Closing costs can be a significant expense for home buyers. If a seller offers to pay closing costs, it can significantly alleviate the financial burden.
But why would a seller pay the closing cost for a buyer?
And are there any downsides for the buyer?
Most sellers won’t pay closing costs in this hot market, although they may still pay other forms of seller concession (such as repair credits).
If buyers can get a seller to pay any part of their closing cost, it’s usually great for the buyer—but trying to negotiate this could cost the buyer the house they want.
Why Do Sellers Pay Closing Costs for Buyers?
Sellers sometimes offer to pay buyers’ closing costs to sweeten the deal and make their homes more attractive to potential buyers. By doing this, sellers are increasing the money buyers will have to bring to the table at closing, making it easier to purchase the home.
As real estate gets harder to purchase, this can open doors for buyers. Sometimes buyers have more than enough to pay a monthly payment for a mortgage, but they don’t have enough in cash for the actual closing costs.
Sellers can open their bidding pool by offering credit for closing costs. If a seller can’t provide seller financing or owner financing, it can be easier for the buyer to qualify for the loan.
Other times, sellers may find themselves crediting a buyer for closing costs so that the transaction will even go through. This type of seller assist is common if the buyer’s financing options have changed but are still committed to the property.
How Sellers Can Pay Closing Costs for Buyers
Sellers can pay for buyers’ closing costs in several ways.
The most common is for the seller to simply initiate a seller credit. The escrow company will take care of this. Money from the sale will be credited back to the buyer.
Another way is for the seller to increase the sales price of the home and credit the buyer with the amount of the closing costs.
The extra money paid for the home is then used to cover the buyer’s closing costs. This is riskier because the property still needs to appraise at the increased value.
Note that if the seller can credit the buyer while increasing the purchase price of their property, they aren’t losing anything. They’re just making it easier for the home buyer to buy the home.
Lenders Limitations on Seller Credits
Lenders frequently put limitations on seller credits. For instance, the maximum amount that a seller can contribute could be 3% of the home’s sales price.
For example, if a home sells for $300,000, the maximum amount the seller could pay towards the buyer’s closing costs would be $9,000.
If a seller wants to contribute more than the limit set by the lender, they would have to bring cash to closing. This is to avoid scenarios in which the buyer is intentionally bringing nothing to the table and negotiating to subvert the intentions of the loan.
But there are other options for buyers who don’t qualify for traditional loans, such as a USDA loan, VA loan, or FHA loan.
The Disadvantages of Seller Paying Closing Costs for Buyers
Sellers should be aware of the potential disadvantages of paying buyers’ closing costs before agreeing to do so. The most obvious drawback is that the seller will have less money in their pocket at the end of the sale. (Although this isn’t true if the seller also increases the sale amount.)
Paying for buyers’ closing costs can result in a lower net profit on the sale, which could be a problem if the seller needs to sell the home for a certain amount of money to break even or make a profit. Paying for the buyers’ closing costs could make it harder for the seller to purchase their next home if they are buying and selling simultaneously.
But there are also issues for the buyers themselves.
If two buyers are interested in the same property and one is willing to pay full price while the other is only willing to pay if the seller pays their closing costs, the seller is more likely to accept the offer from the buyer willing to pay full price. Getting a seller to pay closing costs can be risky in a seller’s market.
Furthermore, sellers are often of the impression that a buyer who needs closing costs paid is not well-qualified. For a seller, accepting such an offer could indicate that the offer is less likely to close. For a buyer, trying to negotiate such an offer could make an already on-the-fence seller back out.
Finally, if a buyer has the seller pay closing costs while also raising the cost of the property, that will ultimately mean that the buyer may pay more over the life of the loan. So, the buyer may not necessarily be arguing in their favor. This is perhaps the most critical disadvantage to a buyer.
Other Forms of Seller Credit
In addition to paying buyers’ closing costs, sellers can also offer other forms of seller credit. For example, a seller could offer a home warranty, which would cover the buyer for repairs on major systems in the home after purchase.
Sellers could also offer a termite inspection or credit for painting the home’s interior or exterior. These are all common ways that sellers can help offset buying a home without paying closing costs directly.
Frequently, sellers will provide credits for repairs to the property rather than repairing the property themselves. This is because it can be challenging to estimate the cost of repairs, and the buyer may want different repairs than the seller would make. Additionally, some sellers are unwilling or unable to make repairs to their homes before selling.
In these cases, providing a credit allows the buyer to choose their own contractor and have repairs made after they move in.
Paying closing costs is just one way sellers can help buyers when they’re looking to purchase a home. In a competitive market, offering to pay closing costs could be the difference between your home selling or sitting on the market. But in a buyer’s market, it may not be worth it.
Sellers should carefully consider whether or not paying buyers’ closing costs is the right move before agreeing to do so. They should also be aware of the potential disadvantages for themselves and the buyer.
When a seller offers to pay a buyer’s closing costs, they increase the number of buyers who can qualify for their property. But they could also be luring in buyers who aren’t well-qualified and committed to the transaction.
When buyers ask for closing costs to be covered, they may be hurting their offer. It only makes sense for a seller to choose an offer that doesn’t require any concessions in hot markets. And they may only be increasing the amount that they pay over time.
If you’re not sure whether you should be paying a buyer’s closing costs (or if you should be asking for your closing costs to be paid), your real estate agent can give you more insights.
What are some of the disadvantages of sellers paying buyers’ closing costs?
Some of the disadvantages of sellers paying buyers’ closing costs include less money in the seller’s pocket at the end of the sale, a lower net profit on the deal, and possibly attracting buyers who are not well-qualified.
Can a seller refuse to pay buyers’ closing costs?
Yes, a seller can refuse to pay buyers’ closing costs. It is ultimately up to the seller to decide whether or not they want to contribute toward the buyer’s closing costs. If they have better offers, they will take them.
Should a buyer ask for their closing costs to be covered?
It depends on the market conditions. It might not make sense to ask for closing costs to be covered in a hot market because the seller could just choose another offer that doesn’t require any concessions.