Where do you start?
If you’ve hired a good buyer’s agent, they’ve likely prepped you on this. If not, how do you go about asking the seller to cover a credit toward closing costs, that you’d otherwise be responsible for? Good question. Most buyer’s don’t understand what closing costs consist of, let alone what a seller credit for closing costs actually means. Buyers tend to think that closing costs are what the mortgage company charges to provide them with the loan to buy their home, but that’s not entirely true. What a lender charges to provide the buyer with a home loan, is actually much lower than what most buyer’s think (we’ll talk about this more later).
Closing costs are made up of property taxes, homeowners insurance, title fees, discount points, appraisal fees, etc. Also, depending on the loan a buyer is using to purchase a home, only a certain percentage of the purchase price can be credited back to the buyer by the seller for closing costs. Typically, anywhere from 3-6%.
If you’re buying a home in a seller’s market, it can be tough to negotiate any seller credit for closings costs, although not impossible.
How much should you ask for?
It’s important to remember that there is only so much of the pie to go around. What do we mean by that? Here’s an example… let’s say you were able to negotiate a large seller credit to cover a good majority of your closing costs with your offer. You go through the process of holding inspections on the home you plan to buy, and as a result of those inspections, agree upon more closing costs credits (maybe in lieu of repairs).
That all sounds great, but guess what, you’re in for a surprise when you can’t use those additional closing cost credits. A buyer can only be credited up to a certain percentage at closing, so be sure to discuss this with your agent before negotiating seller credits. It could make sense to instead ask for a price reduction, or for the seller to perform certain repairs.
With a conventional loan, you can typically only apply 3% of the home’s purchase price as a seller closing cost credit. You can negotiate higher amounts with different types of loans, but be careful. Again, if you request too much, and it can’t be applied to any closing costs, there’s a chance you will not receive the additional credits at closing.
Calculate the right amount.
The lender you choose will be able to provide with a good faith estimate of what your closing costs will be. Now, this typically includes very conservative amounts. It also doesn’t include other closing costs that might arise. This is where a great real estate agent can advise you, based on your market and the type of property you plan on purchasing.
You want to choose a real estate buyers agent that not only knows the market, but also has an understanding of the closing costs involved for the type of property you’re interested in. Ask your agent about negotiating seller credits for your closings costs, and how a credit could factor into an offer you make, before getting started. Review the good faith estimate with your agent to calculate how much of a closing cost credit should be requested in your offer.
The closing costs credit you negotiate with the seller can be presented as a percentage of the home purchase price, or a dollar amount.
