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As I see all these threads and news reports about the interest rate climbing, I am considering getting into a house much sooner than i really anticipated. Have you seen options or buyers accept deals in which they cover closing costs?
Yes. But the seller looks at the bottom line - Purchase price minus closing costs. The bottom line has to work for the seller in order for them to accept an offer that asks them to pay the closing costs.
But the amount they can pay is limited by the lender, typically 3% of the purchase price +/-. And the closing cost credit CANNOT be used towards the down payment.
Having the seller pay the closing costs is a good way to reduce your cash outlay. But you must understand that it is only one component of your offer. Your offer must be good enough for the seller to accept the total package. As Nina pointed out the amount of money the seller receives at closing, call the net amount, will determine if they accept your offer.
My best suggestion is to ask your agent to run sample "net sheets" for both your costs and the hypothetical sellers costs so you can visualize your offer in dollars. Then you will see if your offer makes sense. This will ensure greater chance for success.
Of course depending how hot your market is will determine how aggressive you can be.
Seller paid settlement costs are capped with regards to the loan program you are using...under CON loan terms the seller can pay 3% if the buyer is putting less than 20% down, that goes up to 6% on a 20% or more down payment from purchaser. FHA is 6%, VA is generally 6% but then I have had lenders tell me sellers can pay more than that regarding certain costs. I have never had a client need to exceed that. Check with your lender to see what your cap is for seller's contributions before making an offer, and get an estimate for them so the amount you ask for is somewhat close to what you will need at closing. Like Nina said, there is an amount the purchaser will have to contribute at closing that the seller cannot contribute to, typically your downpayment.
Also be careful with wording, when we use "closing costs" that refers only to lender and title costs. Does not include such items as title insurance, prepaids, escrows, ect. which can be paid by seller under most loan terms as long as you are within the cap set by the lender. We use the term "settlement costs" in our contracts. You don't want to leave money on the table and end up having to bring money to closing due to poor verbiage. You definitely need your own agent in your purchase.
What is common is probably dictated by your market, and as the others have said, what the seller is willing to "net" at closing. When a buyer asks a seller to contribute to their settlement charges, the buyer is essentially rolling those costs into the mortgage. If you can't get a seller to pay all that you need and you still want to pursue, you can discuss with the lender about pricing some of those costs into your interest rate. In my area a lender typically can credit a buyer 1% for about 1/4 % point on their rate.
Last edited by LCTMadison; 01-05-2017 at 04:24 AM..
Also consider many times the seller has set an asking price, expecting to accept less. Or, their agent has prepped them they will have pay 10K towards closing. But don't expect to be able to discount the offer 90% of list and have 100% closing covered. This is assuming you are not working with an over-priced or distressed home.
The biggest red flag is when the home is listed for a price and the contract comes in above the list price by the amount of the closing cost credit. That appraisal report will be scrutinized heavily, especially when there's minimum down.
An experienced Realtor is invaluable with this sensitive process.
I put in a bid at 88.8% of the listing price, straight up. They countered with the minimum they'd accept (97% of list). I countered with that + closing costs and was accepted, ended up at 101% of list.
Seller paid settlement costs are capped with regards to the loan program you are using...under CON loan terms the seller can pay 3% if the buyer is putting less than 20% down, that goes up to 6% on a 20% or more down payment from purchaser. FHA is 6%, VA is generally 6% but then I have had lenders tell me sellers can pay more than that regarding certain costs. I have never had a client need to exceed that. Check with your lender to see what your cap is for seller's contributions before making an offer, and get an estimate for them so the amount you ask for is somewhat close to what you will need at closing. Like Nina said, there is an amount the purchaser will have to contribute at closing that the seller cannot contribute to, typically your downpayment.
Also be careful with wording, when we use "closing costs" that refers only to lender and title costs. Does not include such items as title insurance, prepaids, escrows, ect. which can be paid by seller under most loan terms as long as you are within the cap set by the lender. We use the term "settlement costs" in our contracts. You don't want to leave money on the table and end up having to bring money to closing due to poor verbiage. You definitely need your own agent in your purchase.
What is common is probably dictated by your market, and as the others have said, what the seller is willing to "net" at closing. When a buyer asks a seller to contribute to their settlement charges, the buyer is essentially rolling those costs into the mortgage. If you can't get a seller to pay all that you need and you still want to pursue, you can discuss with the lender about pricing some of those costs into your interest rate. In my area a lender typically can credit a buyer 1% for about 1/4 % point on their rate.
Thanks for the clarification!
Do you think I have more leverage if i came in 90-95% of asking price + settlement costs on a home that has been in the market over 100 days? What is considered "on the market for a while" in terms of days listed?
Do you think I have more leverage if i came in 90-95% of asking price + settlement costs on a home that has been in the market over 100 days? What is considered "on the market for a while" in terms of days listed?
You need your own agent in your local market to answer this for you.
In my market for certain price ranges, 100 days is a LONG time. Regarding "luxury" homes where the buyer pool is smaller, that is not necessarily the case as it can take longer to find the buyer.
Get your own agent who knows your local market well and will represent your best interests.
As a seller I would much rather negotiate a lower purchase price than pay buyer's expenses. For one reason, anything off a lower purchase price results in a lower sales commission I must pay.
Honestly I don't know how these credits to buyer reflect my capital gains taxes and tax deductible seller's expenses that would reduce my capital gains. (I'm willing to accept advice if that isn't hijacking the topic.)
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