Will a seller really pay your closing costs? Why would they do that? Well, there are some key things you need to understand about closing costs in general, seller paid closing costs and how they impact you as a home buyer today.
Many home buyers, particularly first time home buyers, don’t have enough money saved to cover their down payment and all of their closing costs and pre-paid items. What are these amounts, what do they cover, and will the seller pay?
In addition to your down payment amount, which will vary based on your loan type and pre-approval, you will have closing costs and pre-paid items that you will need to cover in your home purchase. These items include but are not limited to:
- Lender Fees for Origination of Your Loan
- Appraisal Fees
- Interest you will pay at closing on your loan
- Mortgage Insurance (if applicable)
- Real Estate Taxes
- Home Owners Insurance
- Title Company Charges for researching and insuring the title of your new home
- Government charges
- Real Estate Fees you may agree to pay
Depending on the purchase price of your home, your loan amount, the property taxes and even your loan type, these amounts can vary dramatically. Contrary to popular belief, there is no set percentage for closing costs or pre-paid items. The reason a percentage doesn’t work is largely due to the fact that a number of closing costs are fixed amounts and as a result the higher your loan amount is, the lower the percentage will be. Each individual home and your individual situation will cause these amounts to vary and, you have options as to how you want to structure your closing costs and pre-paid items.
For example, mortgage loan guidelines will dictate how much you can ask the seller to pay in your closing costs. For minimum down payment mortgage financing, FHA loans will allow for the seller to pay up to 6% in seller paid closing costs and pre-paid items, whereas with Conventional loans, the seller is only allowed to pay 3% in seller paid closing costs and pre-paid items. Higher down payment loans and loan for homes you won’t occupy as your primary residence have varying guidelines.
Seller paid closing costs are a common option in today’s Minnesota real estate market. Most transactions will include some form of seller paid closing costs. Now, let’s be realistic though – the seller isn’t giving you something for nothing.
For simple math sake, let’s use a $100,000 purchase price example. If you offer $100,000 to a seller and you ask them for 3% in seller paid closing costs, you’re actual offer is $97,000, not $100,000. The seller credits the $3,000 back to you at the time of closing against your closing costs. So, it stands to reason that you could have asked the seller for $97,000 for a purchase price and they would have accepted it the same as the $100,000 with them giving you back $3,000 at closing. You are therefore, financing your closing costs over the life of your loan due to the higher purchase price and corresponding loan amount.
Are the offers really the same? Not really when you’re in the sellers shoes. While the dollars and cents come out the same, keep in mind that you’re indicating to the seller that you don’t have enough money to cover these costs with this offer. If someone else comes in with a lower offer, say $95,000, but they’ve asked for no closing costs to be paid for them, the seller may emotionally decide that even though their bottom line is a couple thousand less, the other offer is better because the buyer is a more financially solid offer. If you have the ability to pay your own costs, handle them through structuring your home loan differently, or by using closing cost assistance as a first time home buyer, you may have the edge that the other home buyer doesn’t in a multiple offer situation.
It’s also important to note that while FHA will allow you to have up to 6% in seller paid closing costs, our market isn’t allowing for that in most cases. With lender mediated home sales nearing 50% of our home sales, particularly in the first time home buyer price ranges, you will find that banks who are selling bank owned properties or lenders who are negotiating short-sales are typically maxing out seller paid closing costs at 3%. If you are preparing for more than 3% in seller paid closing costs, you may come up short if you’re looking at bank owned or short-sale properties.
Ultimately, yes, you are likely to be able to include a portion of your closing costs in your purchase price to be paid by the seller. This will allow you to reduce your cash investment at closing and if you’re a first time home buyer in Minnesota, there are a number of Minnesota First Time Home Buyer Programs that you may also be eligible for that include down payment assistance and closing cost assistance that can further decrease the amount you need to come up with for closing. Find out if you’re eligible for one of these first time home buyer programs by completing an online pre-qualification worksheet.
If you’re a first time home buyer and you’re looking for more information about buying your first home in Minnesota, special first time home buyer programs with down payment assistance or closing cost assistance, we offer a Free First Time Home Buyer Class the third Thursday of every month. Our next First Time Home Buyer Class is scheduled for Thursday, January 20th from 6:30-8PM. Register for the First Time Home Buyer Class Online or call 952-808-0042 to register today.
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