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According to the National Association of Realtors, the most difficult step for home buyers is saving for the down payment and closing costs. For cash-strapped home buyers, asking the seller to help pay closing costs could be an ideal solution.
- Seller-paid closing costs or seller concessions are money paid toward the closing on your behalf. Generally, but not always, this money is applied to the buyer’s closing costs. Seller concessions allow you to legally roll the closing expenses back into your home loan.
- The home must appraise for the necessary value needed for seller concessions to work. If the home doesn’t appraise for the amount that is needed, further negotiations between buyer and seller may be necessary.
- It’s important to remember that sellers are not going to just pay for your closing costs as a kind gesture. The amount is built into the sales price.
What are closing costs?
Simply put, closing costs are fees associated with the services that are required to close your home loan.
Some fees include charges for appraisers, home inspectors, attorneys, credit bureaus, real estate agents, title companies, and of course your lender. All of these services are essential in a real estate transaction, and all need to be paid.
This expense can range from two to five percent of your home’s value. It can create difficulty when you are trying to budget for what you need to close.
Your lender should disclose estimated charges within three days when you apply for a mortgage, using a Loan Estimate form.
Actual costs can’t vary from the estimate by too much, or the lender has to pay the difference. That keeps estimates accurate, and ugly surprises away.
Closing cost charges can vary extensively, based on location. Some of these geographic variances are based on the state in which you live, others on the county.
Who pays for what?
There are several considerations involved when it comes to getting your mortgage from the application stage to the closing table.
Other than the appraisal and home inspection fees, which are normally paid upfront, most of the other fees are paid at the time of closing.
Chances are good that there is a set of costs customarily paid by the seller, and another customarily paid by the buyer.
Fortunately, “customary” does not mean “set in stone.” You can negotiate any closing cost allocation you like, as long as it meets your lender’s guidelines.
How seller concessions work
Seller-paid closing costs or seller concessions are money paid toward the closing on your behalf. Generally, but not always, this money is applied to the buyer’s closing costs.
Seller concessions allow you to legally roll the closing expenses back into your home loan.
As an example, let’s say your sellers want to net $200,000 on the sale of their home.
You might have the necessary down payment, but you need some assistance with closing costs.
Using this scenario, the seller may consider an offer of $205,000, contributing $5,000 towards the buyer’s closing costs.
This can be a win-win scenario for both buyer and seller. Due to increasing the purchase price by $5,000, the seller can still net their target amount of $200,000.
It helps the buyer, as they end up needing $5,000 less out-of-pocket at closing. Again, the buyer is essentially financing the $5,000 into the amount borrowed for their loan.
It is important to note the potential downside to this approach. The home must appraise for the necessary value needed for this scenario to work.
If the home doesn’t appraise for the amount that is needed, further negotiations between buyer and seller may be necessary.
How much you save
It makes very little difference to the sellers’ bottom line if they drop the sales price by three percent or pay three percent toward your closing costs.
For example, if you negotiate for a $200,000 house, you could offer 95 percent of the sales price, or $190,000. Or you could offer $200,000, with the sellers paying five percent of the purchase price toward closing costs.
If the sellers accept your $190,000 offer, and your closing costs equal three percent of the purchase price, you pay:
- $9,500 down payment
- $5,700 closing costs
- Your principal and interest payment at today’s 30-year fixed rate of 3.75 percent, is $836 per month.
If you can come up with this amount, it’s a good alternative. But what if you can’t?
You can ask the sellers to absorb five percent in closing costs (assuming your loan program allows this) instead of lowering their price by five percent. So if you make a full price offer, but with five percent in seller-paid closing costs, you get this:
- $10,000 down payment
- No closing costs
- There is an extra two percent in concessions. That gets you a 3.375 percent interest rate.
- Your principal and interest payment at 3.25 percent is $827.
So this method lets you avoid $5,700 in closing costs, and in this case, you get a lower mortgage rate and payment as well.
Seller concessions vary by loan program
Seller paid closing costs not only vary by location, but also by the type of loan program for which you’re applying.
Your real estate professional should be able to assist you with guidance in this area. But pertains to your money, it helps to know and understand the facts ahead of time.
It is important to know how much a seller, or any interested party can contribute to a buyer’s closing costs.
There are exceptions to the rules, but the maximum allowable seller concessions by loan program are as follows.
- FHA loans: six percent
- USDA loans: six percent
- VA loans: four percent
- Conforming (Fannie Mae and Freddie Mac) loans: three to nine percent, depending on down payment
- Investment properties: two percent
Other programs, such as portfolio loans, jumbo loans and non-prime loans may have their own rules about seller contributions. If that’s a factor for you, ask lenders about their policy when you call them for mortgage quotes.
Negotiate sharing the closing costs
It’s not uncommon to ask the seller to pay for some, or perhaps even all, your closing costs.
Generally, sellers can pay any of your settlement charges. This includes the amounts necessary to set up your escrow account.
For sellers, offering, or at least being open to paying a buyer’s closing costs, can increase the number of potential buyers.
As with almost everything in real estate, who pays what when it comes to closing costs is negotiable.
It’s important to remember that sellers are not going to just pay for your closing costs as a kind gesture. The amount is built into the sales price.
It’s okay if the seller gets a higher sales price in exchange for covering your closing costs, as long as the property appraises for at least the sales price.
This is where the right real estate agent can be a great resource for you.
What are today’s rates?
Sellers often pay for part or all the buyer’s closing costs.
For home buyers struggling to come up with their down payment, moving expenses and closing costs, asking the seller to cover these expenses is a great way to minimize your out-of-pocket expenses.
Lenders can also pay your closing costs. Ask about this when you shop for your mortgage.