Who Pays Closing Costs in Washington State?
Closing costs in Washington State are the fees and taxes associated with real estate transactions. If you’ve purchased a home in the past, you may can recall the fees that get tacked on during closing. Whether you are a first-time home buyer or move-up buyer, this article will explain closing costs in detail.
Many home buyers are surprised by the long laundry list of closing costs. Real estate deals have a lot of moving pieces like financing, ensuring the title is clear, establishing the home is free of major defects, etc. During the home buying process, several parties (like title companies, lenders, appraisers, and real estate agents) come together to make everything happen in an orderly and timely fashion. Accordingly, each vendor is compensated for their work.
There are two stages of the escrow period: opening and closing. Vendors are paid at the stage in which their services are rendered. Some fees are paid out-of-pocket while other fees are rolled into the loan amount. Out-of-pocket fees are paid during the opening escrow period.
Buyers and sellers are separately responsible for certain closing costs like taxes and insurance. In Washington, buyers and sellers split the escrow fees in half.
Here’s a complete rundown of the process, who gets paid, when they get paid, and who pays.
When a seller accepts an offer on their home for sale, the buyer places a good faith deposit (a.k.a. earnest money) on the home, usually to the tune of 1% of the agreed-upon price. When a buyer makes a deposit, it shows the buyer he or she is serious and making a commitment to the deal. Earnest money is refundable most of the time. In a small number of cases (perhaps 2% of the time), the buyer will fail to perform the contractual obligations outlined in the offer letter.
Inspections and appraisals also happen during the opening escrow period. Both are out-of-pocket expenses and non-refundable.
Inspections uncover structural problems with the home like a roof that needs repair or cracks in the foundation. They also check the major systems and components of the home like the air conditioner, electrical wires, or pipes.
Appraisals determine the fair market value of the home on the date of the appraisal. Lenders require appraisals to make sure the value of the home is sufficient to back the loan (as collateral).
Inspections are not required by law but are highly recommended. Some mortgage programs like FHA and VA loans require them.
After the appraisal and inspection, if there are no more contingencies to clear, the deal moves into the closing of escrow stage or simply “closing.” Closing costs are divided between the buyer and seller. What follows is an outline of who pays what.
Closing Costs for BUYERS in Washington State
Buyers are responsible for two kinds of fees, one-time and recurring. One-time fees are just like they sound; fees paid only once. Recurring fees include items like insurance and property taxes that are paid in installments during the course of home ownership. Having certain ongoing fees pre-paid at closing helps new home owners transition to a new payment routine, essentially giving them some breathing space to adjust.
One-Time Fees (Lender Fees)
- Discount Points – optional fee that can “buy down” the mortgage interest rate
- Flood Certification – assesses the future flood risk of the property
- Mortgage Insurance – covers the lender’s risk of making a loan where the down payment was less than 20%
- Mortgage Origination – an upfront fee the lender charges to make the loan
- Processing – the lender’s fee to manage and complete the loan documents
- Underwriting – the lender’s administrative cost to evaluate the borrower’s capacity to repay the loan
Lenders may require an upfront deposit to an impound account that will cover the first three months of homeowner’s insurance and six months of property taxes. These upfront deposits are called “impounds” and once the money is set aside, the first few installments are paid automatically from the account on behalf of the buyer.
Pro-rated funds may be required to cover the following:
- Hazard Insurance – the annual homeowner insurance premium
- HOA Dues – condo association fees (usually the first two months is all that is required)
- Prepaid Mortgage Interest – the interest portion of the mortgage payment for the current month in which the deal closes
- Property Taxes – up to six months of taxes
Closing Costs for SELLERS in Washington State
Home sellers in Washington can expect closings costs that average from 5% to 9%.
- Attorney – if applicable, paid to the attorney that represents the seller
- Broker’s Commission – the fee charged by the listing broker for marketing the property
- Real Estate Excise Tax (REET) – known as a documentary transfer tax in some states, this is the sales tax on the transfer of real property
- Seller Concessions – and fees the seller agreed to pay such as property taxes, loan discount points, or a home warranty.
- Title Insurance – an insurance policy for the buyer that protects against title defects like prior liens.
Closing Costs Shared by BUYERS and SELLERS
Lastly, escrow fees are split 50/50 between the buyer and seller.
- Document Preparation – pays for preparation of the stacks of paperwork you will sign at closing
- Escrow Fee – charged by the title company or escrow company for conducting the closing
- Homeowners Insurance – annual premium paid upfront
- Title Insurance – protects buyer against title defects like prior liens
- Recording Fees – covers the cost of registering the transaction with the local government (city or county)