All home loans carry closing costs. But can a seller pay for closings costs? Even the so-called “no closing cost” loan has costs, it just depends upon who pays them. There are different kinds of these fees charged by various third parties. The lender has its own charges such as a processing fee or an underwriting fee and others and there are also multiple third party services the lender needs in order to properly document and approve a home loan application.
There are two primary types of closing costs- recurring and non-recurring closing costs. Recurring charges include those for interest payments, home owners insurance and property taxes. Because they will occur again and again throughout the life of the loan, they fall into the recurring category. Non-recurring charges don’t happen again and are one-time fees associated with funding a mortgage application. Non-recurring charges include a fee for a property appraisal, a settlement fee to a settlement agent or attorney and various other services needed. How much do all of these services add up to?
It’s easy to get an estimate of how costly will be on a potential purchase simply by speaking with your loan officer. To find out if can a seller pay for closings costs you have to reach out to a mortgage broker. This can be done over the phone, by email or in person. The loan officer will want to know the price range you’re looking into and how much you’ll have for a down payment and closing costs. Different types of mortgage loans will have similar costs associated with them but there can be slight differences. For example, a VA loan restricts the borrowers from paying certain types of closing costs but in general the same types of costs will appear on most every real estate transaction. If you’re not ready to talk to a loan officer or just want a general idea on what to expect regarding costs, depending upon where the property is located and what services are needed, borrowers can anticipate closing costs to add anywhere from 2 or 3 percent of the sales price of the home. For example, if you’re looking at homes in the $300,000 price range, costs can range anywhere from $6,000 to $9,000. Many times buyers concentrate more on saving up funds needed for a down payment but don’t take into consideration the additional amount needed for closing.
Okay, so if you’re saved up enough money for your down payment and you want the seller to pay for your closing costs, how much should you ask for? Well, to come to the closing table with as little as possible you want the sellers to pay for all of them. But again referring back to the type of loan being applied for, there are limits on how much the sellers can pay.
The three government-backed loans, VA, FHA and USDA, place limits on how much the sellers can pay listed as a percentage of the amount borrowed. With VA loans, sellers can pay up to 4 percent of the borrower’s allowable costs. FHA and USDA loans allow for seller contributions toward closing costs up to 6 percent of the sales price.
Conventional loans place limits on seller credits toward closing costs based upon the amount of down payment the borrowers have. With a down payment of less than 10 percent, sellers can pay 3 percent towards closing costs, from 10 to 25 percent, 6 percent is allows and any down payment more than 25 percent of the sales price lets the sellers pay up to 9 percent.
You can ask the sellers to pay a certain percentage or you can also just ask for a specific amount. Instead of asking for 3 percent of the sales price, you can ask for a seller credit toward your closing costs of say $5,000.
Okay, so you now have a property picked out and are ready to submit an offer to the sellers. You have a list of estimated closing costs associated with your selected loan type. Let’s say your offer is $300,000 and you want the sellers to pay for up to $5,000 of your closing costs. $5,000 is the amount listed on your loan cost estimate. So how do you ask the sellers to pay for your costs and to get the sellers to agree?
The first consideration may be the state of the current housing market in the area you want to buy. Sellers may be more willing to help pay for your closing costs as an incentive to buy their home if home sales in the area are somewhat depressed. You’re more likely to get a seller to agree to pay for your fees if sellers are having trouble selling their homes at the listing price.
On the other hand, if your real estate market is rather healthy, sellers might not be so inclined to pay for your costs. Why should they if another offer comes in without a request for the sellers to pay for your closing fees?
This is when you confer with your real estate agent to craft an offer that will meet your goals as well as the sellers.’ But before you make any offer, make sure you have a solid pre-approval letter in your hand. In a healthy market, you’ll need every negotiable advantage and when the sellers know you’ve already applied for a mortgage, your credit has been reviewed and you have a preapproval letter in your hand, it can help sway a decision in your favor.
Okay, the list price is $300,000 and closing costs are $5,000. Instead of writing the offer at the list price, make an offer at the list price plus your closing costs. That’s $305,000. Your offer will ask the sellers to pay $5,000 of your closing costs. The sellers still net the same amount and you come to the closing table with less cash to close.
Another way to help get the sellers to agree or find out if can a seller pay for closing costs is to reduce or eliminate any seller requirements in the offer. For example, let’s say the sellers agree to your offer of $300,000. You immediately order a property inspection and a few short days later you get the results. While the property is in good enough shape in order to receive a loan approval there are a few things that need some attention. For example, the carpets definitely need a thorough cleaning and the hot water heater is more like a warm water heater. Interior paint is also on the inspector’s list as do several leaky faucets. In most cases, the buyers would negotiate the price of the home to also include the sellers to make the listed repairs the inspector pointed out. Instead of asking the sellers to fix things, ask the sellers to pay for your closing costs instead.
Finally, when buyers and sellers negotiate a final sales price there can be more than a bit of back and forth. You can make an offer and receive a counteroffer from the sellers. Answering a questions if can a seller pay for closings costs. The answer is yes. Their counter can be countered by you and so on until both parties agree to the terms listed in the contract.
Be flexible. Sellers like that and so will the seller’s real estate agent. If you ask for a $5,000 closing cost credit and the sellers turn down your request, ask for $4,000 or make some other type of concession. In real estate markets the sellers can hold the advantage while in others the buyers do. But when properly crafting your offer you can have the sellers pay for your closing costs in most any real estate climate.