As counterintuitive as it might sound, home sellers sometimes pay part or even all of their buyer's closing costs. Who pays closing costs depends on several factors, including state law, what's customary in your area, and whether you're in a buyer's market or a seller's market. Let's look at the circumstances under which a seller pays closing costs and how to get a seller to agree to them.
- Closing cost credit is a negotiated cost between buyer and seller that reduces the expense to the buyer.
- Closing costs depend on many factors and can sometimes be more than anticipated.
- You can negotiate closing cost credit so that it benefits both the buyer and seller.
What Kind of Homebuyers Seek a Closing Cost Credit?
Many buyers who ask for a closing cost credit are first-time homebuyers. They might be obtaining a Federal Housing Authority (FHA) loan or Department of Veterans Affairs (VA) loan, programs whose generous terms enable people with little in the way of upfront reserves to become homeowners. The FHA requires buyers to make a down payment of only 3.5% of the home's purchase price, and the VA requires no down payment at all.
Many of these buyers don't have the ready cash to pay the closing costs, which typically range from 3% to 6% of the home's purchase price. Even experienced homebuyers may also lack the liquidity to pay closing costs that can run into the tens of thousands of dollars, especially after they've made a 20% down payment on a conventional mortgage. So those buyers might also ask the seller for closing cost assistance.
Lenders may offer no-closing-cost mortgages, but this usually means the loan either has a higher interest rate or the closing costs are added to your loan.
How Much Can Closing Cost Credits Be?
Although sellers need to be amenable to the idea, the matter of whether to pay the closing costs isn't totally up to them. The buyer's mortgage lender usually sets restrictions as to how large the credit can be. Some lenders limit it to 3% of the purchase price, for example. Seller closing cost credits, also known as seller concessions, also can't exceed the actual amount of the closing costs.
Say the purchase price of a home is $300,000 and the maximum credit the lender allows is 3%, or $9,000. If the closing costs end up totaling 2%, or $8,000, that is all the lender would officially allow. Seller concessions are also limited depending on the type of mortgage. VA mortgages, for example, only allow up to 4% of the purchase price, and the seller credits can only be used for certain costs.
Negotiating a Credit: A Bigger Purchase Price
The primary way many buyers get the sellers to pay a closing cost credit is by agreeing to a higher purchase price. For example, let's say a home is listed at $300,000 and the buyers are figuring on 3% in closing costs ($9,000). So, a buyer would offer that amount (maybe rounding it up to $310,000), contingent on receiving a $9,000 credit. Even with paying that credit, the seller still nets $300,000.
The drawback to this approach comes if the buyer's lender doesn't appraise the home at $310,000. If there is no provision for this in the purchase contract, the seller could be stuck paying a credit based on the higher sales price and netting less than anticipated.
Negotiating a Credit: A Fast Close
Another popular approach to getting the seller to pay closing costs relates to escrow, which is the period between the signing of the contract and the actual completion of the deal. Sellers want qualified buyers who won't cause any problems during the escrow period, like making a fuss about issues uncovered by the home inspection. If a buyer offers to accept the home in its as-is condition and not demand major repairs, it could encourage the seller to agree to some concessions, which is a small price in return for the assurance escrow will close without hassles.
Negotiating a Credit: Other Trade-Offs
If the seller seems reluctant to offer a credit, a buyer could ask for a different sort of break, such as a lower down payment or less earnest money. Either of these options leaves the buyer with more funds for closing costs. Alternatively, the buyer could ask for a little discount on the home's price (sellers usually work a little flexibility into the price tag anyway), which will also lower the closing costs. Finally, if the seller does not want to pay the full amount of the closing costs, ask if they'll pay a smaller percentage of them.