What Closing Costs Can the Seller Pay?
Many buyers (particularly first-time buyers) are short the cash they need for the down payment and
closing costs. One way to overcome this cash shortage is for the seller to
pay a portion of the closing costs. How much the seller is allowed to
contribute depends on the type of mortgage loan.
On a conventional loan,
the seller can only pay non-recurring costs. These do not include pre-paid
items or items to be paid in advance (such as mortgage insurance or hazard
insurance). The seller's contribution is limited to the amount the buyer is
putting down. If the buyer puts 10 percent or more down, the seller may
contribute up to 6 percent. If the buyer puts less than 10 percent, the most
the seller may contribute is 3 percent.
On a VA loan, the seller
may pay all the closing costs (this is known as a "VA-No-No" - the buyer
pays no down payment and no closing costs). Sellers who agree to pay the
closing costs often put a ceiling on the amount they will pay.
On a FHA loan, the seller
may pay all the closing costs. However, the buyer must make a minimum 3
percent investment in the property - whether as part of the closing costs, a
down payment or pre-paid items. The 3 percent can be from the buyer's own
funds or from a family member's gift.
Asking the Seller to Pay a Portion or All of Closing Costs
The seller's willingness to contribute to
closing costs is often driven by market conditions and the way in which the
request is made to the seller.
As your real estate
agency, we will help you prepare an offer that balances the purchase price
and request for closing cost assistance with the dynamics of the current
marketplace. For instance, in a seller's market we may increase the offered
purchase price to offset the request for closing cost assistance.
Remember - When you ask the buyer to pay a portion or all
of your closing costs, in essence you are financing the closing costs. This
is because the seller's contribution is typically offset by a higher
purchase price. And it is this higher purchase price that is financed with
your mortgage loan.