Dear Home Buyer, It's Not Monopoly Money
Monday May 28th, 2018
People get hung up on all kinds of things during a real estate transaction. Preconceived notions of good and bad often blind people from the bigger picture, and emotion almost always runs amok.
One of the things people get hung up on are seller paid closing cost. Many buyers mistakenly think the seller must pay their closing cost. This is simply not true. Paying the buyer’s closing cost is the buyer's responsibility. However, your real estate agent may be able to negotiate seller paid closing cost.
It is strictly up to the seller whether or not they will be willing or able to pay buyer closing cost.
Let’s take a look at the basics of seller paid closing cost.
What Are Seller Paid Closing Cost
Seller paid closing cost means that the seller will credit the buyer of a home a certain amount of money towards their closing cost.
Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the parties consummate the purchase contract, and ownership of the property is transferred to the buyer. Closing cost are incurred by either the buyer or seller.
How Much Will The Seller Pay
If receiving a FHA loan to finance your home lenders will allow you as a buyer to receive a closing cost credit from the seller up to the equivalent of 6% of the purchase price of the home that you are buying. If receiving a conventional loan the maximum allowed is 3% of the purchase price of the home you are buying. For example if you are purchasing a $200,000 home the maximum a seller would be allowed to pay if you are obtaining a FHA loan is $12,000, if you are receiving conventional financing the maximum would be $6,000.
The amount a seller may actually pay generally depends on a number of factors such as market conditions and norms. If you live in a hot area where prices are climbing, inventory is low and competition is intense, then you might get the seller to pick up very little of the closing cost. In other areas, paying buyer’s closing costs might be an absolute must. And then there’s a whole bunch of areas that fall somewhere in between.
Why Would A Seller Pay A Buyer’s Closing Cost
Cutting to the chase -paying a home buyer’s closing costs could mean selling their home faster and put more money in the seller’s pocket.
Offering or at least being willing to pay a buyer’s closing costs increases the number of potential buyers for a home. More potential buyers equals more competition, which leads to a faster sale and possibly a higher price.
That still doesn’t mean that a seller will absolutely pay a home buyer’s closing cost . Suppose a seller receives three offers on their home for $300,000. If one offer is asking for $9,000 in closing help and another is asking for $18,000 in closing help, and the other is asking for zero in closing help, then it’s a no brainer. The seller is going to go with the offer that nets them the most money. The seller’s goal is to get the highest net price they can.
For instance if the sales price is $305,000 and the buyer offers $300,000 and ask the seller to pay $9,000 closing cost. The net offer to the seller is actually $291,000. If the buyer offers $300,000 and ask the seller to pay $18,0000 closing cost - the net to the seller is actually $282,000. But if the buyer asks for no closing cost the net to the seller is $300,000.
Bottom Line: It’s Not Monopoly Money
As I mentioned earlier a seller is not obligated to pay a buyer’s closing cost. With that said a buyer should remember that the closing cost credit is not monopoly money. While it may seem like just a credit to you. It is the sellers cold hard cash.
Buyer’s be grateful. The seller has in fact given you a cash gift as this is less money that you need to bring to the closing table for the purchase of your home. If a seller agrees to give you a $5,000 credit toward your closing cost. This is actually $5,000 less that the seller will receive at the closing table.