Closing costs are, in my opinion, one of the most misunderstood aspects of buying a home. It’s extremely common that I come across a buyer who is adamant about having the “seller pay their closing cost” as if they are getting something for free from the seller because, in reality, YOU are paying for it. I don’t know where this myth began but I’m here to let you know how it REALLY works.
What Are Closing Costs?
Closing costs are the amount of money it costs the mortgage company to close on your loan. This amount can vary depending on the price of the property and the mortgage lender. This is a standard expense to processing a loan and the buyer is responsible for covering these costs since they are the ones getting the loan. Make sure you ask your mortgage lender to give you an estimate of the closing costs BEFORE you start house hunting.
Important: Your down payment requirement is NOT part of the closing costs. Your down payment is a separate amount you need to have to get the loan. You need to have enough funds to cover the down payment AND the closing costs, among other expenses like the home inspection, appraisal, etc.
How Can I Get The Seller To Help Cover My Closing Costs?
Asking for closing cost “credit” when you submit an offer on a property really means that you want to use a portion of your loan to go towards your closing cost. Most people would prefer to have the closing costs added to their mortgage vs using their available cash. If a person doesn’t have a lot of money saved up to buy a house, but they still pass all the other requirements to get a loan, it’s very common for the mortgage lender to suggest that you ask for closing cost credit with your offer.
Example: You’re approved for $250,000 mortgage loan and the closing costs are $5,000. You want to find a home for $245,000, you offer them $250,000 with $5,000 to cover your closing cost. This means your total loan in which your monthly mortgage will be based on will be $250,000 NOT $245,000.
Can I Offer The Seller Less Than The Asking Price And Ask For Closing Costs?
It depends on current real estate market in your area. If you’re in a “seller’s” market, meaning there are more people trying to buy a property in an area where there are not many properties for sale, then my advice is NO. If you’re in a “buyer’s” market, meaning there are a lot of properties for sales and not a lot of buyers, then my advice is YES. I suggest that you talk to your local real estate broker to find out how the market is in the area where you’re looking to move.
Important: There are many different things that make an area desirable to live in. You might hear on the news that a certain city is not doing great financially, yet there could be certain areas within that city where homes are selling in one day. Your local real estate broker will know this information and will be able to help you set your expectations on how to make your bid on the house that you want to purchase.
For The Love Of Math – Examples Of Bidding On A Property & Closing Costs
I love math! I love math SO much, that I wanted to provide you with a more detailed example of how closing cost credits affect your offer to buy a property. Enjoy! *Disclaimer: If you don’t like math and word problems, you do not have to read any further.
Recap: Closing costs decrease the value of your offer. When you ask for closing costs from the seller, you are really asking the seller to subtract the amount that you need to cover your closing cost from the amount that you’re offering. You are really asking the lender to allow you to finance your own closing costs.
Here’s an example of how closing costs affect your offer. Let’s say the house you love is listed for $200,000 and you really don’t want to use your cash to cover pay for your closing costs. You offer the seller $200,000 with $5,000 in closing cost, which means that you’re really offering the seller $195,000 (which is less than the asking price of the home) and using the other $5,000 to go towards your closing cost.
My advice is to increase your offer by the amount you need for closing cost. For example, if a house is listed for $200,000 and you would like to use your mortgage to finance your $5,000 closing cost, then you would offer $205,000. Make sure to check with your loan officer to verify that you are approved for $205,000 BEFORE you submit your bid.
Written By: Shena Omotola, Dream Home Specialist & Broker Owner of Skyward Realty – Skyward Realty services Chicago, Suburbs, and Northwest Indiana
P.S. Feel free to email me any questions. I’m always here to help. Check out my recent resources for first time home buyers and sellers.
Click Here to order today!