Sign in here. Access to timely real estate stock ideas and Top Ten recommendations. Learn More. It can be tempting to ask for seller concessions, but there are some serious disadvantages to a seller paying closing costs.
Real estate has long been the go-to investment for those looking to build long-term wealth for generations. Let us help you navigate this asset class by signing up for our comprehensive real estate investing guide. Seller concessions sound pretty good in theory. The seller will pay some of your closing costs? Yes, please! Unfortunately, that's not really how it works -- and there are some serious disadvantages of a seller paying closing costs for a buyer.
Are you considering asking for seller concessions to lower your up-front costs? Here's what to take into account before you do. Let's get this straight right off the bat: Sellers aren't paying your closing costs out of the goodness of their hearts. In the majority of cases, when a seller pays a buyer's closing costs, it actually results in a higher sales price. In very few cases will a seller actually outright cover closing costs out of their own pocket.
In most scenarios, you'll see a higher sales prices as a result. In the event the concessions mean a higher sales price, you could find yourself up against appraisal issues -- not to mention potential financing problems. If you're using a mortgage loan to pay for the home, your lender will likely order an appraisal , basically assessing the home's value. If the home appraises for the new sales price, you're in the clear, and your lender will give you the funds you need to buy the house.
If the home doesn't hit that new, higher sales price, though? Then, you'll have some trouble. Your mortgage lender will only give you the appraised amount, and you'll need to make up the difference between the appraised value and the final sales price out of pocket. If you can't cover the balance, it may mean losing out on the home altogether.
When a seller concession leads to a higher mortgage loan amount, it means more in interest costs, too. Down payments are calculated as a percentage of your total loan balance.
For example: On an FHA loan, you need to make at least a 3. Even if the concessions result in a higher home price, there's still an added cost to the seller -- at least if they're using a real estate agent. And those commissions? They come straight out of the seller's pockets. Though it's likely not a deal breaker for most sellers unless you're asking for some serious concessions , it might make them more hesitant to work with you.
Sellers who have already purchased another property or who are waiting for their home to sell to make an offer are more likely to accept offers with a quick turnaround. Home sellers are ready to sell, not to make upgrades and do renovations. Of course, they should still be responsible for covering any repairs that failed a home inspection. Avoid making cosmetic demands in your offer, like replacing old carpeting or repainting a room. You can easily take on these projects in your own time, and the less money a seller has to put into their property, the more likely they will be to offer you a seller concession.
Sellers may be struggling with limited cash flow during a home sale just as much as you are. This can leave them with little room to cover your closing costs, even if they want to. One of the biggest home buying mistakes you can make is buying in the wrong market. Talk to your realtor about the state of the market before you start the home buying process so you know what to expect.
If seller concessions are important to you, use the market to your advantage. Seller concessions help to keep you from becoming cash poor when buying a home. Adding closing costs to your mortgage instead of covering them out of pocket will leave you with more cash to pay for your move, any necessary renovations, and emergency expenses. A preapproval is given after a bank or lender reviews detailed aspects of your financial situation, such as your credit score, income, and job history.
And if you secured a preapproval before starting your home search, you know that it has a limit. A borrower can only ask for seller concessions if they have enough wiggle room in their home loan preapproval to cover the associated costs. If your preapproval is enough to cover the purchase price of the home as well as closing costs, seller concessions are a great way to free up your cash flow. Seller concessions only really make sense when a home is reasonably priced.
If a home is already reasonably priced based on market value and current trends, asking a seller to cover some of your closing costs could be worth it for the cash it would free up today.
Homebuyers can negotiate and even ask the seller to cover all closing costs, although every transaction between buyer and seller are different and guidelines vary by loan type. Conventional loans, FHA loans, USDA loans, and VA loans allow the seller to contribute to closing costs, but each loan type has different rules and guidelines as to how much a seller can contribute to closing costs.
Conventional loan guidelines are a little more restrictive than other types of loans. The funds from the seller can also be put toward the down payment, although a down payment is not required for USDA loans. No other program will allow the seller to pay discretionary costs, making VA loans very unique. It may seem odd that a seller would be willing to pay your closing costs, but there are advantages for both parties. For the buyer, the clear advantage is that seller concessions are a way to lessen the financial burden that comes with getting a mortgage loan.
There are also tax advantages for the buyer when discount points are involved. Discount points are tax deductible for the buyer during the year after they buy a new home.
Discount points are prepaid interest on your mortgage loan. The more you pay in discount points, the lower your interest rate will be. Sellers are often trying to buy a home, so a smooth, quick sale benefits them as well. Buying a home is a big decision and investment. The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date.
The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.
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