Seller Paid Closing Costs
When buying a piece of property, people often forget about extra fees such as taxes, insurance, and closing costs.
Closing costs consists of fees associated with escrow, title, loan origination, underwriting, doc drawing, and more. Closing costs can be quite expensive, usually several thousands of dollars depending upon loan amount. If a buyer is short on funds, or needs a little help getting financing, a seller will often offer to pay closing costs.
This is where things get a little tricky. The seller isn’t really “paying” the closing costs. The seller will offer to pay a certain amount or all of the closing costs by raising the sales price of the home.
Let’s look at an example:
Buyer’s Offer: $500,000
Closing Costs: $5,000
Seller’s Counteroffer: $505,000
So if a buyer makes an offer on a home for $500,000 but doesn’t want to pay the $5,000 in closing costs, the seller can counter by offering a slightly higher sales price to swallow up the closing costs. In the example above, the seller is paying all the closing costs associated with the deal. The buyer isn’t actually getting the home any cheaper, they’re just able to finance the home with less money out-of-pocket, which can be a lifesaver for a buyer short on funds.
Seller paid closing costs will actually allow the buyer to finance a larger loan amount as well, because their down payment will be reduced with less cash out of pocket. The difference will be lumped up with the mortgage however, and will make monthly mortgage payments slightly higher.
Keep in mind that seller paid closing costs, also known as “seller concession” are limited by mortgage lender, loan program, and even loan-to-value. In fact, recently many lenders won’t allow seller paid closing costs on 100% financed home loans because of the high foreclosure rate.
Typically however, seller paid closing costs are limited to 6% of the loan amount at 90% loan-to-value or lower, 3% between 90-95%, and then usually 3% for 100% loan-to-value at a cost of .25%, which may be taken away from the broker’s yield spread premium.
Be careful when negotiating seller concessions, as things can get tricky if banks and lenders impose their own rules what will and will not work.