Can a Home Seller Really Pay the Buyers’ Closing Costs?

A home buyer called me last week about buying his first home. He saved up about $9,000 that he wanted to use for his downpayment and was so buying a home new jersey closing costsexcited that he’s finally going to be a homeowner! His face dropped when I asked him if he had any money set aside for closing costs. He wasn’t aware that the closing costs alone on a home that he was hoping to buy would be in the $6,000 range. Closing costs are the costs associated with purchasing a home and include such things as the title, title insurance, document recording fees, tax and insurance escrows, mortgage points and funding fees, and attorneys fees.

Happily I was able to make him feel a lot better when I told him how we can have the seller pay the closing costs. Let me explain how this works. For example, say you are buying a home for $300,000 and you have $11,000 available for a downpayment (FHA mortgages allow as little as 3.5% down — for now). The seller is willing to acccept $300,000 for the home so we write the contact for $310,000 and ask for a $10,000 credit from the seller at closing for your closing costs.  At the closing, the seller will get his $300,000 price and you’ll get $10,000 paid toward your closing costs.

There are a few rules and limitations to this, of course. I’ll detail the limitations below:

FHA mortgages:

  • Primary residence only (no second homes or investment properties)

  • Seller can pay up to 6% of the price of the home for buyers closing costs

Conventional mortgages:

  • Primary residence, second home, or investment property

  • seller can pay up to 3%  if the downpayment is less than 10%

  • 6% if the downpayment is between 10% and 25%

  • 9% if the downpayment is 25% or greater

  • If the property is an investment property, the limit is 2% regardless of the size of the downpayment

VA Loans

  • Only primary residences

  • There is a 4% limit that applies to the funding fee, tax and insurance escrows and excessive discount points

  • No limit on all other closing costs

  • If you qualify for a VA mortgage, you can buy a home with no down payment and no closing costs!

USDA Loan

  • Seller can pay all actual closing costs/prepaids without limit

  • As with a VA loan, qualified buyers can buy a home with no down payment and no closing costs!

  • If a home appraises higher than the sales price, closing costs can be financed with USDA rural loans up to the difference between the sales price and appraised value rather than have a seller pay closing costs.

Finally there area a couple of other points you should be aware of as well. If you inflate the purchase price of the home to include the seller paid points, as in the example above, the home needs to appraise for the full purchase price or you won’t get the mortgage. Also, if you are buying a short sale property it is very likely the bank that is handling the short sale will not pay your closing costs or may limit the amount to 1% of the sales price.

If you are saving up for closing costs along with your down payment, you may be able to revise your home buying plans and buy sooner than you had anticipated! Call me today so we can discuss the best home buying strategy for you.

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