In each real estate transaction, there are buyer’s closing costs, as well as seller’s closing costs. But increasingly, buyers are asking sellers to cover their closing costs. Why should sellers pay for buyer’s closing costs?
The main reason is that this is purely an accounting move. With the way we structure purchase agreements, it is more-or-less irrelevant if the seller pays the buyer’s closing costs. I’ll give an example below:
Let’s say you find a home on the market for $200,000. As an example we’ll say the seller receives an offer for $190,000 and negotiates it up to $194,000. Let’s say that the $194,000 is acceptable to the seller and they accept the offer. From the $194,000, the seller will pay their closing costs which includes commission and taxes. If you don’t have a mortgage, you’ll then take a net of about $180,000. (these numbers are very approximate)
Now, let’s say a buyer offers $200,000 with 3% of closing costs. This would net the the seller $194,000. Since this was an acceptable number to the seller in the above example, it should be in this case as well.From the $194,000, they’ll pay the same various closing costs making their net of about $180,000. The same as the above example.
The bottom line is that whether the seller pays for buyer’s closing costs (example #2) or doesn’t (example #1), they’ll end up with the same amount.
Why do buyers ask for closing cost assistance then?
The main reason that buyers ask for closing costs is this: cash in hand.
In the above example, if the buyer is taking an FHA loan on the house, they are required to come up with a 3.5% down payment. That’s approximately $7,000 in the above examples (it varies slightly since the first example has a slightly lower gross sales price). The buyer will also then having to come up with approximately $6,000 for their closing costs. That brings the total expenses to about $13,000 to purchase a particular home.
If you ask for closing cost assistance, you are effectively financing their $6,000 of closing costs into your mortgage. Th mortgage would be $6,000 higher ($200,000 vs $194,000) increasing their monthly payment by a few dollars per month (about $29 per month based on 4.25% interest on a 30 year mortgage). But this leaves you with about $6000 more cash-in-hand.
What this means is that you can purchase a home sooner rather than later. You won’t have to save up the extra $6,000 to purchase a home. This is all at the expense of a slightly higher monthly payment, but most of the time the extra $30 per month is ok