In today’s real estate transactions, it is quite common for a property seller to contribute towards the closing costs customarily paid for by the buyer. As you go about you hunt for a home you might hear about this from your real estate agent but wonder why a seller would want to pay your closing costs.

First of all, you need to understand why you might want to ask the seller to pay your costs.

When you finance the purchase of a home, you will need to account for three things including your down payment, your closing costs, and your prepaid expenses. Most loan programs will allow the seller to pay some or all of your closing costs and prepaid expenses, but never towards your down payment. If you negotiate a transaction in which the seller pays your closing costs, you will be able to reduce the amount of cash required to actually close on the deal.

How seller paid closing costs work

Assume for a moment that you found a home for $200,000 on which you want to put an offer.

If you are using a loan program that requires a 5% down payment, you would $10,000 for the down payment. Let’s assume that your closing costs are $4,900, and that the prepaid expenses are $2,500. Altogether, the total cash required to close would $17,400. If you have saved less than that for the purchase of your home you might think that this home is out of reach.

If you use the financing strategy of asking the seller to pay your closing costs, you might be able to shave $7,400 of closing costs and prepaid expenses off the total, bringing the total amount you need to $10,000.

Your offer to purchase the home might be for $200,000 but with the caveat that the seller must pay $7,400 towards your costs. If they should accept such an offer, your cash to close will be just the down payment since the seller will make this contribution on the day of closing toward your costs.

Why would a seller pay my closing costs?

The seller’s primary concern in reviewing the purchase agreement is their "net offer". In the agreement noted above above, the seller’s net offer is $200,000 minus $7,400 for a total of $192,600. If that amount is acceptable to them they might be inclined to accept the offer. In most ways your offer is the same as an offer of $192,600 from another buyer who does not request seller paid closing costs.

Hints and Tips about making offers with seller paid closing costs

1. While you can negotiate both a lower price as well as seller paid closing costs, keep in mind the actual net offer that you are presenting to the seller. Purchase agreements that make a net offer well below the seller’s asking price might hinder further negotiations. Only you and your real estate agent can decide upon what the best negotiating strategy will be.

2. A seller can never pay towards down payment. It’s a good idea to work closely with your lender on the actual amount of costs to put into the contract.

3. There is always a maximum amount that the seller can contribute. Each loan program will have a cap that the seller can pay towards your costs. This cap is usually a percentage based on the sales price. For example, if the loan program has a limit of 3%, the seller could only contribute $6,000 towards your costs based upon a $200,000 purchase price.

4. The property must appraise to the purchase price including the seller paid closing costs. For this reason, an offer that includes a high amount of seller paid costs such as 6% might cause some concern from the sellers that the house may not appraise to a value sufficient to cover the purchase price.