Seller-Paid Closing Cost Considerations

Seller paid closing costs can be a great way to potentially improve a buyer’s financing or overall transactional benefits on a home purchase.

What are seller-paid closing costs?

When negotiating for a “seller concession” buyers have 2 common options:

1. Asking for a purchase price reduction

   • Ex: from 100k to 97k purchase price (a 3% reduction in price)

2. Asking for seller-paid closing costs, if they are using financing (i.e., a mortgage) to purchase the property

   • Ex: keeping purchase price at 100k, sellers cover 3k of closing costs for the buyer (3% of purchase price)

In both examples the sellers are “losing” $3,000 (or, making $3,000 less, depending on how you think of it). So they are nearly the same in terms of what the sellers make when the property is sold.

• Note: the seller-paid closing cost option does cost the seller a bit more in:

• Real Estate commissions--typically 5-7% on the difference, so ~$180

• Title fees—varies by county/location; also a relatively small %.  

Why use seller-paid closing costs?

Seller-paid closing costs reduce the amount of cash to close that a buyer is required to bring to their closing to purchase a home using mortgage financing.

Furthermore, a lender may only allow certain financing features by using seller-paid closing costs, depending on the loan program.

Permanent Mortgage Rate Buydowns with Seller-Paid Closing Costs

Buyers are generally limited to buydown their rate by “paying discount points”, with a maximum* of roughly ~2.5 points (1 point is equal to 1% of a loan amount in costs).

• *The maximum does vary by loan amount and other factors. 2.5 points is given as a rough value for reference and example and not meant to be a precise guideline to follow.

With seller-paid closing costs, buyers can buydown their rate beyond the normal limitation of ~2.5 points mentioned above. The maximum allowable amount will depend on the Lender, Loan Program, and amount of seller-paid closing costs.

Note on permanent rate buydowns

• Even though the name says “permanent”, it is not quite a permanent as it may seem.

• If a homeowner sells or refinances their home, the fees paid related to the permanent rate buydown initially are not credited toward any future transactions, unless otherwise stated by a Lender or Loan Program.

• Another way of saying this is that a permanent rate buydown only lasts as long as the mortgage lasts.

Temporary Mortgage Rate Buydowns with Seller-Paid Closing Costs

Temporary rate buydowns are ONLY available with the use of “interested party contributions”, which is very often seller-paid closing costs.

Temporary rate buydowns are a bit more complicated than permanent rate buydowns, so I’d recommend reading this page to learn more: https://www.johannsengroup.com/temporary-rate-buydowns

In short, with fixed rate mortgages, they reduce a mortgage interest rate by a significant amount for a temporary period of time (usually up to 3 years) and the rate returns to it’s long-term fixed rate.

 

What can seller-paid closing costs be used for?

Seller-paid closing costs can be used for a number of eligible costs related to a financed Real Estate transaction. Allowable costs that may be covered by seller-paid closing costs are determined by the buyer’s lender and loan program guidelines. However, generally-acceptable costs that may be covered by seller-paid closing costs include:

-        Permanent mortgage interest rate buydowns (i.e., “buying down a rate” by paying more in discount points)

-        Temporary rate buydowns

-        Home warranty

-        Taxes & Other Government fees

-        Appraisals

-        Prepaid and escrow fees (property taxes, homeowner’s insurance, prepaid interest)

-        Lender fees (Underwriting, Processing, Origination)

-        Title fees (closing fees, title exam, title insurance)

-        Real Estate Broker Admin fees

Can seller-paid closing costs cover down payment requirements for a mortgage?

No, seller-paid closing costs generally can not be used to cover down payment requirements from a lender.

Lenders have minimum down payment requirements based on Loan Programs that must be followed.

• Examples for single-unit single-family home first-time homebuyer purchases:

  • Conventional Loans: 3%  

  • FHA: 3.5%

There are exceptions to the minimum down payment requirement if the Loan Program includes a “Down Payment Assistance” (DPA) feature. Let us know if you have questions on DPA and seller-paid closing costs as that is a topic with even more considerations!

What is the maximum amount of seller-paid closing costs?

Buyers can not ask for an unlimited amount of seller-paid closing costs if they are purchasing a home with a mortgage. The lender and loan program determine the maximum amounts.

As of the writing of this article, here are general guidelines by program:

Conventional

Occupancy Type: Primary or Second Home

• Down Payment: 3-10% - up to 3% interested party contribution (seller-paid contributions)

• Down Payment: 10-25% - up to 6% interested party contribution (seller-paid contributions)

• Down Payment: 25%+ - up to 9% interested party contribution (seller-paid contributions) 

Occupancy Type: Investment Property

• Any Down Payment Amount: Up to 2% interested party contribution (seller-paid contributions)

FHA

-        6% of sale price (or appraisal, whichever is lower) maximum seller-paid closing costs

-        Owner-occupied only

VA

-        4% of sale price (or appraisal, whichever is lower) maximum seller-paid closing costs

-        Owner-occupied only

 

USDA

-        6% of sale price (or appraisal, whichever is lower) maximum seller-paid closing costs

-        Owner-occupied only

Questions?

Please get in touch if you want to know more! We are always happy to help. :-D