What Expenses Can the Seller Pay When I Get My New Home Loan?

By Gina Pogol
Mortgage Credit Problems Columnist

Rodney Asks: Dear Gina, I want to buy a new home and have some credit problems. My scores aren't too bad but I don't have a lot of money saved. I read some articles that say you need a down payment plus another 3% for closing costs. That will take years! My real estate agent said the seller can pay the costs for me if I make a full price offer on the home. Is this true?

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Gina Says:

Hi Rodney,

The amount you need to bring in at closing depends on a few things. First, if you work with bad credit lenders or get hard money financing, you probably need a pretty large down payment. The days of 100% subprime financing are over. Bad credit mortgage financing means that you have to pay more if you want a lower interest rate, so that could mean higher closing costs as well.

The FHA Alternative

If you opt for FHA financing, assume that you can qualify, you need 3.5% down if your credit score is at least 580, and 10% if it's between 500 and 579 (keep in mind that most lenders actually require higher scores to approve you for an FHA loan). FHA does allow the seller to pay some closing costs (up to 6% but that is being lowered to 3% as I write this). Eligible closing costs include the actual cost of prepaid taxes and insurance, title and lender charges, closing costs normally paid by the buyer, and discount points. Expenses customarily paid by sellers in the area are not counted. Anything beyond that is considered an inducement to purchase and does not lower your out of pocket expenses by much. For example, if the sales price is $100,000, your down payment is $3,500. If the seller pays $3,000 in closing costs and then another $3,500 toward your down payment (money toward your down payment is considered an inducement to purchase), the lender structures the loan as though the purchase price was only $96,500 ($100,000 - $3,500). So an FHA 96.5% loan would be $93,122.50. And you'd still have to come in with $3,377.50 ($100,000 - $93,122.50 from the lender - $3,500 from the seller).

Concessions and Appraisal

Another consideration with seller concessions is the property value. Many sellers are willing to come down on their price or pay some closing costs but most aren't willing to do it all. So if the asking price is $100,000, the seller may be willing to drop the price to $97,000 or pay $3,000 in closing costs because they get the same proceeds either way. However, if they agree to pay the closing costs and you agree to pay the full asking price, the property must still appraise for at least $100,000. If a real estate agent pushes for a higher sales price (which incidentally nets him or her a higher commission), say $103,000 to get your closing costs paid, the property still won't appraise for more than it's worth and the deal won't fly as written.

Other Options

There are a couple of other ways to get some help. If you qualify, there are grants and loans for down payment and closing cost assistance. In most cases you have to be a first-timer and meet income guidelines. Another way to lower your out-of-pocket expense is by getting a no-cost loan. This means you pay a higher interest rate but don't have to pay some, or all, of your closing costs.



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