What Exactly Are Seller Paid Closing Costs? Does the Seller Really Pay Them?
Seller paid closing costs are by far and away the most asked about question by first time home buyers in Iowa City.
First of all I need to say up front that seller paid closing costs are not really seller paid. What happens is that you as a buyer apply for financing on the home based on the purchase price and part of those proceeds go towards paying the closing costs. That might be difficult to understand, so let me give you an example. Let’s say you make an offer on a house for $150,000 and ask for the seller to pay $2000* towards closing costs. What will happen is that you will apply for a home loan based on a purchase price of $150,000. At closing the seller will get $148,000 and $2000 will be applied towards the closing costs.
If on the other hand you make an offer of $148,000 with no closing costs the result is the same for the seller at closing. He gets $148,000 and you bring a check to closing to cover the closing costs. What changes is your loan amount. Nothing changes for the seller. In both scenarios he walks away from the closing table with $148,000. (Bear in mind this example doesn’t take into account the sellers own closing costs that he has to pay. He doesn’t actually walk away from closing with $148,000).
Okay, so now we know what “seller paid” closing costs are, why would you want to go that route? Well, the main reason would be, you won’t need to bring a check to closing, at least not for closing costs. At a time when 100% financing options are only available on in-house loans and RD Financing, (more about those in another post), buyers are required to have a down payment at closing. For conventional loans it’s a minimum of 5% at the local banks here in town and for FHA loans it’s 3.5%. Either way for many young families, especially those with children, this is a significant amount to come up with. Add closing costs to that and it starts mounting up. Including the closing costs in the purchase contract is one way of reducing the amount you need to bring to closing.
Even if you do have enough funds it might still be an option if you have appliances to buy or the house needs some updates. If money is tight this is something you may want to do, if not, then just remember that if you do decide to go this route you are financing that amount at whatever the current interest rate is for 30 years.
*$2000 closing costs is an estimate for the Iowa City area. Closing cost vary depending on the bank. Local banks are in this range. Big banks often charge more. This is why you should go to a couple of different lenders before deciding where to get your home loan.