June 29, 2018.
Asking for a little extra at the closing table happens more than many buyers realize. If you’re in the process of buying a new house — and especially if you’re a first-time buyer — you could ask the seller to cover the cost of your closing.
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How much will closing cost you?
Along with a potential down payment and some related loan fees, closing costs can add to your initial investment when purchasing a house:
- The cost of closing is something your loan officer will discuss with you in detail before the big day so you’ll be fully prepared and avoid any unpleasant surprises.
- Closing costs can vary, but Freddie Mac estimates these fees as being 2 to 5 percent of the purchase price of a house.
- Zillow says, based on this percentage and the results of a recent survey, that the average buyer pays about $3,700 in closing fees.
Closing costs are also referred to as settlement fees. This is the amount of money a buyer needs to pay to take out a mortgage. Closing costs may be charged by any or all people involved in a purchase, like a mortgage lender, a realtor, and other third-party services.
Closing costs pay for:
- Appraisal fees
- Attorney fees
- Credit report fees
- Government recording fees
- Lender origination fees
- Survey fees
- Tax service fees
- Title service fees
- Underwriting fees
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The good news? Asking a seller to pay these costs for you has the potential to save you thousands of dollars. The even better news? Plenty of homebuyers are doing it.
Why would a seller pay for your closing?
Why not? Toby Roberts, Director of Business Development for Cornerstone Home Lending, says seller-paid closing costs, also called “seller incentives,” are most common among motivated sellers. A seller who needs to move quickly or who may be eager to close while juggling the purchase of another home may be more willing to contribute financially. “The seller who pays closing costs for a buyer helps the marketability of a home by reducing the ‘cash to close,’ or the down payment plus any fees or services required to complete a loan transaction,” Roberts explains.
A seller who agrees to pay all or part of a buyer’s closing costs:
- Makes a home more affordable by reducing “cash to close.”
- May keep a buyer who has less than a 20 percent down payment but doesn’t want to pay for private mortgage insurance.
- Helps close a deal that may not have happened otherwise.
“Seller-paid closing costs, a credit legally allowed to cover buyer closing costs and prepaid expenses on a mortgage, benefit a buyer who doesn’t have a lot of money,” Ryan Niles at Cornerstone says. “And this can bring down the required down payment.”
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Niles concedes that in some markets with smaller inventory, it can be difficult to find a seller who will agree to pay. A seller is less likely to pay for closing costs with multiple offers on a house. Thankfully, there’s still a solution.
Niles suggests asking a seller for a credit instead.
“Let’s say, for example, a buyer wanted to purchase a house for $350,000. Total closing costs are about $5,000,” Niles says. “A seller could bump the purchase price from $350,000 to $355,000 and offer the buyer a $5,000 credit. A seller may agree to this because their net proceeds would be the same.”
Likewise, builders normally prefer to go this route — providing credit rather than a reduction in price — because it keeps the sold listing prices at a healthy level. Using a credit in a hot market also prevents other buyers from seeing houses being sold for less money and wanting that same price. For buyers interested in new construction, asking for a seller credit over seller-paid closing costs can be helpful. “Builders are typically willing to absorb a seller credit as opposed to dropping a price. It’s a win for the seller and the buyer,” Niles explains.
The opportunity to use seller-paid closing costs — or the chance to cash in on a credit — are going to be unique to your local housing market, Roberts says.
What to remember about seller-paid closing costs before you buy
It never hurts to ask a seller to pay for your closing costs, and it can also open the door to negotiation. Talk to your loan officer about the right approach and remember:
- You can find the closing costs paid by the buyer and the seller detailed in your purchase agreement.
- It’s more common to see a first-time homebuyer negotiate seller-paid closing costs. Since many first-time buyers face challenges saving for a down payment, Roberts says a seller may be willing to pay some or all of the closing costs to help facilitate a purchase.
- Sellers may pay for closing costs more frequently in states with high closing costs, related to transfer fees and more.
- The amount of closing costs a seller can pay is typically capped by the mortgage program a buyer uses to finance a home purchase. USDA loans allow up to 6 percent seller-paid closing costs, for example, while VA loans allow up to 4 percent.
- Excessive seller-paid closing costs can negatively impact a home’s appraised value. This is why mortgage program guidelines set limits on seller-paid closing costs to avoid negatively affecting the housing market.
- It’s common for a seller not to pay all of a buyer’s closing costs but to still pay a portion. This number depends on the final negotiations of the selling and listing agents.
- If a seller doesn’t agree to pay closing costs, in part or in full, there are still thousands of down payment assistance (DPA) programs available to first-time buyers throughout the country. DPA programs can help to cover a home’s down payment and the cost of closing, available only through DPA-approved mortgage lenders.
Getting a seller to pay your closing costs is the cherry on top of a great homebuying experience. When you work with a loan officer you trust, every part of the mortgage process can feel this easy. Click here to connect with a Cornerstone loan officer near you.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.