May 01 2009

A buyer always pays their closing costs, somehow


Shane and I have learned so much about what all goes into getting a mortgage and getting into a house. We still have a lot to learn, but I wanted to share this tidbit with you. If you’ve bought a house, you already know this, but this was entirely new to me so I want to put this out there.

At closing, sometimes you can have the seller “pay your closing costs.” This is also known as seller concessions.

Be very careful here. You aren’t getting a gift from the seller. In fact, no money will leave their pockets. When the contract says that the seller will pay a portion of your closing costs, what you are really doing is financing your closing costs as a part of your mortgage.

For example: A house is listed at $100,000. You have qualified for an FHA mortgage and have to put 3.5% down, or $3,500. Your closing costs and prepaids are, say, $5,000. In total, you’ll need $8,500 at closing.

But say you only have $5,000 to work with.

On that house, you can offer $103,500 and stipulate that the seller pays a portion of your closing costs. They’re simply agreeing to let you finance that $3,500. They’ll net the same amount of money than if you offered $100k and paid your own closing costs out of pocket. The advantage to the seller is that it helps you get into the house, and thus, it helps them get their house sold.

[Now, if you were to offer $100k AND have the seller pay your closing costs, you are then getting a true discount on your overall expenditure.]

The way the mortgage lender explained it to me, with an FHA loan you can have the seller pay up to 6% of the house’s value in closing costs. It’s 3% with a conventional mortgage. I don’t know if this is strictly limited to your closing costs or if you can include your prepaids as well (I’m going to guess not, but I’m not positive).

Advantages to doing this: You’ll have more cash in the short-term. If paying your closing costs in addition to your down payment means that you’ll have no savings left, it will keep some cash in your pocket for now.

Disadvantage: You’ll be financing those costs, which means you’ll be paying quite a bit of interest over the long-term. Even at low interest rates like today’s, you could still be paying double the amount over your loan period.

If you have the money, it’s best to pay your own closing costs with cash upfront.

The buyer always pays their own closing costs — it’s just a matter of when you pay them (at closing, or along with your mortgage).

Your lender will stipulate if you’re able to finance your closing costs or not, so be sure to speak with your lender well in advance if you want to pursue this option.

You can request to see a good faith estimate of closing costs prior to taking out your loan. This will help you see specific fees and you’ll know how much money you’ll be expected to fork over at closing. You can then compare those fees to other lenders to make sure you’re getting the best deal possible.

With our situation, we’re looking at roughly $4,000 in closing costs, and an additional $3k (or so) in prepaids. The way it was explained to me, we have to prepay a year’s worth of property taxes and homeowners insurance. Yuck.

So you see, all of these costs at closing add up. We’ve opted to lower our price range so we can not feel so pinched at closing and in the months beyond while we’re working to rebuild our savings.

Yahoo Finance has a list of typical closing costs here . Your situation will vary, but this is a general idea. Again, you can see the actual breakdown of your costs by speaking with your lender.

Posted under Uncategorized | 9 Comments »

9 Responses to “A buyer always pays their closing costs, somehow”

  1. Thanks for the heads up.

    I always assumed if they pay the closing costs, my mortgage would NOT go up by the amount they paid.. tricky wording there.

  2. Yikes. I had no idea! Every once in a while I’ll look at houses out of curiosity even though we can’t buy one at least until after we move. Prices are cheap right now, but once you add in all those closing costs it really does hike it up quite a bit! I had no idea there were so many added costs! These fees definitely aren’t included in the super low home prices I’ve seen.

  3. Great post! We paid all the closing costs ourselves, and I wish I had known how much of our “down payment fund” was going to end up going toward closing costs. We still had enough for the down payment we wanted, but the final closing costs were higher than we had anticipated. It’s definitely something to research while working to save up enough for a down payment.

  4. Hi Kacie,

    You bring up a very good point! This has been very common for the past several years. In the “olden days” banks never allowed this — which might by why so many people find themselves upside down on their mortgages…

    We sold a home in town last fall to a man that makes upteen times more money in a year than my husband and I do. You know what? He didn’t make any down payment what-so-ever AND he walked out of the closing office with the keys to a home AND a fat check. My husband and I just could not believe it. The BUYER walked out with a check?!

    I just wanted to say — it is so great to see you guys being so responsible by doing the research and really understanding what it means to have the seller pay closing costs.



  5. It definitely changes things a bit! I only had a vague idea of what “closing costs” meant, and now that I know…wow. I can see why it makes sense for people to stay in their house for several years, because it will take quite awhile to recoup that money. And, paying all of those taxes and insurance upfront really eats up our savings.

  6. What a great post! I’ve really been enjoying following your house buying experience. I wish we were in a position to buy a house! Unfortunately, my husband has another two years in grad school, and houses cost at least $800k here!! (at least, it is down from $1M) Can you imagine the closing costs on that?!

  7. A $800k house blows my mind. I am so glad we live in an area where prices are much lower! If you moved out this way, you could get one heck of a house for 3/4 mil.

  8. When we bought our house in Oklahoma, the seller was desperate to sell because of divorce, so they paid half of our closing costs. We financed the other half. This may be uncommon, but something worth checking into!

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Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

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