In real estate, closing costs are one of the most confusing and misunderstood parts of the home buying process. Too many homebuyers jump feet first into the process without budgeting for these costs and fees. This is a mistake, as these fees can add between two to five-percent of the home’s entire purchase price (sometimes even more). The good news is that you may or may not have to pay them.
In some cases, you can ask the home’s seller to cover some or all of your closing costs. Keep in mind that every real estate transaction is different, and so much largely depends on the market in the area, the type of financing you’re using, the specific property, and of course, it’s owner. If you are looking to pay less out of pocket, here are a few things you need to know about getting a seller to pay your closing costs.
Loan Type Restrictions
Before you write an offer on a home, talk with your real estate agent and your loan officer about how best to tackle closing costs given your unique situation. FHA, USDA, VA and conventional mortgages allow sellers to contribute toward your closing costs, but there are different caps and rules with each.
When it comes to closing costs for FHA and USDA loans, sellers can contribute up to six-percent of the sale price toward closing costs, prepaid expenses, discount points and more…know that you can’t put this money toward a down payment.
VA loans allow the seller to pay all of the buyer’s mortgage-related closing costs and up to four-percent of the purchase price in concessions, which can cover things like prepaid taxes and insurance and even paying off collections, judgments or leases at closing.
Conventional loans are slightly more restrictive. Buyers with an LTV ratio above ninety-percent can ask a seller to pay a small percentage of the purchase price. If the LTV ratio is between seventy five to ninety-percent, sellers can pay up to six-percent.
Asking Too Much?
Asking the sellers to pay your closing costs may seem like a no-lose situation. But some markets and buying situations may be better suited to this than others. You should always talk to your real estate agent to be sure you understand the market you’re in and the current buying and selling conditions. Asking sellers to pay your closing costs in a hotter real estate market may lead to your offer losing traction. If the seller is dealing with multiple offers, asking for help with closing costs could push your offer to the bottom, or eliminate you from the running altogether.
Sellers will often agree to pay a closing cost credit if they get everything they want. Sellers want qualified buyers who will close escrow and not cause any problems during the escrow period. In other words, offer to buy the home in its as-is condition and assure the seller the buyer will take care of any home inspection issues after closing.
Too many sellers, it is worth it to give a little discount on the price upfront in return for assurance the escrow will close on time without hassles. Some sellers work a little flexibility into the sales price to begin with, so it’s not a hardship to offer a closing cost credit.
What If They Say No?
If the sellers aren’t keen on the idea of paying your closing costs, or if asking might jeopardize your offer, you have a few options to consider. One is to use verified gift funds from family or friends. This needs to be paper-trailed and a true gift with no expectation of repayment. Rules for how you can use gift funds can vary by lender and loan type. You’ll usually need to furnish a letter detailing the gift amount, the relationship and other key information.
You can also ask your lender to pay your closing costs. To make that happen, you’ll typically have to take a higher interest rate, which costs you more over the life of the loan. That may not be a big deal if you’re planning to stay in the home for just a few years. But that higher rate means you’ll pay those closing costs many times over if you’re staying in the home for the long haul (barring a refinance, of course).
There’s also the question of your overall finances if you’re not in a position to cover your closing costs. If these present a struggle, how’s that first mortgage payment going to feel? In the end, you’ll need to weigh the potential costs and benefits of asking your seller to pay your closing costs. Take a realistic look at your budget and finances, too. Talk with your real estate agent and lender to determine the best option for you.