Seller Paid Closing Costs

Back in the day, you would have to hike up hill, both ways, in the snow, barefoot, to the bank carrying a 20% down-payment and a 12 year old Scotch (just to butter up the president of the bank). Then we saw the introduction of ARM's, Interest Only and No Money Down Loans. But soon, buyers realized that No Money Down did not equal No Closing Costs. So, with increasing property values we see more and more buyers/sellers using "Seller Paid Closing Costs". So lets take a little time to look at "Seller Paids"

Call 'em what you want: Seller Paids, Seller Concessions, Seller Contribution, Allowances, etc. Good or Bad, they have become another tool to get home buyers into houses with little or no money to contribute to the transaction. By using Seller Paids in the purchase agreement, the seller is basically just allowing the borrower to roll closing expenses into the loan against the house. It works like this, You're buying a home for $100,000.00 and the seller has agreed to allow for $2000.00 in concessions. That allowance can, unless otherwise stipulated in the purchase agreement, be used toward any expense of the transaction. In the event that the total costs don't use the whole $2000.00, it can be used to reimburse the buyer for any cost which were Paid Outside of Closing (POC), for example the appraisal or earnest money. And vice versa, if the costs of the transaction exceeds the $2000.00, the buyer is then responsible for the difference. Most lenders will cap these concessions at 4%-6% of the loan amount.

I USED TO get this question a lot, "Well, if the property appraises at $110,000.00, can I just get that $10,000.00 out to do improvements?" The answer is always "nope". The lender will only loan the lesser of the purchase price or the appraised value. The reason I say USED TO, is because in the last few years, property values had been going up and up. And buyers/sellers found creative ways to roll many expenses, including closing costs, into the loan amount against the home. What we're experiencing now is a correction or slow down in the market. Property values are not increasing as quickly as they have in the recent past. So many of the people that rolled closing costs into their purchase, could potentially owe more on their home than the market will bare. So instead of just "rolling it in", many buyers are finding out that "Seller Paid Closing Costs" aren't available because of equity issues. In contrast, it is a buyers market, so many sellers are getting more creative and aggressive to sell their homes. So, some sellers will take a 2 or 3 thousand dollar hit by including Seller Paid's, just to sell the property.

Are these closing costs really paid by the seller? Technically yes, but theoretically no. Yes, some costs may be listed under the sellers expenses on the settlement statement. But no, because in the big picture, what is passed to the buyer as a concession, could have been used to negotiate a lower price. As a buyer, your paying more for the home.

So, what are your goals as a buyer? Does it make more sense for you to put those costs into the loan? In the short term? In the long term? Or, does it make better financial sense to pay those up front and not finance those costs for 15 or 30 years? Do you, as a buyer, have the ability to pay closing cost in cash?

Again we arrive at a reoccurring theme in these discussions. A good mortgage professional will look at the goals of their client, the conditions of the market place, and the tools (loan products) they have in order to extend financing options.