If you’re buying a house, there’s a lot of information involved.
You’re signing what seems like countless pages and there are a lot of numbers to cover.
People often worry about whether they’ll have the money to cover the down-payment and closing costs of the house they want to buy.
It’s a valid concern.
Housing prices have gone up steadily over the past decade, and banks are still relatively strict when it comes to lending requirements.
Gone are the days where you could get a home for no money down.
To buy a good home for you or your family, you’re going to be bringing thousands of dollars to the table.
Negotiating over closing costs is very common in real estate.
Buyers agree to a seller’s asking price, but ask them to cover closing costs as a way to meet in the middle.
However, asking a seller to cover closing costs isn’t always the best idea.
Generally, the seller isn’t actually paying the costs. They’re not coming out of pocket.
Instead, the seller increases the asking price by the amount of the closing costs and then deducts the closing costs out of the transaction.
This might seem like a good idea because it keeps thousands of dollars in the bank that you otherwise would have had to pay out of pocket.
But, there are things you should know about asking the seller to pay closing costs that could convince you that it’s not the best long-term outcome.
What Are Closing Costs?
It takes several parties and a lot of documentation to get a real-estate deal done.
A big mistake that a lot of first-time homebuyers make is thinking that the asking price of the house is the final number they’ll pay.
However, you should expect to pay anywhere between 2 and 7 percent of the purchase price in closing costs.
On the typical home in the United States, that means you can pay anywhere from a few thousand dollars to more than ten thousand.
Here are some of the costs you’ll pay:
- Recording Fees – These are what you pay to have the transaction filed and recorded in the public record. It ensures against fraud and is what many tax records are based on.
- Home Inspection– Sometimes home inspections are included in closing costs. Other times you pay this before closing.
An inspector will go through the home and look for any structural issues or safety hazards.
After the report, if there is anything significant, there is often another round of negotiations with the seller around price or who is going to fix it.
- Mail Fees-Also called delivery fees, these are the costs of mailing documents to different parties for closing.
- Wire Fees-The buyer usually has to pay for wiring fees from the escrow party to the seller and anywhere else money has to transfer.
- Title Work-This is often the largest cost in closing costs. You’re paying for title insurance, and make sure the title to a home you’re buying is clean. It helps avoid any legal issues if there is another lienholder on a title.
- Notary Fees-Closing documents have to be notarized by a public notary who typically charges a flat fee per stamp.
- Transfer Taxes-The government is going to get its slice of the pie in any real estate transaction.
- Attorney Fees-Lawyers will sometimes check closing documents for accuracy to prevent any after-sale disputes.
- Escrow Fees – Buyers have to pay into escrow to cover the homeowner’s insurance and taxes for a few months.
- Closing Fees – Sometimes lenders or title companies charge fees for their services that are included in the closing costs.
Always Check Your Closing Documents
We’ve just described above some of the common closing costs in a real estate transaction.
However, other fees are charged, so it’s important that every buyer, with their agent, read through the fees and understand what every dollar means.
Sometimes it’s easy to shrug off a few hundred dollars when you’re dealing with large numbers. However, don’t be shy if you don’t understand what’s in the documents.
Challenge anything you feel uncomfortable with.
What Happens When a Seller Pays Closing Costs
So, you’re looking over your closing documents, and you see the figure at the bottom that outlines how much money you will have to bring to the table at signing.
It can be an obstacle for people on a budget or already stretching themselves to close on a house.
Your agent may suggest asking the seller to cover closing costs, but what does that mean?
It seems generous, especially in a seller’s market, to agree to pay thousands of dollars to close the deal. The truth is that this rarely happens.
Instead, normally the buyer and seller agree that the seller will cover closing costs as long as the buyer agrees to a higher sales price.
For example, if closing costs are $7,000, then the seller will increase the sales price by that amount.
The strategy here is that, although the buyer is paying more, it helps the deal close because they don’t have to come out of pocket that money.
It’s rolled into the loan and they pay it off over 30 years.
Is It a Good Idea?
If the deal can’t get done without the seller paying for closing costs, then the buyer must weigh whether it’s worth it to them.
It can get a person into a house that they otherwise couldn’t afford. There are certainly some positives around that, but there are also drawbacks.
Here are some of the potential disadvantages of a seller paying closing costs.
- Higher mortgage payment – If you agree to a higher sales price so the seller can cover the closing cost, you’ll probably have a higher mortgage payment.
It’s something to keep in mind if you’re on a budget. An increase of $50 to $100 a month on your payment may not seem like a big deal, but remember, you’re paying that every month for 30 years.
- Agents Get Paid Too – If closing costs, in the above scenario, are around $7,000, you’re not simply going to increase the cost of the closing costs.
Anytime a number is added to the sales price, it affects multiple parties involved in the transaction. Tax amounts go up, and so do agent commissions.
As a result, your price to cover that $7,000 is going to be higher than that.
- Appraisal Issues – If you’re buying a home and need a loan from a bank, you need the appraisal to come in high enough to make room for the closing costs.
In a buyer’s market, that can be a challenge. Homes are going for close to appraisal values. There’s very little wiggle room in the numbers to tack on a large chunk at closing.
Your appraisal must be high enough that you can add in closing costs and still meet the bank loan-to-value requirements.
- The Lender May Take Issue – This doesn’t happen often, but lenders could refuse the request. Lending standards are tighter than they were years ago.
Banks try to create a profile of every borrower to protect them in the event something goes wrong.
Remember, they are on the hook if a person stops paying the mortgage. A borrower’s inability to pay the closing costs could be a red flag for them.
These are just some of the disadvantages of having a seller pay closing costs.
If you are thinking about it, consult with a trusted agent about the best path forward and understand everything going on along the way.