If you find yourself coming up short on your closing costs, you may ask the seller for assistance. The seller paying the closing costs is common and is even acceptable in many loan programs. However, it may not be the right choice for everyone. Before you jump at the chance to have help with your closing costs, learn the disadvantages of doing so in order to make the right decision.
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The Seller Isn’t Really Paying the Costs
While it seems like the seller is doing you a tremendous favor by crediting you thousands of dollars at the closing, they truly aren’t paying the fees for you.
When you look closely at the process of the seller paying the closing costs, you’ll see that when you ask the seller for help, he or she agrees to in exchange for a higher sales price. In other words, the seller makes the same amount of money on the sale whether he pays your closing costs or not. When you agree to the higher sales price, you end up taking a higher loan amount. This results in a higher monthly payment, more interest, and more money out of your pocket in the end.
The Appraisal Could be an Issue
If you raise the selling price of the home, the home must appraise for that amount. Anyone could increase the asking price of a home and give seller concessions, but if the market data doesn’t support the value, a lender won’t allow the higher sales price.
If the appraisal comes in lower than the sales price, it puts you right back in the same position. You can either:
- Walk away from the sale. This is often the best idea since who wants to pay more for a home than it’s worth, right?
- Pay the difference in cash. If you didn’t have the cash to cover your closing costs, you probably don’t have the cash to pay the difference, so this probably isn’t an option.
- Negotiate a lower sales price. If you still need help with the closing costs, your seller may not want to lower the price, which could leave you back at square one – walking away from the sale.
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The Real Estate Commission Increases
While you don’t technically pay the real estate commission (the seller does), it still affects the bottom line. If you raise the asking price of the home in order for the seller to cover your closing costs, the seller has to pay a higher commission to the real estate agent.
Many real estate agents make between 3% and 5% of the sales price of the home. While 5% on even $5,000 is only $250, it’s still another higher expense the seller and in return, you have to pay for the home. Plus with the seller paying the closing costs, it’s more money out of the seller’s pocket right away.
You May Have Mortgage Approval Issues
Each loan program has different allowances for seller concessions. The FHA and USDA loan allow up to 6% of the sales price in seller concessions. But conventional loans allow different amounts depending on your down payment. For example, if you put down less than 10%, the seller can only give you up to 3% in seller concessions. If you put between 10% and 25% down on the home, the seller can give you 6% back and if you put down more than 25%, the seller can give you as much as 9% back in seller concessions.
Just because the mortgage program allows it, though, doesn’t mean the lender has to approve it. Each lender has their own rules regarding what they’ll accept. You may find lenders that don’t approve of seller concessions or if they do, they limit what sellers can give you. This could make it harder to get your loan approval.
Having the seller paying the closing costs has its pros and cons. Make sure you look at both sides before deciding what to do. The biggest issue is the larger amount that the closing costs will cost you in the end. With the interest on the loan for a possibility of 30 years, you could greatly increase the amount you pay for that ‘assistance.’