Many buyers (particularly first-time buyers) are short the cash they need for the down payment and closing costs. One way to overcome this cash shortage is for the seller to pay a portion of the closing costs. How much the seller is allowed to contribute depends on the type of mortgage loan.
Conventional Loans
On a conventional loan, the seller can only pay non-recurring costs. These do not include pre-paid items or items to be paid in advance (such as mortgage insurance or hazard insurance). The seller’s contribution is limited to the amount the buyer is putting down. If the buyer puts 10 percent or more down, the seller may contribute up to 6 percent. If the buyer puts less than 10 percent, the most the seller may contribute is 3 percent.
VA Loans
On a VA loan, the seller may pay all the closing costs (this is known as a “VA-No-No” – the buyer pays no down payment and no closing costs). Sellers who agree to pay the closing costs often put a ceiling on the amount they will pay
FHA Loans
On a FHA loan, the seller may pay all the closing costs. However, the buyer must make a minimum 3 percent investment in the property – whether as part of the closing costs, a down payment or pre-paid items. The 3 percent can be from the buyer’s own funds or from a family member’s gift.
Asking the Seller to Pay a Portion or All of Closing Costs
The seller’s willingness to contribute to closing costs is often driven by market conditions and the way in which the request is made to the seller.
As your real estate agent, I will help you prepare an offer that balances the purchase price and request for closing cost assistance with the dynamics of the current marketplace. For instance, in a seller’s market we may increase the offered purchase price to offset the request for closing cost assistance.
Remember – When you ask the buyer to pay a portion or all of your closing costs, in essence you are financing the closing costs. This is because the seller’s contribution is typically offset by a higher purchase price. And it is this higher purchase price that is financed with your mortgage loan.
Homeowner’s Insurance
This insurance covers replacement costs for damages caused by fire, wind or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.
Flood or Quake Insurance
Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA). As we tour houses, I will let you know if the property resides in a hazard zone.
Private Mortgage Insurance (PMI)
Insurance required for conventional mortgage loans when the borrower’s down payment on the house is less than 20 percent of the loan value.
Title Insurance
This policy protects both the buyer and lender by insuring a clear chain of title. (In other words, it insures that that the person who sells the house has the legal right to do so.)