Seller Paid Closing Costs Will Continue To Be An Even More FAQ

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

For the last few years Seller Paid Closing Costs have been a part of most of the Mortgage Loans that I do, and with the upcoming changes to FHA, I would expect that Seller Paid Closing Costs Will Continue To Be An Even More FAQ.  The upcoming changes to the FHA Mortgage Insurance Premium (MIP), and the elimination of the MIP cancellation, Borrowers will be looking to do more Conventional Mortgages than FHA Mortgages.  This will require Borrowers to have more of their own money for Downpayments, which will mean less money for Closing Costs.

One of the big advantages that FHA Mortgages will still have over Conventional Mortgages, is that FHA allows for all the Downpayment money to be gifted, non of the money has to be the Borrowers own money.  Conventional Mortgages on the other hand require that a minimum 5% Downpayment be from the Borrowers own funds. However, the upcoming changes to the FHA MIP will be a big incentive for Borrowers to come up with those additional funds in order to avoid the higher MIP payments, and the inability to ever get rid of the MIP.

The more Mortgages that I do, that the Borrower is receiving Seller Paid Closing Costs, the more obvious it is that Borrowers, and in some cases even some Realtors do not understand how Seller Paid Closing Costs work.  First of all, I have yet to do a loan in which the Seller is truly paying the Buyer's Closing Costs.  What always happens is that the Buyer's Closing Costs are add back into the Sales Price of the agreed upon price for the property.  So the Buyer's Closing Costs are not really paid for by the Seller, they are in reality financed into the Mortgage.

This leads to a second confusion, Borrowers and as I said before even some Realtors, think that the Purchase Price is the Selling Price minus what the Seller agreed to give them towards the Closing Costs.  There are Realtors that will even write up the Sales Contract that way.  The fact is that the Purchase Price and the Sales Price are one in the same.  They are the total agreed upon Purchase Price PLUS the amount the Seller is contributing towards the Closing Costs.

This is because Sellers are not allowed to give the Borrowers money at the Closing.  The Sellers can pay money towards the Closing Costs, but they can not give the Borrowers money back in the form of a check.  Therefore, the Sales Price is the total of the agreed up price, and the Seller's contribution towards the Closing Costs.  Example:

  • Buyer and Seller agreed to a purchase price of $195,000, but the Buyer needs help with the Closing Costs.
  • So the Buyer asks the Seller to contribution $5,000 toward Closing Costs.
  • The Seller agrees, but only if they will still net the $195,000 that they both originally agreed to, so the Sales Price is $200,000 ($195,000 + $5,000), and not the other way around ($200,000 - $5,000).

For those of us in the business for several years, this may be obvious, but for Borrowers, and new Realtors, it is some times hard for them to understand.  So I have a feeling that Seller Paid Closing Costs Will Continue To Be An Even More FAQ in the coming months, as Borrowers start to consider Conventional Mortgages over FHA Mortgages.

 

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 Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

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 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who is licensed in #CT, #RI, #MA, #NH, & #FL and can assist you with all your #FHA, #Conventional, #VA, #USDA, and #State Bonded Progam #mortgage needs in #CT, #RI, #MA, #NH, & #FL. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

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Re-Blogged 1 time:

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  1. Julie Brown 03/11/2013 07:06 AM
Topic:
Lending / Financial
Location:
Connecticut
Groups:
Realtors®
Mortgages
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seller paid closing costs

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Rainmaker
861,525
Gabrielle Kamahele Rhind
KGC Properties LLC, Tucson Property Management & Real Estate - Tucson, AZ
Broker/Owner

GOOD MORNING GEORGE!  Nice explanation.  Even though it sounds good for a Seller to get a higher price for their home, the increase in price can lead to tax consequences for a Seller down the road - I think its important for Sellers to talk to their accountant before jumping right in and agreeing to higher sales prices to offset buyer close costs.  Do you have some advice for Sellers in these situations?

Mar 11, 2013 09:14 PM #27
Rainmaker
861,525
Gabrielle Kamahele Rhind
KGC Properties LLC, Tucson Property Management & Real Estate - Tucson, AZ
Broker/Owner

PS _ I had to come back as well - regarding Andrea's comment - I am in escrow on a transaction now, the Buyer asked for close costs, the seller didn't want to - and especially did not want to pay commission on monies they were'nt going to receive.  Ultimately we negotiated and the Buyer agent ended up absorbing the extra commission expenses.  It seems small - but like I mentioned in my first comment - it adds up for a seller!

Mar 11, 2013 09:18 PM #28
Rainmaker
1,406,727
Michael Setunsky
Woodbridge, VA
Your Commercial Real Estate Link to Northern VA

George, good information! Sellers need to assess the implications when agreeing to pay the buyers closing costs.

Mar 11, 2013 11:26 PM #29
Rainer
58,935
Valerie M. Blake
RLAH Real Estate - Washington, DC
Distinctive Marketing - Exceptional Service

I always advise my sellers to look at an offer only from the amount of their NET proceeds. That way, if a buyer needs closing help, we have a variety of ways to negotiate: accepting the requestied amount or a portion thereof, raising the price to accommodate the closing costs or a portion thereof, changing the settlement date to save the buyer pre-paid interest or condo fees, asking for a free rent-back, providing a copy of the seller's title policy to give the buyer the lower reissue rate for new title insurance and more. There are many ways to help a buyer make a purchase while still protecting the interests of your seller by obtaining the best NET price, which ultimately may not be the best "sales price."

Mar 12, 2013 12:10 AM #30
Rainer
301,154
Lehel Szucs
All Seasons Real Estate, Inc. - Covina, CA
REALTOR of choice

you are right ... it took a while but all my buyers now understand that asking for closing costs now means i am not really interested and just move right on past my offer ... 

Mar 12, 2013 02:17 AM #31
Rainmaker
848,807
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team

Hi George in our market there is little or no room or it won't appraise!

Mar 12, 2013 02:43 AM #32
Rainmaker
219,976
Judy Orr
HomeSmart Realty Group - Orland Park, IL
SW & Near West Chicago suburbs

I also understand how seller concessions work.  However, I have to explain it to my buyers, who still don't want to offer list price or higher in order to get closing costs paid by the seller.  I tell my buyers that if they are offering $100,000 (ease of math) and asking for 3% in closing costs, their net offer to the seller is really $97,000.  Contract price is $100,000 but the seller is netting $97,000 after paying their closing costs, which is in addition to the other closing costs a seller has to pay.

If the list price was $105,000, for example, and my buyers are offering $100,000 and asking for closing costs and another buyer offers $100,000 but does not ask for closing costs, then most sellers would choose the other offer.  Lower price ranges are where many buyers are asking for closing costs and where we are seeing multiple offers. It is rare when a seller will demand to add the closing costs on top of the offer via negotiations.  And sometimes, the property won't appraise if we have to do that.

Mar 12, 2013 04:06 AM #33
Rainmaker
375,360
Elisa Uribe Realtor #01427070
Golden Gate Sotheby's International - Oakland, CA
Opening the Doors to California Homes -East Bay

Great article George. I have a suggestion for your next blog. The risks of writing an offer without an appraisal contingency. We've been seeing a lot of those lately.

Mar 12, 2013 04:28 AM #34
Ambassador
3,998,180
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Praful, your prediction on FHA loans is absolutely right.  I am already starting to see the effects of that, and it has not gone into effect yet.  Once it goes into effect, the amount of FHA loans are going to decrease dramatically.

Andrea as always you bring up very worthy thoughts.  I understand the concern for increasing the financing, but for a Borrower (especially first time buyers)  that really do not have the Closing Costs, this is one of only a few options they have. It would be the same thing if they went CHFA with a DAP Loan.  The second point you made is one that I do not see on my end, but I can see how it cause a big issue.

Gabrielle that would be a wise thing for them to do, because it is going to impact their profit.  I am not an accountant, so I will even try to give advice along those lines.  I have enough to get me in trouble doing the mortgage :)

Michael you are right, it is a decision that should not be made lightly.

Valerie, there are many things that a Seller needs to consider, and you are right it comes down to the net profit.  The second thing is to keep in mind that the property still needs to appraise.

Lehel it is a little different around here, especially with most of the loans that I do.  I work with a lot of First Time Buyers, and they tend to not have much money, so they are usually looking for Seller Paid Closing Costs.

Bob, that is why we all need to work within our market condition.  It would be nice if it was always a one size fits all, but in our business it is more like everything is tailor made :) :) :)

Judy that is a very good example and explanation.  That is why Buyers and Sellers need to work with experienced professionals like yourself that will take the time and have the knowledge to explain the pros and cons to them.

Elisa, thank you for the suggestion, but I have not been seeing that on the other cost.  So it maybe better for an LO in your area to give it a shot.  By the way I was stationed on an Air Craft Carrier in the town next door to Oakland (Alamida) when I was in the Navy :)

 

Mar 12, 2013 04:56 AM #35
Rainer
500,751
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Amazingly insignificant concerns by some who see an add back to close a transaction, especially if the add back closes the deal. Would a reasonable seller add back 2.5% to close, I would, wouldn't you or am I missing something in your illustration?

Mar 12, 2013 05:24 AM #36
Rainer
138,818
Paul Silver
Tiverton, RI
Rhode Island full service real estate firm

excellent and informative... it is fairly common here for buyers to ask for closing cost consessions when makign an offer... and so far, it is just as common for them to be accepted... we shall see how that changes as time goes on...

Mar 12, 2013 05:31 AM #37
Rainer
88,982
Patric Santo Pietro
RE/MAX First Realty - Metuchen, NJ

Good post and timely for one of the deals I'm working on. Maybe in another post you could also mention the interaction between seller concession and appraisals - do the appraisals always have to cover the sale price with the concession built in?

Mar 12, 2013 07:42 AM #38
Rainmaker
1,609,439
Marte Cliff
Marte Cliff Copywriting - Priest River, ID
Your real estate writer

Back when I was an agent we occasionally had a buyer who needed the closing costs added to the price and paid by the seller. Some sellers understood, but others... took hours of explanation. And then after they "got it" the next thing was "But I'm not going to pay a commission on that extra money!"

No sir, we didn't expect you to.

Mar 12, 2013 09:25 AM #39
Rainer
116,518
Ric Mills
Keller Williams Southern Az - Tucson, AZ
Integrity, Honesty, and Vast Real Estate Knowledge

Great post.  A lot of agents have forgotten and buyer's never truly understand that is the way it woerks.  I still get discounted offers and AND they want seller contribution on top of a low offer.  You don't get both.  Next is trying to explain it to the sellers so they understand it all. 

Mar 12, 2013 09:55 AM #40
Ambassador
1,301,854
Dagny Eason
Dagny's Real Estate - Wilton, CT
Fairfield County CT, CDPE Homes For Sale and Condo

Hey, George - Thanks so much for the call today, and also for clarifying this post!   It makes all the sense in the world!  

Mar 12, 2013 12:32 PM #42
Rainmaker
1,069,462
Sharon Parisi
United Real Estate Dallas - Dallas, TX
Dallas Homes

George, this is a wonderful post to share with Buyers and Sellers.  The concept of Seller Contribution is sometimes difficult to understand. Everyone always wants to question why the contribution gets added to the sales price.  You explain it well.

Mar 12, 2013 12:38 PM #43
Rainmaker
370,838
Travis "the SOLD man" Parker; Associate Broker
iXL Real Estate-Wiregrasss\ - Enterprise, AL
email: Travis@theSOLDman.me / cell: 334-494-7846

I use the Seller paying option for Buyers without a lot of extra cash. They may need it for unforeseen expenses right after the move. If not, pay ahead or on the principle.

Mar 13, 2013 02:40 AM #44
Rainmaker
1,431,717
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Seller paid closing cost can be important for cash strapped buyers.  However, they are getting harder and harder to get.

Mar 14, 2013 02:40 AM #45
Rainmaker
273,670
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

My last sale had Seller contributions. Loans do have limits on Seller contributions and it is wise not to exceed them. This is something that a Buyers agent should know.

Jan 06, 2014 09:21 AM #46
Rainer
390,088
Anna Hatridge
R Gilliam Real Estate LLC - Farmington, MO
Missouri Realtor with R Gilliam Real Estate LLC

I missed this when you originally posted.  Coming over from Roy Kelley 's reblog.  With all the recent changes in lending there have been only a few that affect the seller when paying closing cost for the buyer.

Dec 03, 2015 05:08 PM #47
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