Sellers Paying Closing Costs

So now that we have discussed what closing costs are, let’s look at how they can impact the transaction.

Let’s say you’ve found the perfect home and the price is $100,000. If you use FHA financing, the minimum downpayment you’ll have to have is $3,500 (3.5% of the purchase price). You might (ßnotice the word “might” here – we’re not in the lending business so we shouldn’t give a real figure here, other than for illustration) have closing costs of about $3,000. In this scenario, you as the buyer will need a total of $6,500.

A lot of people might have the $3,500 for the downpayment, but another $3,000 may be difficult to come up with at any one time. Therefore, many buyers ask the seller to cover their closing costs by writing in such a term in the offer, basically saying, “I’ll buy your home for $100,000 if you pay my $3,000 in closing costs.”

There are two things to consider here. First, keep in mind that by agreeing to the above, the seller is really only getting $97,000 for their home ($100,000 sales price - $3,000 buyer closing costs) in addition to their own closing expenses. Sometimes a seller can/will consider this, while other times they won’t/can’t.

The other issue comes when the seller says, “I’ll pay your closing costs so you won’t be out of pocket for those expenses, but I want the full $100,000 for my house.” Situations like this sometimes result in the final contract price being above the original list price. What the seller is essentially saying here is, “I’ll pay your closing costs of $3,000 if you pay $103,000 for the house.” This can be done, but only if the house ends up appraising for $103,000 or more, which can sometimes be difficult since the appraiser has to defend the value he or she places on a property on behalf of the lender, especially under the present regulatory scrutiny.

Bottom line: The seller can, and often does, pay the buyer’s closing costs, but it has an impact on what the final agreed-upon contract price comes out to be, and can have another impact on loan approval. All of these factors should be considered when thinking about the seller paying these costs.

For more information on purchasing your first home, check out our website at www.springfieldfirsthome.com or by calling or texting us at 417.872.9222.