Buyers Can Seek Closing Costs Credit
Is it really a full-price offer if the buyers ask the sellers to pay for some of their closing costs? Not exactly.
Sellers are sometimes miffed when they read through a purchase offer and discover, usually in the ''additional terms’’ section of the contract, that the buyers want them to pay for some of their closing costs. Sellers may see this as a sneaky way to reduce the price.
Here’s how it looks from the sellers’ perspective.
Let’s say the sellers are asking $200,000 for their home. The buyers offer to pay the sellers their price, but ask for the sellers to credit $5,000 to them at closing for their nonrecurring closing costs. In effect, the buyers are offering to pay only $195,000 for the home, not the $200,000 that appears in the price section of the purchase offer.
Although buyers sometimes use a closing cost credit to lower the purchase price, this is not always the case. Many buyers, particularly first-timers, are short of the cash they need to pay for the down payment and closing costs. One way to generate cash so the buyers can complete a home purchase is for the sellers to assist with some of the costs in the form of a cash credit at closing.
Lenders have restrictions on how much sellers can credit to buyers at closing. The amount varies with the lender, but it’s usually in the range of 3% to 6% of the purchase price, or $6,000 to $12,000 on a $200,000 purchase price.
Most lenders will only allow a credit for the buyers’ nonrecurring closing costs. Nonrecurring closing costs are paid on a one-time-only basis at closing, like payments for title insurance and loan origination fees. Lenders usually won’t permit credits for the buyers’ recurring costs, such as mortgage interest and hazard insurance. There are some lenders, however, who will allow credits for all closing costs.
A credit from the seller to pay for the buyers’ nonrecurring closing costs can’t exceed the actual amount of those costs. The lender might allow a credit of up to $6,000, but if the buyers’ costs only total $5,000, the maximum the sellers can credit is $5,000.
The way an offer is presented to a seller can influence its chance of success. To overcome any potential resistance the sellers might have to a request for a credit from a prospective buyer, explain how the credit works before discussing the offer price. This way the sellers are less likely to be disappointed when they discover the offer is for less than the offer price indicates.
Buyers who need a credit to buy may find themselves at a disadvantage if they’re making an offer in competition against other buyers. To be competitive in this situation, it may be necessary to inflate the offer price to cover the amount of the closing cost credit.
For example, let’s say the property is listed for $200,000 and you need a credit of $5,000 to help pay for your closing costs. You can increase the offer price to $205,000 and ask the seller to credit $5,000, which is effectively a full-price offer of $200,000. For this strategy to work, the property must appraise for $205,000.
A credit can also be used to resolve inspection issues that arise during the sale. Although lenders usually don’t let sellers credit money to buyers for property improvements, they do allow credits for closing costs. The money the buyers save on closing costs can be used later to make improvements.
Dian Hymer is a syndicated columnist and the author of “Starting Out, The Complete Home Buyer’s Guide,” (Chronicle Books, Revised 1998.)