What Closing Costs Can the Seller Pay for the Buyer?
Sometimes buyers, particularly first-time buyers, are short the cash they need for the down payment and closing costs. One way to overcome this cash shortage is for the seller to pay a portion of the closing costs. How much the seller is allowed to contribute depends on the type of mortgage loan. The seller’s willingness to contribute to closing costs is often driven by the seller’s personal motivation, market conditions, and the way in which the request is made to the seller.
As your real estate agent, we will help you prepare an offer that balances the purchase price and request for closing cost assistance with the dynamics of the current marketplace. For example, in a seller’s market we may suggest you increase the offered purchase price to offset the request for closing cost assistance.
On a conventional loan, in most cases the seller can only pay what are referred to as non-recurring costs. These costs do not include pre-paid items or items to be paid in advance, such as mortgage insurance or hazard insurance premiums. The seller’s contribution is limited by the amount the buyer is putting down. If the buyer puts 10 percent or more down, the seller may contribute up to 6 percent. If the buyer puts less than 10 percent down, the most the seller may contribute is 3 percent.
On a VA loan, the seller may pay all the closing costs – the buyer pays no down payment and no closing costs. Sellers who agree to pay the closing costs often put a ceiling on the amount they will pay.
On a FHA loan, again the seller may pay all the closing costs. However, the buyer must make a minimum 3½ percent investment in the property – whether as part of the closing costs, a down payment or pre-paid items. The 3½ percent can be from the buyers own funds or from a family member’s gift.