Should a Buyer ask the Seller to Pay Closing Costs?
Regarding Sellers paying closing costs, there are a couple of ways to think about this.
It’s not about whether the Seller is nice or not. The Seller has a bottom line for how much they must net on the sale of their home. After taxes, brokerage commissions and lawyers are paid they have to be left with a certain amount of money to pay off their mortgage and to help them get to their next home.
So if you offer a Seller $250,000 but then request $10,000 back at closing for closing costs and prepaids….you are really offering them $240,000. If their bottom line is $240,000…we have a deal. If not, no deal.
When we request that the Sellers pay for closing costs, we are actually going to ask them to pay for “closing costs and prepaids”. This would include standard closing costs like your lawyer fees and property tax and also your prepaid expenses like your building inspection and prepaid insurance. We can not ask for anymore than your mortgage will allow, so please consult with your lender. Sometimes a mortgage allows for 3% other times 6% for closing costs and prepaids. So, please ask your lender what the limit is. Another important thing to know is that you can’t walk away from the closing table with money from the seller. Banks don’t allow this. So, if you are going to ask for cash back, you need to be conservative. If you ask for $10,000 and only can apply $9,000 to closing costs and perpaids…that excess goes back to the seller.
Asking for money back at closing for closing costs and prepaids is not, in essence, a gift from the sellers. You can’t think of it that way. What you are basically doing is financing your closing costs in your mortgage.
One last thing: Although it is usually allowable to get closing costs and prepaids from the seller at closing, the appraisal may complicate things and make financing the home a challenge. If we go back to the example above, you are offering $250,000 with $10,000 back for closing costs and prepaids. If the appraisal comes in lower than $250,000, let’s say $242,000, the bank is only going to give you a loan based on $242,000. Now it is up to you and the Seller to determine what is going to make up the difference. Is the Seller going to agree to taking $232,000 and give you the $10,000? Are you now only going to get $2,000 back at closing while the seller gets their $240,000? At this late stage of the game all bets are off. The terms have changed and neither party has to agree to take a lower amount. We are at an impasse that, for obvious reasons, is difficult to work through. The Seller still has a bottom line and the Buyer still needs money for closing costs. In this case, there are usually compromises by both parties. Sometimes, the deal falls apart in the 11th hour.
So as you can see, the question “can the seller pay our closing costs?” isn’t exactly straight forward. There are many caveats…and we are happy to clarify any of them in more detail.
Let us know how we can help and when you are ready to start looking at homes.