point; what do you love and what are you missing? You may need more storage space, or an extra room to work remote, or a larger backyard for the newest member of the family.

Here are some questions to ask yourself as you build your “Must-Haves” list:

• Where do you want to live? (Be as specific as you can.)
• What do you have now that you can’t live without?
• What are you missing now that you may need for the next several years?

If you’re struggling to determine what it is you need to have, you can start working on your “Nice-To-Haves” list. This can also help you determine what is essential. For example, it may be nice to have five bedrooms when in reality, a three-bedroom house with a flex space that works for an office or guest room would do the trick.

Creating your “Nice-To-Haves” List

While you’re working on your “Nice-To-Haves” list, you’ll be thinking about the parts of a home that would be great to have but aren’t as important for you. You might also want to take into consideration what is reasonable in your area and if it’s a common amenity.

Here are some questions to ask yourself as you build your “Nice-To-Haves” list:

• What home upgrades are you willing to make?
• What is something you’d like to do in your house more often?
• What do you have in your current home that you love, but don’t need?

Searching for Your Next Home

These lists will help guide you and your real estate agent as you search for your next home. During this process you might realize some aspects aren’t as important to you as you thought, and vice versa. Keep your agent in the loop as you update your lists so they can continue to search for the perfect home for you.