Iowa City Real Estate Blog

**This post is written from the perspective of the buyer. In the meantime I've written a second post on the subject looking at it from the sellers perspective.

Should you ask the seller for closing costs and how does it impact your transaction?

Should you ask the seller to pay closing costs when you make an offer on a home? That's one of the most common questions I get asked when I meet with buyers for the first time. This is especially true with first time home buyers.

Most First Time Home Buyers are overwhelmed by the financial impact buying a home will have on their lifestyle. They know they have many other expenses to cover when they move and the thought of saving on the closing costs relieves some of the burden in their minds. (Plus they often come directly from a Lender who has just given them this information and they need to know if it's true).

What I am going to do here is to explain how seller paid closing costs work and leave you to answer the question yourself about including them in your offer based on your own particular situation:

Firstly, let's look at the facts: Seller paid closing costs are not really seller paid. They're actually paid by you the buyer by rolling them into your loan.

That may not make sense, so I will explain it a bit better: Imagine you make a full price offer on a home for $150,000 with a clause in there for $2000 for seller paid closing costs. If the seller goes along with that you will finance the home based on a purchase price of $150,000. Now, if you make an offer on that same home for $148,000 dollars, the seller's bottom line is exactly the same. You on the other hand will be financing the home based on a purchase price of $148,000.

This is probably a good place to mention that I am a Realtor® serving Iowa City, Coralville and North Liberty Iowa. Closing costs are not as high here as in other parts of the country. My son in Rochester MN for instance recently bought his first home and paid around $5000 for closing costs.

Getting back to my example. The question is not so much whether you should ask the seller to pay closing costs, as to ask yourself whether you want to finance those costs into your loan, which will translate into a slightly higher mortgage payment every month.

As you answer that question for yourself there are probably a couple of things you need to consider. Is the home you want to make an offer on "move in" ready or do you have a list of things you need to take care of after you move in? How are your finances? Do you have "breathing" room or are you running a very tight ship?

Should you ask the seller to pay closing costs when you buy a home? Depending on your own financial situation the questions in the last paragraph should help you establish for yourself whether "Seller Paid Closing Costs" are a good option for you or not. If you're tight on cash or want to keep what you have for repairs, then asking for closing costs may be a good option for you.

Of course I have only scratched the surface here. There's so much more to know before making an offer on a home. Even factoring in your own situation there may be something in the specific transaction that could influence your decision to ask the seller for closing costs. If you're in an area where home prices have fallen significantly, then you might be running the risk of the property not appraising for the elevated purchase price with closing costs. That's not so much an issue here in Iowa City, as our market is pretty stable. (Although, again that would depend on the specifics of a transaction).

When you're buying a home, there are so many different things that need to be considered. The question whether you ask the seller for closing costs is just the tip of the iceberg. That's why you're careful when you choose your Agent, so you know you have someone on top of the situation that advises you of all the facets of a real estate transaction. If you're just starting out, the home buying process probably seems a little overwhelming right now. Take my word for it, when you work with someone who knows what they're doing, that feeling will go away quickly.

Asking the seller for closing costs has become standard here in Iowa City in what we're all calling a "buyer's market." My goal with this post is to make sure you're aware of exactly how it works. To sum up: You as a buyer are the one who bears the consequences of the so-called "seller paid closing costs" and should be totally aware of that upfront, before you make an offer on a home.