Buyers, sellers, and sometimes even real estate agents get confused with how closing cost credits work.
Closing cost credits are a great tool to help buyers pay their closing costs and have more money after closing. This is important because buyers often have lots of expenses such as making repairs, upgrades, buying furniture, etc. Closing cost credits don’t hurt the seller in any way. In fact, they help sellers because many buyers cannot buy without them.
The Confusion about Closing Cost Credits
Some buyers think that they will actually receive money back at closing that they can walk away with for their own use. That is no longer allowed; around 2009 all mortgage companies and regulators put a stop to it. Buyers instead can use this money toward all allowable closing costs such as pre-paid interest, escrows, taxes etc. This enables the buyers to bring less money to closing. If the credit covers the entire closing cost amount then the buyer would only need to bring the down payment to closing. For additional details on closing costs when buying visit our blog How Much Money Do I need in Order to Buy?
Sellers often think THEY are actually paying the buyer’s closing costs and may even say or think “I am not paying their closing costs.” Though it may sound that way on the offer, sellers are actually not paying the closing costs. The buyer just inflates their price in order to get the credit.
Example of a Typical Closing Cost Credit:
|Closing Cost Credit||$5,000|
|Net Sale Price||$395,000 (Sellers should pay attention to this number)|
Common Questions from Buyers and Sellers
Q: What do Buyers typically pay for closing costs?
- Fees charged for obtaining a mortgage
- Title insurance both lender and owner.
- Settlement fees
- Property taxes
- Transfer taxes like in NH where they are shared with the sellers
- Homeowner’s insurance (usually needs to be paid for prior to closing)
Q: What are the typical closing costs?Typical closing costs range from 1% to 5% of the home’s price.
Q: Why would I still need to bring money to the closing if I’m getting a closing cost credit from the sellers?Buyers should understand that their total closing cost could be more than the credit they requested. At the time of the offer, it is impossible to determine exactly how much the closing costs/escrows/prepaid interest, etc. will be on the day of the closing, because those numbers change based on the exact day of the closing. At the time of the offer, the closing cost credit is always an estimate of what the closing costs will be, and you should always take a credit for slightly less than the amount of the closing costs, because if your credit is too high, it could result in the seller getting more money, or a delay in the closing.
Q: How much of a closing credit am I allowed to ask for, is there a limit?It all depends on the type of loan. Some loans only allow credits of 2% and some go up to as much as 6%.
- Mass Housing– 3%
- VA– 4% (can cover Funding Fee)
- FHA– 6% (can cover Upfront MIP)
- USDA– 6% (can cover Guarantee Fee)
- Fannie/Freddie: For Primary Residence: o >90% LTV 3%o 75-90% 6% o 75% or less 9% o All investment properties 2%
Q: Can the credit be put towards the down payment?No, it cannot. The down payment needs to come from the buyer.
Q: What do Sellers typically pay for closing costs?
- Loan Payoff
- Real estate commissions to brokerages
- Transfer taxes
- Notary fees
- Attorney fees