*updated 1-24-25
Texas Closing Costs Explained
Who pays closing costs in Texas? The answer could save you thousands. Whether you’re a first-time buyer or a seasoned investor, understanding these expenses is an important part of any real estate deal. With closing costs ranging from 2% to 5% of a home’s price, knowing who pays what closing costs is more important than ever.
Closing costs are one of the most overlooked aspects of the home buying process. Buyers in Dallas and Fort Worth TX need to know what to expect to keep more of their hard-earned money and even lower closing fees in their real estate transactions.
So, let’s dive into the world of Texas closing costs and uncover who is responsible for what.
Average Closing Costs in Texas
The typical closing costs are the assortment of fees and expenses over and above the selling price of the property that buyers and sellers incur as part of the closing process in a real estate deal. In Texas, these average closing costs range from 2% to 5% of the home’s sale price according to recent Texas Real Estate Commission data, depending on various factors like the home’s value, the type of loan, and negotiations between the parties involved.
For buyers, closing costs are in addition to the down payment and can influence how much cash you need to bring to the closing table. Sellers, on the other hand, need to consider costs like real estate agent commissions and transfer taxes, which can affect their net proceeds from the property sale.
Buyer’s Closing Costs vs. Seller’s Closing Costs
In Texas, the separation of closing costs between buyers and sellers isn’t set in stone and can often be negotiated during the real estate deal. For example, in wholesale real estate transactions, the buyer pays the vast majority (if not all) of the closing costs.
Understanding who typically pays for what can help you strategize and potentially save money.
Buyer Closing Costs
The buyer pays for costs associated with obtaining a mortgage loan and ensuring the property is in good condition:
- Appraisal Fees: Lenders require an appraisal to confirm the home’s value supports the loan amount. This fee usually ranges from $300 to $500.
- Home Inspection Fee: A crucial step in the home buying process, inspections can cost between $300 and $500, helping buyers identify any potential issues with the house.
- Loan Origination Fees: Charged by the lender for processing the loan application, typically about 1% of the loan amount.
- Credit Report Fee: A nominal fee, around $25, to cover the cost of pulling your credit report.
- Private Mortgage Insurance (PMI): If your down payment is less than 20%, you may need to pay PMI to protect the lender in case of default.
- Discount Points: Optional fees paid to the lender at closing in exchange for a lower interest rate on the mortgage.
- Title Search Fee and Lender’s Title Insurance Policy: Ensures there are no liens or disputes over the property’s title, protecting the lender.
- Underwriting Fee: Covers the cost of evaluating and verifying your loan application.
- Notary Fees: Fees for the notary public who witnesses the signing of important documents.
- Prepaid Interest: Covers the interest on your mortgage from the closing date until the first payment date.
- Escrow Account Deposits: Funds set aside to pay future homeowners insurance and property taxes.
Seller Closing Costs
The seller pays costs related to transferring ownership and settling any existing obligations, however home sellers who want to attract buyers in a competitive market may offer closing cost assistance, such as a seller credit, to help reduce the buyer’s out-of-pocket expenses at closing :
- Real Estate Agent Commissions: Usually the biggest closing cost for Texas sellers, around 6% of the selling price, split between the buyer’s agent and the seller’s agent.
- Prorated Property Taxes: Sellers pay property taxes up to the closing date.
- Transfer Taxes and Recording Fees: Fees for legally recording the new ownership and transferring the title.
- Settlement Fee or Escrow Fee: The fee charged by the title company or escrow company to handle the closing.
- Mortgage Payoff: Any remaining balance on the seller’s existing loan.
- Home Warranty (if offered): Some sellers provide a home warranty to the buyer as a selling incentive.
- HOA Fees: Any unpaid homeowners association fees may need to be settled at closing.
- Municipal Lien Search: Ensures there are no outstanding municipal liens against the property.
Know Your Key Closing Fees
Appraisal and Inspection Fees
The home appraisal confirms that the property’s value aligns with the loan amount, protecting both the lender and the buyer. The home inspection fee provides a detailed report on the condition of the house, potentially saving buyers from costly future repairs.
Loan Origination and Lender Fees
These closing fees cover the cost of the lender’s policy of underwriting the loan. Paying discount points might be a good idea if you plan to stay in the home for a long time, as they can lower your interest rate and save you money over the life of the loan.
Title Fees and Insurance
Title fees include the title search fee, which verifies the property’s title is clear of liens, and the lender’s title insurance policy, protecting the lender against future title disputes. An owner’s title insurance policy is optional but recommended to protect your own interest in the property.
Escrow Fees
An escrow company or title company handles the funds and documents until the transaction is completed. The escrow fees or settlement fees cover these services, ensuring a smooth closing process. Escrow accounts are also used to hold funds for property taxes and homeowners insurance, making it easier to manage these payments.
Real Estate Agent Commissions
These Realtor and agent fees are typically paid by the seller and represent one of the biggest closing costs in a real estate transaction. However, these fees can be negotiated, especially in a buyer’s market.
Legal Fees
While not always required in Texas, hiring an attorney can be a wise investment. Attorney fees or legal fees ensure all documents are in order and your interests are protected during the closing process.
Other Fees
- Notary Fees: For notarizing documents, ensuring they are legally binding.
- Transfer Fees: Associated with transferring the title and ownership records.
- HOA Fees: If the property is part of a homeowners association, there may be fees to transfer the HOA membership.
- Prepaid Interest and Escrow Deposits: Cover interest and escrow account funding from closing until the first mortgage payment.
Factors That Influence Closing Costs
Several variables can affect your closing costs:
Type of Loan
Your loan type—whether it’s a conventional loan, an FHA loan, or a VA loan—will influence the fees you pay. For example, FHA loans have specific fees like mortgage insurance premiums, FHA rule on house flipping that can affect your total closing costs.
Home’s Purchase Price and Value
The price of the home directly affects percentage-based fees like loan origination and agent commissions. The home’s value, as determined by the appraisal, can also impact your loan terms and associated costs.
Credit Score
Your credit score plays a significant role in determining your interest rate and lender fees. A higher score often results in better terms and lower costs, while a lower score might lead to higher interest rates and increased fees.
Housing Market Conditions
In a buyer’s market, where there are more homes for sale than buyers, home sellers might be more willing to negotiate on closing costs. Conversely, in a seller’s market, buyers may have less leverage to request concessions.
Strategies to Reduce Your Closing Costs
While closing fees and costs are an inevitable part of buying or selling a home, real estate professionals recommend these strategies to lessen the financial burden.
Seller Concessions
Negotiating for seller concessions can be an effective strategy. In some cases, a seller might agree to pay a portion of the buyer’s closing costs to facilitate the sale, especially if the property has been on the market for a while.
Closing Cost Assistance Programs
Texas offers closing cost assistance and first time home buyer programs. These programs can provide grants or low-interest loans to cover closing expenses, making homeownership more accessible.
Shop Around for Services
Obtain quotes from multiple lenders, title companies, and insurance providers. Comparing costs can save you money on lender fees, title fees, and other services. It’s also a good idea to compare costs calculators offered by different lenders to get an accurate estimate.
Negotiate Agent Commissions
While standard, real estate commissions are negotiable. Discuss with your buyer’s agent or seller’s agent about potentially lowering their commission, especially if the selling price is high.
Paying with a Cash Offer
If you’re able to make a cash offer, you can eliminate many lender-related fees, reducing your total closing costs. This can also make your offer more attractive to sellers.
Understanding the Texas Closing Process
The Role of Escrow
In Texas, an escrow or title company typically manages the closing process. Before proceeding, it’s important to understand the federal guidelines for closing on your home. The title company will handle the escrow account, hold funds, and ensure all conditions are met before the property changes hands. The escrow company acts as a neutral third party, safeguarding both buyer and seller interests.
Closing Date and Closing Day
The closing date is set during negotiations and is a critical milestone in the home buying process. On closing day, all parties sign the necessary documents, funds are distributed, and ownership is officially transferred. It’s essential to review the closing disclosure and loan estimate ahead of time to understand all the costs involved.
Final Steps in the Home Buying Process
Before closing, many buyers in Texas go through an option period to conduct inspections and finalize negotiations. This period allows buyers to back out of the contract if any major issues are found. Learn more about the option period in Texas to understand your rights during this time. Before closing, conduct a final walkthrough to ensure the property is in the agreed-upon condition. Confirm that any negotiated repairs have been made and that no new issues have arisen since the inspection. It’s also wise to verify that all personal property included in the sale agreement remains in the house.
Tips for First-Time Homebuyers in Texas
As experienced Texas homeowners share on Reddit, buying your first home is an exciting milestone, but it comes with its own set of challenges. Here are some tips to help you navigate the process:
Study and Know Your Mortgage Loan
Educate yourself on different mortgage options. Consider factors like interest rates, monthly mortgage payments, and whether paying discount points is beneficial in the long run. Be sure to ask about any application fees or underwriting fees that could affect your closing costs.
Calculate Total Costs
Use online costs calculators to estimate your total cost, including down payment, closing costs, and ongoing expenses like property taxes and HOA fees. Understanding how much you’ll need can prevent financial surprises.
Consider a Home Warranty
Requesting a home warranty from the seller can provide peace of mind by covering potential repairs during your first year in the new home. It’s a small cost compared to the potential expense of major home systems failing.
It’s a Good Idea to Seek Professional Advice
Working with experienced professionals, such as a reputable buyer’s agent and a knowledgeable lender, can provide valuable guidance throughout the home buying process. They can help you understand complex terms, negotiate effectively, and avoid common pitfalls.
Wrapping Up: Making Informed Decisions in Your Real Estate Journey
Understanding who pays closing costs in Texas empowers you to navigate your real estate transaction with confidence. By being aware of typical expenses, knowing how to negotiate, and exploring ways to reduce costs, you can make the home buying or selling process more efficient and less stressful.
Whether you’re stepping into your new home for the first time or handing over the keys to the next owner, being informed about closing costs ensures you’re making decisions that align with your financial goals and needs. The good news is that with the right knowledge and resources, you can successfully manage closing costs and embark on the next chapter of your life in Texas.
** About the Author: Hilary Schultz is a licensed Texas Realtor and real estate professional — is a leading authority on DFW metroplex real estate. Hilary is a member of the executive board of her local Texas PTA and active member of the Texas community. Along with her husband Patrick, they have combined 40 years of experience with over 2700 real estate transactions completed. Read our online reviews to see our passion to help the Texas community and provide homeowners with valuable insights, guidance, and a personalized experience through the home selling process. Let us serve you and help to navigate the Dallas Fort Worth housing market on your real estate journey.
*** Disclaimer: This article provides general information on who pays closing costs in Texas and outlines typical buyer closing costs, financing considerations, and average cost of closing fees. It is not intended as legal, financial, or real estate advice. Because closing costs, home value, and financing options can vary greatly, please consult with a licensed professional who can offer guidance tailored to your home loan, buyer or seller closing responsibilities, and options to reduce closing costs.