For many people, buying a home is the biggest purchase in their lifetime. Several loan products allow for 100% financing with no down payment; however, buyers still have out-of-pocket expenses not covered by the loan such as moving expenses and closing costs, to name a few.
Asking the seller to pay some or all of the closing costs is a great way to allow buyers who otherwise may not buy a home to be able to do so. This is a popular tool for many first time homebuyers and is especially common with VA loans, which allow for 100% financing. Oftentimes, buyers who ask for closing costs offer the seller their full asking price or renegotiate the price to enable the buyer’s closing costs to be covered by the seller.
Tip #1: Get an estimate on closing costs before asking the seller to pay. Be careful when calculating how much to ask the seller to pay towards your closing costs. If you ask for too much of a credit at closing to cover closing costs, some of that credit may be retained by the seller. For example: if you offer to pay $200,000 for a house and ask the seller to pay $5,000 in closing costs, you are essentially paying the seller $195,000. If the closing costs end up being only $4,000, the seller will retain the excess $1,000 and you will essentially pay $196,000 for the house.
Check with your lender for their guidelines on seller-paid closing costs. Some lenders are more flexible in what they will allow to be paid by the seller, and some put a cap on the amount allowed, usually between 2% and 4% of the loan amount, depending on the lender and type of loan. Your lender will also be able to help you calculate a fairly accurate amount for your total closing costs. Be sure to ask your closing attorney to verify their fees, title insurance premiums, and recording fees.
Tip # 2: If you finance 100% of the contract price, you cannot receive back after closing more than you paid into the transaction. For example, if you pay $1,000 in earnest money and $500 for due diligence, you cannot receive more than $1,500 after closing. So, using the example above, if you offer $200,000 and ask the seller to pay $5,000 in closing costs, and your closing costs end up only being $3,000, you cannot get $2,000 back at closing, You would only get $1,500 and the other $500 would be returned to the seller.
Asking a seller to help pay your closing costs can be a great tool when purchasing a home. Keep in mind the above tips to ensure your expectations are met on closing day. And always check with your lender for their guidelines and for estimates on your closing costs before you make the final offer on your dream home.
Most lenders will allow a seller to pay these buyers’ closing costs:
- loan origination fees
- appraisal fee
- credit report fee
- flood certification fee
- prepaid interest
- initial deposit for escrow account
- title examination fee
- title insurance premiums
- pro-rated property taxes
- homeowner’s insurance
- recording fees
- termite reports
Published on December 1, 2016