Closing costs- What are they, what do they cover and who pays them?
In the last few years more and more home buyers are asking the seller to pay their closing cost. Last year alone, in the Greater Mankato Area, about 50% of sellers paid buyers closing costs as part of the purchase agreement on behalf of the buyer.
What are they? Closing costs are the cost in which a buyer has to pay to get a loan- this is on top of the down payment they are putting down for the loan.
What do they cover? Closing costs cover lender fees, title fees and 3rd party fees (NOT Realtor fees). They range in price depending on the type of financing a buyer is doing. The type of financing also dictates how much a seller can pay on the buyer’s behalf as part of the purchase agreement.
Who pays them? Buyers can obviously pay their own closing costs. However, more buyers have opted to ask the seller to pay their closing costs for them, as part of the purchase agreement. Sellers DO NOT have to pay buyers closing costs. I repeat, sellers DO NOT HAVE TO PAY BUYERS CLOSING COSTS. However, when factoring in closing costs on an offer, you should always ADD them ON TOP of the price you want to offer. For example: You want to buy a home that is listed for $200,000. You want to offer $195,000 but know that you need $5,000 of your closing costs paid by the seller. In that case, you should offer the seller $200,000 as the $5,000 for your closing costs are taken off the top right away . This puts you at the offer price of $195,000. That is the number that the seller will base their acceptance off, as their real estate fees have be deducted from that price.
How do you determine home much closing costs you need? This varies depending on the type of loan the buyer is financing.
Here is a quick rundown: FHA loan– seller can pay up to 6% of the purchase price for buyer closing costs. Conventional loan- 5-9.9% down– seller can pay up to 3% of the purchase price for buyer closing costs. Convention loan- 10-99.9% down– seller can pay up to 6% of the purchase price for buyer closing costs. VA loan– seller can pay up to 4% of the purchase price for buyer closing costs. Confused yet?! If you have the right lender and Realtor combo this process, which may seem difficult, can be very easy.
If you are looking to buy a home, give me a call and I will put you in touch with one of my lender partners who know this process inside and out and will make your purchase as smooth as possible.
Have a fantastic day. Thanks for reading and let me know if there is anything real estate related I can help you with.