How to Ask a Home Seller to Pay a Closing Cost Credit
Counterintuitive as it sounds, home sellers often pay part or even all of their buyer's closing costs. Let's look at the circumstances under which these closing cost credits occur and how to get a seller to agree to them.
Which Kind of Homebuyers Seek a Closing Cost Credit?
Buyers who ask for a closing cost credit are often 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 percent of the home's purchase price; the VA requires no down payment at all.
Many of these types of buyers do not have the ready cash to pay the closing costs, which, while they can vary tremendously depending on the municipality, typically range from 2 to 5 percent of the home's purchase price. However, better-heeled buyers may also lack the liquidity to pay closing costs that can run into the tens of thousands of dollars, especially after they've made the 20 percent down payment that conventional mortgages require. So those buyers, too, might ask the seller for closing cost assistance.
How Much Can a Closing Cost Credit Be?
Although the seller needs to be amenable to the idea, naturally, the matter of paying the closing costs isn't totally up to him. The buyer's mortgage lender usually sets restriction as to how big the credit can be. Some lenders limit it to 3 percent of the purchase price, for example. Nor do lenders like the credit to 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 percent, or $9,000—but the closing costs end up totaling 2 percent or $8,000. The $8,000 is all the lender would officially allow, although that $1,000 of unused credit could be applied if the buyer's agent and lender used a little ingenuity—buying down the interest rate if nothing else.
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 percent in closing costs. If you were to divide the sales price by .97, that would equal $309,278. So, a buyer would offer that amount (maybe rounding it up to $310,000), contingent on receiving a $9,278 credit. Even with paying that credit, the seller still nets $300,000.
The drawback to this approach comes if the buyer's lender does not 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—that tense period between the signing of the contract and the actual completion of the deal. Sellers want qualified buyers who will not 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 credits: 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 halving the down payment or earnest money—leaving funds for the 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, in turn, lower the closing costs. Finally, if the seller does not want to pay the full amount of the closing costs, ask if she'll pay a smaller percentage of them.
After all, something is better than nothing.