**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.
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Very well written. Often, buyers don't understand that seller paid closing costs are indeed buyer paid, by raising the price of the home.
Denise,
I agree with Christianne. I enjoyed reading this post and the good explanations. You made it clear that the real question to ask when it comes to closing costs is whether you want to finance those costs into your loan.
Denise,
I have mixed emotions about asking for closing costs. I always advise my sellers that if a buyer is asking for closing costs, they should be asking for price reductions. It's one or the other. Granted that varies in each situation but that's usually what happens.
Thanks for the comments, I appreciate your feedback. The funny thing is, even sellers have a hard time understanding that they're not actually paying them!
Brian, I'm not sure that I agree that's it's price reduction OR closing costs. I've had many transactions where it's been possible to do both. The only exception to that is when a buyer is looking for a hefty price reduction. It's kind of difficult to ask for closing costs when a buyer wants to "low ball" the offer. The buyers I've worked with understand that though and don't try both in that situation.
Of course that statement applies to our market here in Iowa City. In an area where closing costs are higher you may be right and it is an either / or situation.
Denise
I don't understand your explanation, nor Christianne's comment (#1).
That may not make sense, so I will explain it a bit better: Imagine you make an 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 a 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.
If my Clients make an offer of $150,000 on a home listed at $150,000, with $30,000 down payment and Seller pays $5,000 in closing costs, and the offer is accepted, how does the price of the home get raised (Christianne's comment)? It's still $150,000 and the Seller has agreed to pay $5,000 in closing costs. Christianne's comment leads me to believe that in her area, the price would be raised to $155,000. That doesn't make any sense to me.
In your paragraph, you seem to be talking about two homes, one priced at $148,000 and one at $150,000. Or are you? If not, it seems that you are deducting the Seller's closing costs from the price of the home. That doesn't make any sense to me, either. I sure would like it if the Seller would pay $5,000 in closing costs AND reduce the price of the home by $5,000. That would be great!
Jim,
I have changed a couple of words in that paragraph to make it clear that I am talking about the same home. For consumers I don't think it's helpful to talk about a down payment when I am making this case, so for my example the down payment was irrelevant.
Going with $5000 down payment and using your example: If a buyer asks for $5000 closing costs on a $150,000 house and pays $30,000 down, then he will be needing financing for $120,000
If he simply asks for a price reduction of $5000 dollars on the same house, then he will need financing for $115,000.
You are absolutely right about me "deducting" the closing costs from the purchase price...I know that the seller has other closing costs, but a buyer has no control over them - the thing they do have control over is their own closing costs and they should decide who pays them.
When Christianne talks about closing costs raising the price of the house, she means the amount a buyer will need to finance it. She is not talking about an actual increase in the price of the house.
The point for buyers still is that they ask for a price reduction then the seller is paying for it, closing costs on the other hand are ultimately paid by the buyer, either through the down payment or actually financing the closing costs into the loan.
Denise