Closing Costs, Part 3: Who Pays for What?

In the first part of our mini-series looking at closing costs, we talked about just how important they are, and just how expensive they can be. If you’ve been following, you’re probably a little worried about them yourself now, and are ready to jump at the chance to have someone else pay them. Well, it’s true. It’s very common for sellers to pay the closing costs, and some lenders will even pitch in when it comes time to get a mortgage, and to start talking about closing costs with your mortgage broker. In part 3 of our mini-series, we’ll look at just who you can expect to pay what closing costs, as well as how that process works.
Closing costs, in total, generally cost anywhere from $4,000 – $8,000, depending on things such as the sale price of the home and where you live. It’s important to understand that you won’t be able to unload all of these costs, and most of recurring cost such as utilities and property tax will be your responsibility. However, it is extremely common for the seller to pay many of the non-recurring closing costs, such as the home inspection and the appraisal fee. But, this isn’t a simple case of you telling the seller you want them to pay “X” number of dollars for your closing costs, and they simply hand the cash over. In fact, to the disappointment of many home-buyers, it works very differently than that.
Instead of the closing costs just being handed over along with the key, they are instead usually added to the price in your offer to purchase, whether you as the buyer include them in there initially; or they’re added in as a counter-offer by the seller, though it’s usually the latter. So after you’ve asked the seller to pay the closing costs and they have agreed, your purchase price will in fact be more than you originally offered. Why is this? And how is this possibly saving you money?
The difference actually comes in not how much you pay, but who you make those payments too and when you have to pay them. In the scenario where your purchase price goes up when the seller takes over the closing costs, instead of you paying out the closing costs to each contractor or vendor individually, you are instead paying out the amount of those closing costs over the life of your loan. When you do it this way, the closing costs become a part of your mortgage, instead of upfront costs that you need to pay before you can take ownership of the home. The seller meanwhile, is responsible for paying those vendors upfront, but they have the money to do so with the increased purchase price of the home.
In addition to the closing costs that you can have the seller pay, lenders sometimes also step in and pay some of your closing costs, all in an effort to attract you into getting your home loan with them. Some lenders will take over your legal fees and disbursements under certain conditions, and there often are no appraisal fees if your mortgage has been insured by CMHC.
When buying a home, it’s extremely important to talk to both your real estate agent and your mortgage broker about the closing costs on your home, and how some of those may be divvied up between different parties.
And, also don’t forget about all the different times you need to consider closing costs. In our next, and final, part in our closing costs mini-series, Closing Costs, Part 4: Closing and Refinancing, we’ll take a look at the time when closing costs are most often forgotten.