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.
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 firstname.lastname@example.org