Should I pay the buyer’s closing costs?

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According to the National Association of Realtors, closing costs and down payments are big hurdles for would-be buyers. As a seller, you may be able to get ahead of the competition if you’re willing to pay buyers closing costs.

• Accepting a higher offer and paying closing costs affects your payout very little, and can make an impossible deal possible for your buyers
• Different mortgage programs set different limits on costs you’re allowed to pay
• The property appraisal must support the sales price, and concessions like covering closing costs will be noted

Your decision should also depend on the overall strength of the buyer. If he or she can’t produce a mortgage pre-approval letter, you may not want to take your home off the market or make any sacrifices.

What are closing costs?

Closing costs include fees for every aspect of the home transaction — from real estate commissions to mortgage lender fees to title insurance and appraisal charges.

Other closing costs include property taxes and homeowners insurance. And often mortgage insurance.

This expense can range from two to five percent of your home’s value. It can create difficulty for buyers who just spent five years saving up a 3 percent down payment and have little emergency savings.

Related: 4 ways to keep your mortgage closing costs low 

A savvy buyer should already have secured a mortgage pre-approval before making an offer on a home. This approval comes with a set of disclosures estimating the closing costs likely to come up. A cash-strapped buyer has a couple of options — taking a higher mortgage rate (which could make approval more difficult), or asking you to cover the costs.

Who typically pays for what?

Most real estate transaction costs are paid at closing. If you don’t close, you don’t pay.

Related: How can I avoid a home appraisal when I apply for a mortgage?

Chances are good that there is a set of costs customarily paid by the seller, and another customarily paid by the buyer.

However, you can negotiate any closing cost allocation you like, if it will increase your odds of closing and get you the price / proceeds you want.

Your seller concessions at work

Seller-paid concessions are just a way to roll the costs into the buyer’s loan. Instead of accepting an offer of $95,000 for your $100,000 house, for instance, you might accept $100,000 and pay the buyer’s closing costs of $5,000.

You still get your $95,000 (less real estate commissions). But things are more favorable for your buyer. Instead of coming up with a 5 percent down payment of $4,750 and paying $5,000 in closing costs, he or she just needs to pay a $5,000 down payment. Making the odds of qualifying a lot better.

Related: Interested party contributions (getting the seller to pay your mortgage closing costs)

One way of using your seller concession to help your buyers close the deal is to purchase their mortgage insurance. Buyers can pay it monthly (most do) or in a lump sum upfront. By paying that lump sum for the buyer, you can shave hundreds off their monthly payment and help them qualify for a bigger mortgage (enough to buy your home).

However, there are two drawbacks. If the property doesn’t appraise for $100,000, the deal won’t work as structured. And the real estate commission will be slightly higher. If you pay 6 percent, for instance, getting a 95 percent offer costs you $5,700. While a full-price sale at $100,000 costs you a $6,000 commission.

Mortgage program differences

Customary seller-paid costs not only vary by location, but also by the type of loan program your buyer wants.

It’s important to understand how much different programs allow you to contribute.

Related: How much cash do you need to buy a house?

There are exceptions to the rules, but in most cases, the maximum seller concessions are:

• FHA loans: 6 percent
• USDA loans: 6 percent
• VA loans: 4 percent
• Conforming (Fannie Mae and Freddie Mac) loans: 3 to 9 percent, depending on down payment
• Investment properties: 2 percent

Other programs, such as portfolio loans, jumbo loans and non-prime loans make their own rules about seller contributions.

Shared closing costs

In most markets, buyers and seller split the closing costs. How the split goes depends on what’s customary, and who has the power in the transaction.

Generally, you can pay buyers settlement charges without restriction (other than lender limits). Offering to pay part or all of the buyers closing costs can increase the number of potential buyers.

Related: Buying a house (dealing with tough competition)

The main points to keep in mind are: how good is their offer, how likely is the loan to close, and how much are you willing to give up to make the deal work.

You should probably require your buyer to get mortgage pre-approval before entertaining paying buyers closing costs. For one, you won’t know what the costs are without seeing lender disclosures. And second, pre-approval proves that the buyer is serious and capable of closing the deal.