You have a better picture of what closing costs are and how to navigate the home purchasing process. While you're reviewing how you want to manage the purchase expenses for your new home, remember to make time to find the best homeowners insurance coverage before closing day.
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Seller concessions sound pretty good in theory. The seller will pay some of your closing costs? Yes, please! Unfortunately, that's not really how it works -- and there are some serious disadvantages of a seller paying closing costs for a buyer. Are you considering asking for seller concessions to lower your up-front costs?
Here's what to take into account before you do. Let's get this straight right off the bat: Sellers aren't paying your closing costs out of the goodness of their hearts. In the majority of cases, when a seller pays a buyer's closing costs, it actually results in a higher sales price. In very few cases will a seller actually outright cover closing costs out of their own pocket.
In most scenarios, you'll see a higher sales prices as a result. In the event the concessions mean a higher sales price, you could find yourself up against appraisal issues -- not to mention potential financing problems.
If you're using a mortgage loan to pay for the home, your lender will likely order an appraisal , basically assessing the home's value. If the home appraises for the new sales price, you're in the clear, and your lender will give you the funds you need to buy the house. If the home doesn't hit that new, higher sales price, though? Then, you'll have some trouble. Your mortgage lender will only give you the appraised amount, and you'll need to make up the difference between the appraised value and the final sales price out of pocket.
If you can't cover the balance, it may mean losing out on the home altogether. When a seller concession leads to a higher mortgage loan amount, it means more in interest costs, too. Down payments are calculated as a percentage of your total loan balance. For example: On an FHA loan, you need to make at least a 3.
Even if the concessions result in a higher home price, there's still an added cost to the seller -- at least if they're using a real estate agent. Sellers are receiving poor advice if they are discounting an otherwise strong offer that includes a buyer credit at closing.
Sometimes, the listing agent simply isn't correctly explaining the closing cost credit to their seller.
The previous paragraph notwithstanding, there are three things a seller may consider before accepting an offer with a buyer credit for closing costs. Real estate commissions are typically paid on the net sale price of a property, meaning the sale price, less any credits to the buyer; however, sellers would want to verify with their listing agent that the listing commission is based on the net sale price. In fairness to the Seller, increasing the purchase price to include a seller credit does cause a potential appraisal issue.
Should the buyer really be able to cancel the agreement under those circumstances? If the Seller raises that issue in a negotiation, the home buyer might want to talk to his or her buyer agent and attorney about limiting the appraisal contingency to apply to the net sale price.
If the appraised value is in between the gross purchase price and net purchase price, the buyer would have to make up the difference by adding more money to the down payment. Depending on the amount, the home buyer could be in about the same position as he or she would otherwise have been without the closing cost credit. Determining whether to include a buyer credit at closing in an offer is just one of many important decisions a home buyer will have to make during the home-buying process.
Working with a competent exclusive buyer agent and other experienced and trustworthy professionals is crucial to making wise decisions. Community Information. Home-buying Tips. Massachusetts Relocation. Real Estate Market. Contact Us. Twitter: OnlyBuyers. Our Reviews:. Massachusetts Home Buyer Guide. Jul 19, PM.
Borrowers May Pay Points to Lower Interest Rate As explained above, sometimes home buyers will pay a point or a portion of a point or more than one point at the closing. Seller Provided Credit for Closing Costs There are federal laws that govern kickbacks and outside-or-transaction dealings between sellers and buyers and other professionals involved in a real estate transaction.
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