Are Seller Paid Closing Costs Actually A Thing?

Certified Mortgage Advisor
NMLS 1701021
Published 
October 19, 2020

Closing cost paid by sellers?!

Now, we're talking about having sellers paid closing costs a real thing? A lot of people get this mixed up. They just think the seller's going to cover closing costs for them, but it doesn't work exactly like that. So three things we're going to learn here. Number one, if the seller can cover all of your closing costs. Number two, the trick to getting the seller to actually accept paying for your closing costs because it takes a little bit of negotiation there. Then finally, an easy-to-read chart that's going to show you exactly what you can ask for in closing cost credit.

How much will the seller shoulder?

So first let's talk about the seller and the drama of it all. So often what people say to me when I asked them about, you know, what are you going to do as far as closing costs? Because you have your down payment and closing costs that create your total cash to close.

And so they say, well, the seller is going to cover that. Well, the problem is how much, how much is the seller going to cover? Because in a contract you can't just write, the seller is going to cover all closing costs. It doesn't work exactly like that. I'll show you how it does works here at the end.

How seller is affected

So what happens is that money comes directly out of the seller's pocket. So we have to keep this in mind. So for instance, if you're purchasing, let's see a $300,000 house and you ask the seller for $5,000 in credit towards your closing costs the seller is actually only going to be receiving a net offer of $295,000. So when we ask for closing costs, we ask for a specific dollar amount or a specific percentage, and that money comes directly from the money that the seller would be getting.

So even though you might be offering $300,000, the seller is actually getting a net offer for their home of $295,000 after they give credit towards your closing costs.

So obviously, this is not super attractive. If you come to a seller and you say, Hey, I want I'll offer your 300,000 for your house, but I want you to give me $5,000 back they're going to think, well, that's $5,000 that we wanted that they would have had in extra money if they go with an offer with somebody not accepting closing costs. So your offer becomes a lot less attractive when you ask for closing costs. So you need to be cautious of this, especially in a really competitive market.

Wrap the closing cost to your purchase price

So one trick that you can do, to get the seller, to actually view this net number a little bit differently is actually to kind of wrap closing costs into your purchase price. So you used to be able to, before the housing crash actually wrap closing costs in your mortgage. So, you used to, you know, if you had a $300,000 house, you could get a loan for like $310,000 and have $10,000 to go towards closing costs, and sometimes you could use it for like, repairs and furniture. And it was that's what led to the housing crash that doesn't exist anymore. So you can't wrap it into the loan, but you can wrap it into the purchase price.

How to do it

So I'll show you how this works. So what you can do, let's say this $300,000 example, the sellers listing a home for $300,000. So what you could do is offer $305,000 and ask for $5,000 in closing cost credit. So what does that do? That makes the seller oops so we offer $305,000 and ask for $5,000 back. And what does that do? That gives the seller a net of $300,000. That's exactly the amount that they wanted. So you ask a little bit above to wrap those closing costs into the purchase price so then you can finance them with the loan. So what this does is it's easier for the seller.

Needs to appraise

But we have to be very careful because we need to make sure it appraises. Right? So for instance, let's say a, it was a $300,000 house, but let's say we ask for $10,000 in closing costs. Well, if we offer $310,000, the home now has to appraise for $310,000. If it doesn't, then we won't be able to take all those closing costs and put them into the purchase price.

Talk to your realtor

So something you need to be very careful of. And if you're going to do the strategy, talk with your realtor about doing this and make sure that there's a high level of confidence that the home is going to appraise for that higher amount, because if it doesn't, then we need to talk about how do we actually handle this appraisal coming in lower.

Credible

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Make your offer attractive

So let's go ahead and jump into how to make this offer attractive. Again, because we're talking about how much does the seller actually want to get out of this? We want closing costs and the seller wants to walk away with the money that they were expecting. So we have to be able to create the best of both worlds with those two scenarios.

Is our offer attractive?

So, first, we need to look at how attractive is our offer, to begin with, right? If we're asking for closing costs, We need to make sure that we're either evening out the net that the seller is going to get, or the rest of our offer needs to be attractive. So maybe we need to have an earlier closing date, or we need to ask for fewer contingencies in the contract. There are ways that we can set up our offer to be more attractive to the seller even if we're asking for closing costs.

Because the contract that the seller gets is all leaning towards being more favorable to us, the seller has less likely of a chance to actually want to go with our offer. So ask your real estate agent, how can make this offer more attractive if we're going to ask for closing costs?

Depends on local market

Also, this is huge. This is going to depend a ton on your local market. So if you're in really high-cost areas, if you're in these crazy areas of California or, you know, high, competition areas in Florida or Tennessee or, or wherever you're at, just know that asking for closing costs might not be something that's very customary in that specific local market.

Most of the time high competition markets don't have a lot of closing costs going on. Because the markets are so competitive people with more favorable offers are going to win over people asking for closing costs. However, if you're in more of an average market somewhere, for instance, like where I'm at Dayton, Ohio, then closing costs are super common. I would say probably 70% to 80% of the loans that we do have some sort of closing costs concession from the seller. It's just incredibly common in this area, but it might not be in your specific local market. Now, this is also going to depend on the market energy that's going on.

Seller's market or buyer's market?

So if it's a buyer's market or a seller's market. So in a seller's market, the sellers have the control, meaning that it's going to be difficult to get as many closing costs as you want because there are a lot of buyers bidding on the same home. One home might have several offers. So asking for closing costs makes your offer kind of stack a little bit lower amongst other offers.

Now on the reverse, if it's a buyer's market, then the buyers have the control. And you might be able to ask for more closing cost credit in a buyer's market.

If you like it, buy it!

So then also, you know, just like the Beyoncé song, if you'd like it to put a ring on it. A lot of times people want to fight over these small amounts, and I see this happen all the time, where, where somebody writes an offer and then they get a counteroffer back from a seller and they don't accept it because there's a difference of $1,000 or $3,000. And I get it, you know, money is money. Money is expensive, which is a stupid phrase.

No pouring of emotions if you are not really into it

But if there's a home that you love, the action behind it shows that you actually love it because a home will go away if you're not willing to put the offer up for it. I see people lose out on homes, literally over a thousand dollars. At that point, we're just playing with egos and we probably need to take a breath and say, you know what? We actually really want this home. We're willing to pay money for it.

So if that's you just, just recognize it. If it's a home you want, be willing to pay for it. And if you're not willing to pay for it, then don't put as much stake in it that home, emotionally upfront.

Closing costs are negotiated as a percentage of the purchase price

Going back to the first bullet point, you can't just write in the contract "seller pays all closing costs". It doesn't work like that because if you're using financing, there's a maximum amount that the seller can actually pay and you have to fit within those guidelines. You can't just receive however much money you want from the seller.

#CalmMoment

So we're going to cover that here in just a second, but first let's slow down and let's have a CalmMoment, just like you want to slow down in the mortgage process and in the home buying process, we're going to slow down in this blog.

So, if you're bidding on a home, especially in a market right now where nationally, it seems like every market seems to be in a seller's market. It can be really frustrating if you need closing costs to help. If you need closing cost help from the seller, it's hard because you're putting in offers and you're most likely are getting beat out by other people who aren't asking for closing costs.

If it won't work now, it might work in the future

So, first, I just want you to recognize that if something doesn't work out right now, the odds are it's going to work out in the future. Often what I see happen is buyers will put in offers on homes and they get super disappointed, but then one finally comes along that they get an accepted offer on and they're able to close it. And that home was so much better than the initial homes that they were offering.

NO is usually for the better

There's just this interesting thing that seems to work in this world where, when we get told no when things don't work our way, it usually is for the best.

No crying over spilled milk

Also, it's difficult to accept that, but sometimes we just have to take a moment and say, you know what we're accepting the circumstances happening or accepting that this option, this opportunity isn't working out, and we're okay with that.

Learn to move forward, wait for the right time

We're going to move forward and see what plan we can create, moving forward without that specific one. So just know if, what if the home you're looking at right now, isn't working out. If someone else puts in an offer on it or you keep getting beat out, I promise you there's going to be a better one coming ahead. You just need to wait for the timing to be right for that perfect home to show up.

Max Seller Credits

So let's talk about the max seller credits you can get with each loan type. So conventional loans are a little bit different. They have a couple of extra guidelines here.

For Conventional

So the max seller credits on a conventional loan. If you're putting less than 10% down, the max you can ask for is 3%. So for instance, on a $200,000 house, the max seller credit you can ask for is $6,000. If you're putting 10% to 15% down, you can ask for up to 6% of the purchase price towards your closing costs. If you're putting 25% or more down, then you can ask for up to 9% towards your closing costs.

For FHA

On FHA loans, you can ask for up to 6% of the purchase price.

For VA and USDA

On VA, it's up to 4% and on USDA, it's up to 6%.

For Jumbo Loan

Then if you're looking at a Jumbo loan, Jumbo loans are for people who are purchasing above the conventional loan limit. Which right now is hovering around the mid $400,000 range. If you're using a jumbo loan, each lender has specific guidelines for jumbo loans, and just ask your lender if you're using one of those loans, how much you can ask for in seller credits, normally it hovers around the lower side, like 2% to 3%. Again, it depends on lender by lender.

Talk with a loan officer
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