How to Ask a Home Seller to Pay a Closing Cost Credit
You might wonder why any buyer would ask a home seller to pay a closing cost credit for the buyer. It can seem odd to many sellers that a buyer would ask. The first thought that crosses a seller's mind is "doesn't the buyer have any money?" And if the buyer doesn't have any money, "why should the seller subsidize the buyer's home purchase?" Those are excellent questions.
However, it is common for sellers to pay a closing cost credit for some buyers in certain situations.
Sellers often might pay all or part of the buyer's closing costs under the right circumstances.
How Much Do Buyers Need for a Closing Cost Credit?
All loans are different, but an easy rule-of-thumb to figure out the amount a buyer needs to pay closing costs is to multiply 3 percent of the purchase price. That's not an exact science, and it can cause complications if the seller is willing to credit, say, 3 percent of the purchase price to the buyer but the buyer's closing costs are less. There are also some loans that will allow a larger credit but they are few and far between these days.
Say the purchase price is $300,000. If the maximum allowable credit is $9,000, buyers should not ask a seller to give them $10,000 because their lender most likely will not allow that amount. Plus, if a buyer's closing costs add up to $8,000, for example, there is $1,000 of unused credit that could be applied if the buyer's agent and lender used a little ingenuity.
They can buy down the interest rate if nothing else.
Not every home buyer will ask for 3 percent of the purchase price. Some buyers might already have most of the closing cost money in the bank but could be short a few thousand. In that instance, they would ask for $1,000 to $3,000 or so. It can be different amounts depending on the buyer's needs.
Which Kind of Home Buyers Are Likely to Ask for a Closing Cost Credit?
Buyers who ask for a closing cost credit are often first-time home buyers. They might be obtaining a VA or an FHA loan. The reason those two loans often involve some sort of seller credit is because the minimum down payment for FHA is 3.5 percent of the purchase price and VA is zero down. These loans allow buyers with little upfront reserves to buy a home.
Many of these types of buyers do not have additional funds in the bank to pay the closing costs that are required above and beyond the purchase price. However, I have also had buyers who are putting down 20 percent with a conventional loan ask the seller for closing cost assistance. If the transaction is attractive enough to the seller, the seller might agree.
Tips for Asking the Seller to Pay a Closing Cost Credit
The number one way many buyers get the sellers to pay a closing cost credit is by increasing the sales price to cover the additional expense. For example, let's say the sales price is $300,000, and the buyers need 3 percent of the purchase price. If you were to divide the sales price by .97, that would equal $309,278. If you take $309,278 X 3 percent and deduct it from the sales price, the seller is still netting $300,000.
Most buyers would round that to $309,500 or $310,000 and ask for a 3 percent credit. Then the seller is getting the same amount of money as selling at the list price of $300,000.
The drawback to this approach is what happens if the home does not appraise by the buyer's lender at $310,000? If there is no provision for this in the purchase contract, the seller could be stuck paying a credit from a lower sales price and netting much less than the seller anticipated.
Offer a Trade Off for a Closing Cost Credit
Sellers will often agree to pay a closing cost credit if they get everything they want. Sellers want qualified buyers who will close escrow and not cause any problems during the escrow period. In other words, offer to buy the home in its AS IS condition and assure the seller the buyer will take care of any home inspection issues after closing.
Too many sellers, it is worth it to give a little discount on the price upfront in return for assurance the escrow will close on time without hassles. Some sellers work a little flexibility into the sales price to begin with, so it's not a hardship to offer a closing cost credit.
If the seller does not want to pay a full 3 percent, ask for a little bit less, and find a way to get the balance without borrowing the money. If the borrower is putting down 10 percent, maybe the down payment could be reduced to 5 percent, leaving funds for the closing costs. Buyers should not under any circumstances borrow the closing costs because the lender will not allow it, but it doesn't mean a buyer could not tap the bank of Mom and Dad for a gift.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.