WHEN CLOSING COSTS ARE LESS THAN SELLER AGREED TO PAY
Before shopping for a home most home buyers will take into account their funds for down payment, closing costs and other out of pocket expenses. Depending upon the loan program these figures can vary. Mortgage loan programs each have defined minimum down payment requirements and maximum seller contributions. What follows is a discussion about what happens when closing costs are less than negotiated for the seller to pay.
For a FHA mortgage loan the seller can contribute up to 6% of the sale price. Other programs cap the contribution at 3% or 4% depending on the loan type.
In the Northern Kentucky/Greater Cincinnati market it is not uncommon for a home buyer to ask the seller for all or part of their required closing costs. Consider these seller paid costs a negotiating point. I recently had a listing agent call me and say someone writing on her listing was asking for $6,000 in closing costs. They weren't that far apart on price negotiation and realized the amount of closing costs may be overstated.
I'm writing on this subject today because I am seeing contracts where the agreed upon contribution is stated in terms of the maximum allowed vs the actual costs needed. How does this happen and what happens with the excess closing costs if they cannot be used?
When seller closing costs are negotiated the amount the seller agrees to is subtracted from their proceeds at closing. When an amount is negotiated which results in more dollars than can be utilized by the home buyer (closing costs are lower than the agreed amount) the seller keeps those funds. They are not typically credited back to the home buyer at closing.
It may not be the end of the world if one negotiates $6000 in closing costs and can only use $3500 but it leaves a very unpleasant feeling at closing. And it is totally avoidable! Why I'm seeing more contracts with higher amounts for seller paid contributions than needed I can't say.
I can say best practice is to make sure as a home buyer you discuss the necessary closing costs with your lender before you write the offer. Make sure you have that discussion with the real estate agent writing the contract. If a home buyer is working with a seasoned loan officer and real estate agent they are well aware of the norms and need to communicate the details of this facet of the contract. Revisit this subject with the loan officer before your loan closes. If you are leaving money laying on the table perhaps some can be used to lower your rate.
The way I always discuss closing costs with a home buyer is simple. I can estimate what you need in closing costs and you can choose the amount you need or want to request. If you ask for more than you can use then you will leave money laying on the table. Or you can opt to bring some portion of the costs to closing assuring you leave nothing behind.
KEEP THIS IMPORTANT INFORMATION IN MIND AND HAPPY HOME BUYING IN 2019!!!! I'LL BE RIGHT HERE TO HELP YOU NAVIGATE THE PROCESS WITH CONFIDENCE.