Use it or Lose it! – Make sure you use all of your seller-paid closing costs

When you buy a home, one of the items you can negotiate with the seller is that you ask the seller to pay for all or a portion of your closing costs. Closing costs are the fees that you pay to buy a home, such as origination fees for your loan, recording fees or appraisal fees. Closing costs are NOT part of the purchase price and are separate from your down payment. Let’s take a look at a fictitious example.

In this example, the buyer is purchasing a home for $300,000. They plan to make a down payment of 20% ($60,000) and will take out a loan for 80% of the purchase price ($240,000). The buyer is also required to pay their closing costs, which in this simplified example come to $4,250. The total amount of cash that this buyer would provide to close the transaction is $64,250.

Purchase Price $300,000
Down payment (20%) $60,000
Loan amount (80%) $240,000
   
Loan origination fee (1%) $2,400
Hazard insurance $600
Settlement fee $500
Title insurance $600
Recording fee $150
TOTAL CLOSING COSTS $4,250

Now, let’s say that as part of our negotiations to purchase the property, the buyer requested that the seller pay for their closing costs. During the negotiation, buyers have to work off of estimated closing costs, so it is difficult to pin down the exact total. Let’s look at three examples of seller-paid closing costs for this transaction.

  • Seller-paid closing costs = $2,000
    • Buyer pays their remaining closing costs of $2,250, plus their down payment of $60,000.
  • Seller-paid closing costs = $4,250
    • Buyer pays zero closing costs and only has to bring $60,000 for their down payment.
  • Seller-paid closing costs = $5,000
    • Buyer pays zero closing costs and still has to bring $60,000 for their down payment. Lenders will NOT allow closing cost contributions to be contributed towards a buyer’s down payment.
    • Seller only pays $4,250 towards closing costs, since there are no more closing costs to pay. Although the seller conceded an additional $750, they get to retain that amount.

The last example is the troubling one. If a buyer requests that the seller pays for more closing costs than they actually incur, the buyer will LOSE this money, even though the seller made that concession during the negotiation. Lenders will not allow this money to reduce the purchase price or down payment. There are two strategies to avoid this unfortunate circumstance for the buyer. First, try to be as accurate as possible when requesting closing costs to be paid by the seller. If you are unsure, err on the side of “not enough” and pay the remaining costs yourself, even if it is a few hundred dollars. Second, you may be able to use these additional seller contributions to “buy down” the interest rate on your loan. As a home buyer, you don’t want to lose out on a concession that your seller is willing to make. Spend time discussing your negotiation strategy with your real estate agent so that you don’t lose out on unused seller-paid closing costs.

  • It can be pretty tricky to not leave extra funds on the table. Getting an updated good faith estimate prior to presenting the offer will help.

    I think error a little over the estimated amount and having all the closing costs paid (if possible) with a few hundred back to the seller is a fine option (better than the buyer paying a few hundred of closing cost).

    Buyers should also be aware of LO’s who might try to pocket the funds that were left on the table by increasing fees. Bring your GFE to the closing table with you to compare to the HUD.