It’s not unusual for buyers to ask the seller to pay closing costs but sometimes sellers don’t want to pay them. This is likely due to not understanding exactly what it means. So, what are closing costs, and who should pay them?
Closing costs are fees associated with the buyer’s loan
Closing costs include:
origination fee to the lender title search fee
flood certification fee closing attorney fee
title insurance for the lender recording fee
title insurance for the buyer transfer tax
and prepaid expenses to set up escrow account:
1 year homeowners insurance policy plus funds to set up an escrow account
A portion of property taxes for the remainder of the year plus funds for the escrow account
Who pays closing costs?
These costs are all to the buyer’s benefit and are the buyer’s obligation. However, many first time buyers don’t have enough money available to cover these costs and their down payment. To reduce the amount needed for closing, it’s common to ask the seller to pay some or all of the closing costs. In effect, this is allowing the buyer to finance the closing costs with their loan.
Purchase price $100,000
Closing Costs 3,000
If the seller is agreeing to this purchase price and paying the closing costs, he is accepting a true purchase price of $97,000. The buyer is not paying the closing costs at closing but instead paying $3,000 more than the seller would accept. Therefore, he is basically adding the closing costs to the amount financed. When asking the seller to pay closing costs, it is important for the buyer to check with the lender to be sure of the amount needed. If you ask for $3,000 and the actual costs are $2,500, the seller gets the benefit of the leftover $500 – It is not given to the buyer. Also, an actual amount must be entered on the contract – not “seller to pay all closing costs”. The seller needs to have an exact amount he is committing to pay at closing.
For details on the process from “under contract” to “closing”, check out our complete guide