EVERYTHING YOU NEED TO KNOW ABOUT CLOSING COST CREDITS
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, and more. Closing cost credits doesn’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 a Home?
The allowable closing credit that a buyer can request depends on the type of loan they are applying for. The limits on closing credits include:
- VA– 4% (can cover Funding Fee)
- FHA– 6% (can cover Upfront MIP)
- USDA– 6% (can cover Guarantee Fee)
- Fannie/Freddie: For Primary Residence:
- >90% 3%
- 75-90% 6% LTV
- 75% or less 9%
- All investment properties 2%
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. Instead, the offer can be tailored in such a way that a certain dollar amount of seller proceeds is used to cover the buyer’s closing costs which must be allowable costs.
Example of a Typical Closing Cost Credit
|Closing Cost Credit||$5,000|
|Net Sale Price||$395,000|
Closing Costs in Massachusetts
In the state of Massachusetts, both buyers and sellers are responsible for certain closing costs during a real estate transaction. Buyers typically pay 2%-3% of the property’s price, and sellers typically pay 1% of the property’s price (plus agent commissions). While this is the usual protocol, the terms of who pays the closing cost credit can be negotiated between parties.
Closing Costs in New Hampshire
Closing costs in New Hampshire have a much wider range than in Massachusetts. In the granite state, buyers can expect to pay anywhere from 2%-5% of the house’s purchase price, and sellers can expect to about 8%-10%. Similar to Massachusetts, both buyers and sellers in New Hampshire are responsible for paying for certain closing costs. The sellers take care of paying for the REALTOR® commission, whereas buyers cover transfer fees and other documentation fees. Of course, who is responsible for what closing cost can always be negotiated among both parties.
Closing Costs in Connecticut
Closing costs in Connecticut are very similar to New Hampshire, as the sellers can usually expect to pay 8%-10% of the home’s final sale price, and buyers cover 2%-5%. The costs that each party is responsible for are much more laid out in this state. In a typical real estate transaction, the sellers pay the REALTOR® fee, recording fee, and the escrow fee The buyers will usually cover the loan origination fee, the mortgage escrow account, title insurance, and home inspection fee.
Closing Costs in Rhode Island
In the state of Rhode Island, buyers and sellers pay a similar amount in closing costs, with sellers ranging from 2%-8% and buyers ranging from 2%-5%. Each party has three primary settlement costs they can expect to pay, and any other remaining fees can be negotiated. The three costs sellers cover are the REALTOR fee, the recording fee, and the escrow fee, and the buyers are responsible for the loan origination fee, the escrow/impound account, and the appraisal fee.
Closing Costs in Florida
The total closing costs in Florida can amount to anywhere between 5%-10% of the property’s purchase price, depending on the home’s location. In this sunny region, the seller is primarily responsible for most of the closing costs that arise during a real estate sale. Sellers can expect to pay the REALTOR® commission, title insurance, transfer tax, property tax up to the time of closing, and pretty much all other closing costs that can pop up. Buyers, on the other hand, usually are only responsible for a loan processing fee.
Closing Cost Credits: Frequently Asked Questions
- Fees charged for obtaining a mortgage
- Title insurance for 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)
Typical closing costs range from 1% to 5% of the home’s price.
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.
No, it cannot. The down payment needs to come from the buyer.
- Loan Payoff
- Real estate commissions to brokerages
- Transfer taxes
- Notary fees
- Attorney fees
The closing cost credit simply frees up money for the buyer. The reason a seller never had one maybe because either the credits were not available at that time or the purchase price at that time was much lower.
Sellers do pay stamp fees based on the offer amount. Sellers should remember that the typical stamp fee in Massachusetts is $4.56 per thousand.
BOTH BUYERS AND SELLERS
Both buyers and sellers can expect to pay closing costs.
It is very important that the buyer works with their mortgage broker and buyer’s agent to come as close as they can with how much of a closing cost credit they will need. It is actually better to request a credit that is slightly less than the expected amount so that you don’t have an excessive credit.
If the closing cost credit exceeds the actual closing costs, technically, the parties would have to do an amendment to the contract and adjust the purchase price. However, this is normally so late in the process that all of the paperwork and loan documentation would need to be adjusted and it could result in a delay in the closing. Therefore, it is always wise to err on the side of caution and put a closing cost credit in the offer that is slightly less than what you think the closing costs will be.
The appraisal does need to come in at the Offer Price. This is usually not an issue.
This is another case where sellers just need to pay attention to the net number (see chart above). Whether the buyer requests a decrease to the offer price or requests a closing cost credit really does not matter to the seller. It’s the same either way.
With respect to the buyer, the benefit of a credit instead of a reduction in the sales price is that it will allow a buyer to keep cash on hand to do repairs, etc. If a buyer and seller negotiate a price reduction following the home inspection, it won’t actually give the buyer money to do the repairs. By doing a credit, the buyer essentially “puts cash in their pocket” by virtue of the fact that they are bringing less money to the closing.