One of the most popular ways to buy a home today is to have the home seller pay your loan closing costs. There are restrictions based on the type of home loan you qualify for but its becoming one of the most common ways to bring no money down.Home buyers who are short on cash should negotiate to have the home seller pay for all or part of the closing cost. The advantage is that the buyer can purchase the house with less money. Take for example, a house selling for $300,000. A buyer offers $290,000 and the offer is accepted. The homebuyer gets a mortgage of 80% loan-to-value, with a 20% down payment, or $58,000. Assuming the closing costs is 5% of the loan amount, or $11,600. The buyer would need $69,600 ($58,000 + $11,600) in order to purchase the property.
Instead of offering $290,000, suppose the buyer purchases the house for $300,000 and asks that the seller pays $10,000 towards settlement costs. The buyer then takes out a mortgage of 80% of the purchase price. With a 20% down payment ($60,000), 5% closing costs ($12,000), and the seller contributes $10,000 towards closing costs, the buyer needs only $62,000 to purchase the same house. In effect, the home buyer is able to get a bigger loan, without having to go over the maximum 80% loan-to-value set by most banks.
The seller does not always have to loose money or truly concede on their net proceeds of the sale. If the home were appraised at $300,000 and an offer of $285,000 was accepted, the buyer could then make an addendum offer. In the addendum offer the buyer can ask that the purchase price be raised to $300,000 and pay closing costs of $15,000 or 5%. Thus, the seller still gets their net sales price, and the borrower gets their closing costs taken care of.
Most loan programs will restrict the amount of seller assistance towards closing costs. Many programs limit it to 3 per cent of the sales price although some allow as high as 6 per cent.
One thing to remember is most banks will not let you profit from the purchase. So the credit can cover your closing costs but cannot exceed the costs resulting in cash back to you.
Talk to your real estate agent about seller's concessions when discussing financing of closing costs on any new purchase.
Many loan programs allow for seller paid closing cost to pay for all the fees associated with the loan. This allows buyers taking advantage of 100% financing to literally walk to the closing table with no money at all and at times even getting a refund of earnest money.
Different loan programs will dictate how much you can receive from the buyer. This can be a percentage or it can be a fixed amount and is usually between 2% to 6%. The most common amount used is 3% on a average priced house. This is fully negotiable with the seller and some sellers may not be willing to give. The more motivated they are the better chance you might have. I would always start out with asking for seller contribution...it's usually free money for you.
Did you know that sellers are allowed to pay for your closing costs and prepaid? Sellers are allowed to pay up to 3% (6% on some programs) of the sales price toward closing costs, prepaid and points. This helps you with cash needed at closing. It is important to remember that if you want a seller to pay closing costs, you must detail this in your offer to purchase the property.
Seller paid closing costs are a great loan feature, especially for the borrower who may not have all of their closing costs available to them. I frequently will pre qualify a borrower who does not realize that they are expected to bring their closing costs to the table. However, after I have had a chance to explain that seller paid closing costs are essentially financing your closing costs in with the loan have a very positive response.
Seller paid closing costs are the best way to bring zero money to the closing table. Your mortgage broker and real estate agent can help you structure your loan this way.
Why would a Seller want to pay the buyers closings costs? In a buyers market Sellers wanting to sell their home quickly often use this as an incentive for buyers to purchase their home. A benefit to the Seller is that this also increases the number of buyers that are able to purchase their home. Many buyers today lack the resources or savings to pay the sometimes hefty upfront closing costs of buying a home. Today, more Sellers are figuring in buyers closing costs when setting the price of their home, knowing upfront that to sell their home quickly they need to increase the number of potential buyers.
Seller concessions, which allow the closing costs to be paid, are subtracted from the appraisal price. The appraisal price must be large enough, to include the purchase price and the concessions.
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