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.Click to see today's rates (Oct 20th, 2017)
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 expenseÂ can range from two to five percent of your homeâ€™s value. It can create difficulty when you are trying to budget for what you need to close.
Your lender should disclose estimated chargesÂ 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 areÂ based on the state in which you live, others on the county.
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,Â "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.
Seller-paid closing costsÂ or seller concessions areÂ money paid toward the closing on your behalf. Generally, but not always, this money is applied to the buyerâ€™s closing costs.
Seller concessions allow you to legally roll the closing expensesÂ back into your home loan.
As an example, letâ€™s sayÂ your sellers want to net $200,000 on the sale of their home.
You mightÂ have the necessary down payment, but youÂ need some assistance withÂ closing costs.
Using this scenario, the seller may consider an offer of $205,000, contributing $5,000 towards the buyerâ€™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 doesnâ€™t appraise for the amount that is needed, further negotiations between buyer and seller may be necessary.
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,Â and your closing costs equal three percent of the purchase price, you pay:
If youÂ 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:
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 paid closing costs not only vary by location, but also by the type of loan program for which youâ€™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 buyerâ€™s closing costs.
There are exceptions to the rules, but the maximum allowable seller concessions by loan program are as follows.
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.
Itâ€™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 buyerâ€™s closing costs, canÂ increase the number of potential buyers.
As with almost everything in real estate, who pays what when it comes to closing costs is negotiable.
Itâ€™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.
Sellers often pay for part or all the buyerâ€™s closing costs.
For homebuyers 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.Click to see today's rates (Oct 20th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)