Why Would the Seller Pay Closing Costs?

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“Why would the seller pay closing costs? When purchasing a home, people focus on the immediate, upfront expenses. For buyers, that means the purchase price and down payment; for sellers, it might mean making the home show-ready through repairs, renovations, and improvements. However, there are additional costs before the deal closes: closing costs.”

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Why Would the Seller Pay Closing Costs?

The closing costs will vary depending on several factors, including the property’s price, the type of mortgage the buyer gets, the condition of the house, and more. Certain costs are traditionally the responsibility of one party or the other, but many other expenses might change. Let’s examine why a seller would pay closing costs.

 

Closing Costs: What Are They?

A closing cost is a financial expense associated with a real estate transaction over and above the property’s price. A loan has several cost types, including origination fees, discount points, appraisals, title searches, title insurance, surveys, taxes, and deed recording charges. It is the law for lenders to provide closing disclosures to buyers three business days before a closing date.

 

Closing Costs: How Much Do They Cost?

Why would the seller pay closing costs? Typically, homebuyers pay between 3% and 6% of the purchase price as closing costs to complete the transfer of property title. Closing costs can vary by location and property value. Approximately $9,000 to $18,000 in closing costs applies to a $300,000 mortgage at settlement.

A nationwide survey by a national firm specializing in these costs found that the average closing costs 2021 for a single-family home with transfer taxes were $6,905; without taxes, it was $3,860. In terms of closing costs by the percentage of the sale price, the District of Columbia incurred the highest percentage at 3.9%. Missouri incurred the lowest at 0.8%.3

 

Closing Costs: Which costs include?

  • Lenders charge a fee for processing mortgage applications.
  • A real estate attorney will charge a fee if they prepare and review home purchase agreements and contracts.
  • The closing company receives this fee, also known as the escrow fee.
  • The cost of transporting paper documents.
  • The cost of pulling credit reports from the three major credit bureaus.
  • Some lenders require escrow deposits at closing equal to two months’ worth of property tax and mortgage insurance payments.
  • One must determine whether a home needs flood insurance or is in a flood zone.
  • Proof of pre-payment for homeowners insurance.
  • For a fee, certified inspectors inspect properties for lead-based paint hazards.
  • Covers lenders and buyers in ownership disputes or liens that do not appear in title searches.
  • A fee typically equals 1% of the loan amount that covers mortgage processing fees.
  • In this case, professionals will inspect the property to detect termites, dry rot, or similar damage to the property.
  • You can make these optional payments to a lender to lower your interest rate.
  • Interest accrued between the closing date and the first mortgage payment.
  • This is necessary with a down payment of less than 20%. Closing may mandate PMI for one month.
  • This fee helps determine the home’s market value.
  • Amounts paid within 60 days of purchasing a house in local property taxes.
  • The fee a municipality or county charges for recording public land records.
  • Surveyors charge fees to confirm the boundaries of a property.
  • The cost of analyzing property ownership records.
  • The state or local government charges this tax when the seller transfers the title to the buyer.
  • The lender charges this fee to verify the buyer’s income, employment, credit, and other financial information.

The fees are for a mortgage, VA loan, or homeowners association (HOA). They depend on the type of mortgage and property. Both FHA loans and VA loans are available to qualified buyers. Condominiums and apartment communities often have homeowners associations.

 

Are Closing Costs Negotiable?

It is possible to negotiate closing costs with a lender if the buyer suspects unnecessary fees are being added. Buyers should avoid excessive processing and documentation fees and find a way to reduce closing costs by:

  • Shopping around: Compare the fees charged by different lenders. The lender is not required to recommend a title company, pest inspector, or home insurance company to the buyer.
  • Schedule closing at the end of the month: Closing at the end of the month minimizes prepaid interest charges.
  • Work with the seller. Motivated sellers with a home on the market for a long time and few offers may lower the price or cover some closing costs.

 

Does The Buyer Pay The Closing Cost?

Buyers pay any closing costs related to acquiring a mortgage, which is part of your mortgage costs. Typical closing costs for buyers include:

 

Lender-related fees:

The lender will charge you for its expenses for originating, drafting, and processing your loan, including a credit check and other underwriting procedures.

 

Appraisal:

If you apply for a mortgage, you will need an appraisal of the home’s value from an independent professional.

You will likely need homeowners insurance, and you will need to make the first premium payment (or more) at closing.

 

Title costs:

The insurance policy for the title protects buyers from future claims against the property’s title. The lender’s title insurance is usually mandatory, while the buyer can purchase the owner’s title insurance.

 

Home inspection:

When you close on the property, you’ll have to pay the inspector’s bill if you conduct a home inspection.

 

Attorney fees:

In some states, a real estate attorney must review title documents and contracts and prepare closing documents. A typical lawyer charges by the hour, although specific tasks, such as drafting a purchase and sale contract, may require a set fee.

 

Prepaid interest:

Interest will accumulate on the loan between the closing date and when you pay your first mortgage payment.

 

Is The Seller Responsible For Closing Costs?

Closing costs for sellers differ from those for buyers. If you’re selling your house, you might be required to pay the following costs: These are generally deducted “off the top” of the purchase price unless you specifically request that they be paid separately.

  • Realtor commissions: The sellers usually pay commissions for both agents involved (the seller’s agent and the buyer’s agent). This will be the most expensive part of your purchase price, usually between 5 and 6 percent. For example, 6 percent is $23,508 on a median-priced home sale of $391,800.
  • Title fees: Fees associated with transferring a home title from the seller to the new owner.
  • Transfer taxes: A transfer of ownership occurs when you (the current owner) hand over the property to a buyer (the new owner).
  • Property taxes: If the home’s property taxes are unpaid at closing, the seller is responsible for paying them.
  • HOA fees: As far as HOA fees are concerned, they will also have to be paid on closing day if the property is in a community operated by an association.

 

Why A Seller May Be Willing To Pay For The Buyer’s Closing Costs?

There are a few reasons why a seller may be willing to pay for the buyer’s closing costs. For example, a seller might pay for the buyer’s closing costs if the buyer lacks the funds to cover their down payment and closing costs.

 

Why A Seller May Be Willing To Pay For The Buyer’s Closing Costs?

 

If a seller wants to attract more buyers and close faster, they might pay a buyer’s closing costs to make their property stand out in a buyer’s market.

 

What are the limits on the closing costs that sellers can pay?

Concessions from the seller can make home ownership attainable for many buyers. However, certain mortgages may restrict a seller’s closing cost assistance.

 

Limits on concessions

  • Depending on the loan-to-value (LTV) ratio, Fannie Mae has different seller contribution limits for primary and second homes.
  • If the LTV exceeds 90% (in other words, if the down payment is less than 10%), the seller may offer 3% of the sales price as a concession.
  • A seller concession of 6% of the sales price applies if the LTV varies from 75.01% to 90%.
  • If the LTV exceeds 75%, 9% of the sales price is available as seller concessions.

Seller concessions should be at most 2% of the sales price of conventional loans for investment properties.

  • FHA loan concessions: Sellers of homes with FHA loans can contribute up to 6% based on either the appraised amount or the sale price (whichever is lower).
  • Loan concessions provided by Veterans Affairs (VA): VA loan concessions are limited to 4% of the home’s value.
  • USDA concessions: USDA loans permit seller concessions of up to 6% of the sale price.

 

Are There Any Disadvantages To Paying Closing Costs For The Seller?

Sellers need to understand the disadvantages of paying a buyer’s closing costs.

 

Fees and closing costs could be higher.

It sounds great if you have an offer that’s $10,000 higher than the next best. Sure, but remember that closing fees often depend on a percentage of the sales price, so higher prices mean higher costs.

The commission alone will cost you roughly $500 – $600 extra if you sell your home for $400,000 instead of $390,000.

 

Profits may be lower.

If you provide seller concessions but don’t get the higher offer you were hoping for, you may suffer a loss in profit. Most buyers will pay part of their closing costs if you pay for them, but not all. You may walk away with less profit if you don’t have a buyer who pays.

 

Fraud may be a risk to you.

Failing to disclose seller concessions can result in fraud despite its apparent harmlessness. Seller concessions must appear on the closing statement and appear to the lender.

 

How Does the Seller Pay Closing Costs Affect the Buyer?

The seller’s concession is a nice perk for cash-strapped buyers. But, if the seller pays for the closing costs, we must consider the buyer’s disadvantages.

 

Mortgage approval may be a problem for you.

It is common for mortgage lenders to require a home appraisal if the value of the appraisal drops below the purchase price. You must pay the difference if the value drops below the purchase price.

A home that costs $400,000 includes seller concessions (and you would have agreed to a home for $390,000 without seller concessions), but the appraisal comes in at $390,000, so your loan amount will remain the same, and you will need to contribute another $10,000 to the down payment.

 

The down payment could be higher.

As a general rule, if you want to put down 10% on a house instead of $390,000, you’ll have to come up with $1,000 more, and if you want to put in 20% down, you’ll have to come up with $2,000 more.

 

Mortgage payments could be higher.

The trade-off between paying less at closing and paying more at closing is to offer a higher price in exchange for seller concessions. Before you agree to a higher purchase price, make sure you’re comfortable taking on the monthly payment.

 

What Is The Commission Paid To A Realtor At Closing?

A typical closing involves higher costs than other transactions, including commissions. Buyers don’t pay them; sellers do. A typical commission ranges between 5% and 6%, split equally between the seller’s and buyer’s agents.

 

Are Closing Costs Worth It for the Seller?

In a buyer’s market, paying closing costs is often worth it for the seller, especially if the buyer is willing to pay a higher price or wants to sell the home quickly. But, giving seller concessions to buyers has drawbacks. The seller must disclose any closing credits given to the buyer.

 

Bottom Line: Why Would the Seller Pay Closing Costs?

The buyer pays the most closing costs. These include the origination and underwriting of a mortgage, taxes, insurance, and record filing. Closing costs also include various charges at the settlement or closing of a real estate deal. Before signing a real estate contract, you must disclose closing costs to buyers and sellers and agree upon by law.

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