It’s not always readily understood. Especially, if the seller hasn’t been involved in a home sale for a long time. Even if they do kinda know what it means, most sellers are resistant to the idea.
Let’s look at what it is and see…
What Are Closing Costs?
Closing costs are the fees and charges that are not directly associated with the sales price of the house.
For example, a house might be on the market for $395,000. A buyer comes along and offers, say, $395,000 for the house. So far, so good. However, the seller really won’t get the whole $395,000 because there are closing costs associated with selling the house like:
- County and State transfer and recordation fees,
- settlement company fees,
- real estate broker fees.
The buyer will actually have to pay more than the $395,000 because the buyer also has closing costs like:
- County and State transfer and recordtion fees,
- lender fees,
- title insurance,
- settlement company fees,
- etc. etc. etc.
These all add up to a nice, hefty sum.
What Closing Help Means To The Seller
It’s time to sell your home so you call in your friendly real estate agent (some one like me) and you start to discuss the process. The most important part, of course, is the price.
Most people think, in a general way, that if they put their house on the market for, say, $395,000 someone will come along and offer something a little less or, maybe, a lot less and there will be a negotiation and the buyer and seller will agree to a price. Of course, the seller knows there are certain costs associated with selling his home. (see above)
What the seller doesn’t expect is that the buyer may want a reduced price and they will want the seller to kick in a little bit more to help cover part of their closing costs.
Depending on the market conditions and where the house is located, closing costs help to the buyer may be a very common thing. In other places, during hot markets, closing help may be non-existent. The thing to remember is that any closing help requested by the buyer is purely and totally negotiable. It just depends on how much the seller wants to help expedite the sale of his or her house.
What “closing costs help” — the formal name is Seller Credit To The Buyer — means to the seller is a further reduction in the net proceeds they will get when the sale is complete. It’s like lowering the sales price even more. The seller doesn’t come out-of-pocket with cash. They just get less of it when the sale closes. The seller may or may not be able to make this happen depending on how much of a mortgage they have on the house and many other factors.
What Closing Help Means To The Buyer
On the buyer side of the home sale transaction, closing help may mean the difference between being able to buy the home and not being able to buy the home.
The buyer really has to come up with a lot of c-a-s-h in order to buy a house.
There is the down payment which may range from 0% for VA loans and some other niche products to 3½% for FHA loans to 5% and up for typical “conventional” loans. Then, there are the closing costs.
For many home buyers with moderate incomes, coming up with the down payment is the hard part. They may have put money aside for a long period of time. They may have gotten a gift from the Bank of Mom & Dad. They may have had to take advantage of some pretty interesting State or County or bank designed programs that help with down payment assistance but end up creating a higher interest rate which, in turn creates a higher monthly mortgage payment.
The thing to remember about closing costs for buyers is that it is actual cash out-of-pocket that they will need in order to complete the sale. It does not get rolled into the mortgage. Down payment + closing costs = LOTS of c-a-s-h from the buyer.
That’s why a lot of home buyers will ask the seller to kick in a certain amount for “closing help”.
How Much Closing Help Is Expected?
Many lenders will have a cap of 6% of the sales price of the home for any closing help provided by the seller to the buyer.
Typically, though, many buyers will ask for about 3% of the sales price.
The thing to remember is that this is a totally negotiable item. Sellers can agree to the buyer’s request, deny it completely (as often happens) or negotiate some different amount. It just really depends on how much equity a seller may have in their home and how motivated they are to sell the house.
It’s important to expect it as part of the initial offer in slower markets. It doesn’t mean the seller has to agree especially if the buyer is asking for a reduced price as well.
A good real estate agent (someone like me) can help you navigate through this negotiation.