A popular question before and during negotiations start on the purchase contract is who pays closing costs? Sellers and buyers have their distinct breakdown of closing costs to pay at closing. Yet, often the seller crosses over to pay some or all of the buyer’s costs. Sometimes the buyer needs seller paid costs out of necessity, or it may be part of a buyer strategy to keep funds in their pocket.
Who Pays Closing Costs, Buyer or Seller?
There are costs for each party in a purchase, yet they vary based on which state the property is located, local market, vendor choices, and mortgage program. For instance, it is customary for the seller to pay deed stamps in NC and SC. However, in states like Virginia and Florida, the buyers pay a form of transfer taxes. To plan for closing, both buyers and sellers need to know their closing cost responsibilities. Local markets may influence who pays certain costs. Furthermore, vendor choices greatly affect the charges. Fees charged by closing attorneys, lenders, and other vendors vary, so the choices affect the bottom line.
So, how do buyers and sellers know which costs they pay? Let’s discuss the bottom line and how strategies affect it.
Who Pays Closing Costs – Affect on Seller’s Bottom Line
The topic of closing costs should be part of the initial listing price strategy meeting between the seller and listing agent. An experienced Realtor discusses all factors which influence the seller’s bottom line. There are key components of this meeting which affects the seller’s bottom line. Typically, these key areas include:
- Market analysis
- Mortgage payoff(s)
- Other payoffs – judgments, liens, equitable distribution, etc
- Commissions
- Seller closing costs
- Buyer costs paid by seller
Knowing the bottom line helps a seller plan for their next purchase. Although, not every seller buys another home with the proceeds. Sometimes the seller decides to rent, sell their investment property, or flip the home. Additionally, at certain price levels, the seller may bring money to closing. All of which are reasons to know the bottom line which helps decide between paying buyer closing costs or not.
Who Pays Closing Costs Marketing Strategy for Sellers
While discussing price and net to or from the seller, a couple of topics within this discussion should include
- For the property’s market, is it typical for sellers to pay buyer costs?
- Should the listing market buyer closing cost assistance?
It is Customary for the seller to pay buyer closing costs
Who pays closing costs is often dictated by the local market. There are many markets where it is pretty much expected for the seller to pay buyer costs. This is especially true in military markets. Military buyers often look to bring no cash to closing with a VA loan which may finance 100% of the purchase price. However, there are closing costs too. In order to cover these costs, the buyer often expects the seller to pay their costs. Therefore, a seller should account for this.
Should the Seller Market Paying Costs for Buyers?
The housing market is uber-competitive and a seller’s listing needs to stand out. Something a seller could consider as a marketing tool against other homes is to offer to pay buyer closing costs. To attract buyers, the seller and listing agent could decide to offer a set amount up-front in the property listing. Although, make sure to follow the process mentioned above for planning an acceptable bottom line.
Who Pays Buyer Closing Costs?
Whether out of necessity or part of a strategy, buyers often request sellers to pay closing costs. Keep in mind that the seller already has their own potential costs such as Realtor commissions, deed prep, state tax stamp, or transfer fees. Requesting seller paid costs for the buyer is especially popular when buyers use low to no down payment programs.
Although VA loans, USDA guaranteed loans, and down payment assistance loans provide up to 100% financing for buyers, there are still closing costs and pre-paids required by the buyer. These costs are in the thousands of dollars range. So, often buyers need and want to include these costs into their loan for various reasons.
Reasons Buyers Request Seller Paid Costs
- Not enough savings
- Gift funds not available
- Doesn’t want to touch retirement
- Taxes for withdrawing retirement funds
- Keep emergency cash fund
- Strategy to finance costs at low rate
- Use buyer funds for qualifying
- Buyer used all funds towards down payment
Doesn’t seller paid costs just mean the costs are financed into my loan? Technically, yes. For buyers to finance their costs, the purchase contract must state the amount which the seller is paying. Then, the lender will provide financing at a certain percentage of the price which includes the seller paid costs. There is one scenario which USDA allows a buyer to finance closing costs without involving the seller. If the property appraises higher than the purchase price, a buyer may increase the loan up to the value to finance closing costs and pre-paids.
Even though sellers are allowed to pay the buyer’s closing costs, there are limits which vary by loan type.
Seller Paid Closing Costs Limits
Lending programs have their own guidelines, and this is no different when it comes to who pays closing costs. Part of the strategy in choosing the right loan program involves how much closing costs may be paid by the seller. For instance, a low down payment Fannie loan would allow 3% compared to FHA allowing 6% could make a big difference on a low purchase price. Using a price of $100,000, A buyer able to finance up to $6000 in costs with FHA would be an advantage over $3000 with Fannie.
Max Seller Paid Costs by Loan Program:
- USDA: 6% of sales price
- FHA & FHA 203k: 6% of sales price
- Conventional Primary or Secondary Residence: <10% down = 3%, 25.01% – 10% down = 6%, 25% or more down = 9%
- Conventional Investment Property: 2% limit all LTV’s
- VA & VA Renovation: All reasonable & customary closing costs plus 4% in sales concessions
How Much Are Closing Costs?
As a buyer, it is key to know the amount of the costs, a breakdown of the costs, plus have an understanding of the costs. Therefore, before determining who pays closing costs, there has to be an understanding of what is being asked. Too often a random request such as $3000 in seller paid costs for the buyer is included in the contract. When in fact, during the process the lender finds that the buyer is short to close by $2000. This results from a lack of preparation.
So, part of the pre-qualification process is not only to review credit, income, and assets but also to create a strategy that works for the buyer. If the buyer’s closing costs, the first year of insurance, and setting up escrows is $5,000, then determining who pays closing costs and how much is key information. This information must be relayed to the buyer’s agent, who then passes along to the seller’s agent in the form of an offer to contract. Thus, choosing a dedicated, professional mortgage loan officer that will do the up-front work for the buyer will create the best chances of success in the end.