Seller concessions (or can we finance our closing costs?)
Seller concessions (or can we finance our closing costs?)
One question often asked in the midst of the pre-approval process is about seller concessions, sometimes asked “can we finance our closing costs?” The direct answer is that – no, you cannot finance your closing costs. However, there are some ways to have the seller contribute to either a portion or the entire amount required for closing. Here are a few examples:
Let’s say you make a VA offer on a home for $300,000, and your closing costs are $9,000, or 3%.
- You cannot take out a loan for $309,000 to cover the total. Instead, you’d have to take out a loan for $300,000, and pay the $9,000 in cash at closing. This option keeps the price the lowest, but requires the largest out of pocket expense.
- You can ask the seller to pay the $9,000 (or any portion of it) out of their proceeds, and still take out a loan for $300,000. This option is the worst for the seller, but the best for the buyer.
- You can offer $309,000, and ask the seller to contribute back the $9,000 that you have offered which is more than the price the home was listed as. In this case the sales price includes the additional $9,000 you need. This option increases the monthly payment for the borrower slightly, but allows the seller to still receive the $300,000 they want.
Please note that in all of these examples the loan amount MUST be at or lower than the appraised value of the home, so by artificially increasing the purchase price you may be more likely to run into value issues. It is very important to discuss closing costs and who is paying them (and how) with both your lender and your real estate agent.
As a rule, the seller can contribute up to:
3% for Conventional purchases
6% for FHA and USDA purchases
4% for VA purchases
Also, you cannot receive cash back at closing, so any funds you have negotiated to go towards your closing costs will need to be costs that the lender is actually charging (with some small exception for VA in some circumstance). Therefore there is no use in negotiating 6% closing costs, if your lender will only be using 4%. The additional 2% is simply retained by the seller! Again, always be sure to discuss this with your lender and your real estate agent ahead of time, so you can make sure you are making an offer that makes the most sense for you and your budget.
If you’d like to discuss your own purchase and what closing costs you’ll need to factor in, please feel free to call Ashlee Cameron with The Lake Cameron team at 360-900-9590
