Buying a home is one of the biggest purchases most people make in their lives. Don’t think your total cost will be just the cost of the house, however. Just like when you order something online your costs usually includes tax and shipping, the cost of buying a home also includes closing costs and prepaids. So what are they?!
Both buyers and sellers have closing costs related to their sale or purchase.
Closing costs include things such as…
- Fee for closer’s services
- Pro-ration of taxes between buyer and seller
- Buyer financing expenses, including appraisal and document preparation
- Title examination and title insurance
- Underwriting/processing fees
- Mortgage registration tax
- Recording fees
- Broker fees
- Seller mortgage payoff
- Seller sales commission which typically covers both buyer and seller agent commission
Prepaids include things such as…
- Prepaying mortgage interest, real estate taxes, insurance from closing date to the end of the month (the closer your closing date is to the end of the month the lower this amount will be)
- Buyer homeowner’s hazard insurance for the first year
- Setting up buyer escrow account for taxes and insurance with a few months ‘seed’ money so the mortgage company has the funds to make future payments on your behalf
Typically most of the seller’s cost is commission and most of the buyer’s cost is related to financing.
So if both buyer and seller have closing costs, what are “seller paid closing costs”?
“Seller paid closing costs” usually refers to a credit from the seller to the buyer at closing to reduce the amount of cash the buyer needs to close. It is most commonly used by buyers short on cash as a way to finance some of their expenses, or to cover some repairs the seller agreed to cover following inspection.
So… why would a seller contribute to a buyer’s closing costs? The seller has closing costs of their own! Think of it as another way to negotiate price. For example, an offer of $300,000 with $6,000 contribution to buyer’s closing costs is a net offer of $294,000. The purchase price can also be increased to cover the closing cost contribution, but keep in mind that the property must appraise for the increased amount. For example… you agree to a purchase price of $300,000 but the buyer needs the seller to contribute $6,000 to their closing costs so the purchase price becomes $306,000.
For some buyers it is essential to finance some of their closing costs through “seller paid closing costs” to have sufficient funds to close… they qualify for a higher mortgage but don’t have any more cash. When competition is fierce buyers usually try to avoid asking the seller to contribute to their closing costs to make their offer stronger
So does this mean the seller simply pays all the buyer’s closing costs?
No, you negotiate how much the seller will contribute as part of the purchase agreement, provided the buyer’s financing will allow it. Most mortgage companies have guidelines of a maximum seller contribution of 3% of the purchase price for conventional mortgages and maximum 6% for FHA and DVA loans. You must use all the closing costs you ask for so it is wise to talk to your lender to get an accurate estimate if you want to ask for the maximum allowed to reduce your out-of-pocket closing costs to a minimum.
Sharlene Hensrud, RE/MAX Results – shensrud@homesmsp.com