Seller concessions sound pretty good in theory. The seller will pay some of your closing costs? Yes, please!
Unfortunately, that's not really how it works -- and there are some serious disadvantages of a seller paying closing costs for a buyer.
Are you considering asking for seller concessions to lower your up-front costs? Here's what to take into account before you do.
It almost always means a higher sales price
Let's get this straight right off the bat: Sellers aren't paying your closing costs out of the goodness of their hearts. In the majority of cases, when a seller pays a buyer's closing costs, it actually results in a higher sales price.
Here's how it typically works:
- You, the buyer, ask the seller to cover some of your closing costs.
- The seller agrees, and their agent adjusts the purchase agreement by however much you want covered. If you ask for $5,000 in closing costs on a $200,000 purchase, for example, the sales contract would be upped to $205,000, allowing the sellers to still net the same profit.
- You apply for a home loan -- in that higher amount, essentially financing your closing costs and paying them out over time (plus interest, of course).
In very few cases will a seller actually outright cover closing costs out of their own pocket. In most scenarios, you'll see a higher sales prices as a result.
Your home might not appraise
In the event the concessions mean a higher sales price, you could find yourself up against appraisal issues -- not to mention potential financing problems.
If you're using a mortgage loan to pay for the home, your lender will likely order an appraisal, basically assessing the home's value. If the home appraises for the new sales price, you're in the clear, and your lender will give you the funds you need to buy the house.
If the home doesn't hit that new, higher sales price, though? Then, you'll have some trouble. Your mortgage lender will only give you the appraised amount, and you'll need to make up the difference (between the appraised value and the final sales price) out of pocket. If you can't cover the balance, it may mean losing out on the home altogether.
You'll pay more in interest over time
When a seller concession leads to a higher mortgage loan amount, it means more in interest costs, too. Here's a quick example: Let's say you're taking out a 30-year loan for $300,000, and you get a 3.5% interest rate. Without asking the seller to pay closing costs, you'll end up paying $184,968 in interest over the 30-year term.
If you ask the seller to pay $5,000 in closing costs, and it results in a $305,000 loan? You'll pay $188,051 in interest over time -- the difference of about $3,000. It would also mean a higher monthly mortgage payment (around $25 more per month).
You'll need a bigger down payment, too
Down payments are calculated as a percentage of your total loan balance. For example: On an FHA loan, you need to make at least a 3.5% down payment. On a $300,000 loan, that's $10,500. If you ask for closing costs and that balance goes up to $305,000, your down payment requirement jumps to $10,675.
While another $175 doesn't seem like much at first glance, when you couple it with the extra thousands you're spending in interest, it could mean a lot of wasted money in the long run.
It means more costs for the seller
Even if the concessions result in a higher home price, there's still an added cost to the seller -- at least if they're using a real estate agent. Since agents are paid commissions based on the final purchase price, a price of just $5,000 more can mean a few hundred extra in commissions. And those commissions? They come straight out of the seller's pockets.
Though it's likely not a dealbreaker for most sellers (unless you're asking for some serious concessions), it might make them more hesitant to work with you. They may be less willing to make repairs or to negotiate if your appraisal comes in low, and they may be more apt to throw in the towel if something goes awry.
You could lose out to other buyers
If you're in a bidding war, asking for closing-cost concessions can send you to the bottom of the pile competition-wise. After all, why would a seller pay even a penny more if there's another home buyer willing to foot the full bill? It just doesn't make sense.
The truth is the type of market you're in should play a big role in whether you ask for concessions or not. If you're in a buyer's market and you have the upper hand, asking for closing costs might not hurt your chances. But in a seller's market? Concessions are an outright deal-killer.
The few advantages of a seller paying closing costs
As you can see, there are a lot of disadvantages of a seller paying closing costs. Still, they're not entirely without merit.
On the buyer side, seller concessions can lower the up-front costs of buying a home. This is good if you have very little saved up, and it also may allow you to buy a home sooner (you don't have to scrimp and save for a long time before pulling the trigger).
For sellers, covering a portion of buyer closing costs usually means a faster sale since it gives you a larger net of qualified buyers to pull from. That's about where the advantages stop, though.
The bottom line
Asking a home seller to pay some of your closing costs can definitely sound tempting -- especially if you don't have much saved or you're struggling to pull together your down payment. But in reality, seller concessions have serious drawbacks, and they usually result in more costs over time (plus a higher monthly payment).
If you're considering asking for seller concessions, make sure to talk to your agent about the pros and cons, and ask your accountant for advice, too. They can guide you on the best move for your unique financial situation.
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