Due to the rise in home values in recent years, many first time home-buyers and novice investors have a hard time coming up with all the necessary funds to purchase a home. They may qualify for a mortgage but now they have to come to closing with several thousand dollars to take ownership. This is difficult with rent prices, student loans and other responsibilities that make it difficult to save. One strategy seller’s and buyer’s implore to get the property under agreement is to have the seller pay the buyer’s closing costs.
Many homebuyers look to FHA financing which requires 3.5 percent down to close. On a $400,000 home, this means, they must come to the table with $14,000 just for the down payment, excluding attorney fees, pre-paids etc. If you are purchasing a multifamily, this number jumps to 5 percent or $20,000 and to avoid Private Mortgage Insurance (PMI) requires 20 percent or $80,000. Please bare in mind these numbers are just the down payment. This can be extremely overwhelming and discouraging for first time homebuyers. One way to ease this burden is to negotiate buyer credits in which the seller will cover some or all of the closing costs associated with a borrower’s home loan. This option makes a home more attractive to buyers because they are required to come up with less at closing. The seller can then ask for full asking price offers and cover buyer closing costs.
With this strategy, a specific amount of the seller’s proceeds, is used to cover the buyer’s closing costs, pre-paid items and settlement costs etc. This number is not unlimited, rather for an FHA mortgage, the credit cannot exceed 6 percent and for most conventional mortgages cannot exceed 3 percent of the purchase price. Generally, we advise you give a dollar amount of how much is needed and whatever is unused, comes back to the seller.
Although it sounds terrible for a seller to “give away” money, sometimes offering a credit is needed to get them the most money for their home in the end if there aren’t that many offers on the table. A seller can provide a buyer credit for a specific dollar amount but require the buyer to increase the sale price by said amount to cover their own closing cost. Essentially, the buyer is financing their closing costs over the duration of their mortgage and the seller will net the same amount at closing.
To learn more about how this process can benefit you as the seller or buyer, please contact our office at firstname.lastname@example.org and one of our agents will be in touch to explain the process with greater clarity.