No Money for Closing Costs? Seller Concessions can Make the Difference

In my last post, I talked about how it is still possible to buy a home here in the Chicago area with no money down with FHA financing combined with a Down Payment Assistance program like AmeriDream or Nehemiah. But even if you are able to buy with no money for the down payment, there are still other costs you will need to come up with at the closing. You will need money to pay for the bank closing costs which include the appraisal and credit report, a commitment fee for FHA financing and underwriting and processing charges for conventional loans. Then there are title charges, transfer taxes, pre-paid interest, insurance and the money to set up your escrow accounts. The truth is, real estate is a high cost transaction. Even with out the down payment a typical real estate purchase will cost you thousands. So what happens if you are ready to buy now, but your pockets are empty and your wallet is still a little light? There are a couple of ways to buy with no money out of your pocket, but you need to plan ahead.

One way is to ask the seller to pay for your closing costs through a seller concession. You need to ask for this as part of your initial negotiation, once you have a signed contract it is too late. Most conventional loan programs allow the seller to contribute up to 3% of the value toward the buyer's costs, and with FHA you can get a 6% seller concession. You will need to talk with your lender and have him put together a Good Faith Estimate of what all your costs will be to close. Once you know how much you are going to need, you can ask that the seller to pay that amount at the closing. From the seller's standpoint, this is part of the price. Any money that he pays out is deducted from the sale price. If the contract for the home is $300,000 and they are paying $3,000 for closing costs and pre-paids, the true sale price is $297,000. It is important to phrase it so that the seller credit will be "toward closing costs".

You can't walk away from the closing with any extra money, so make sure you have a use for all the money you get as a concession. One of the great things about this program is that you can use it in different ways. Not only can you pay for the normal closing costs, but you can also use a seller concession to pay for points to lower your interest rate, or for more creative financing options like an interest rate buy-down. Remember though, the seller is looking at this based on how much they will net from the sale, but the appraiser is basing the value on the contract sale price. So it will need to appraise out at the full contract price. This can be more of an issue if you are asking for substantial closing costs along with a seller donation to pay for a grant from Nehemiah or AmeriDream.

Another way to pay for closing costs is through a lender credit. This is more common with refinances than it is with purchases, but it is a great option in some situations. As a mortgage banker, I can offer loans in a variety of price and cost variations. For people who are strapped for cash, it is possible to offer a slightly higher interest rate, but use some of the premium to pay for the loan costs. Whether this will work for you depends on your whole situation. But it is an option, and one more way to reduce the cash you need to close.

Pete Thompson is an Illinois mortgage banker who provides superior mortgage service and competitive mortgage rates in Chicago, the Chicago area and throughout Illinois. Click here for a Free copy of The Real World Home Buyer's Guide - How to Save Thousands when Buying a Home and Getting a mortgage. For information on the latest mortgage news and current Illinois mortgage rates, please visit http://www.illinoismortgageratesandnews.com/