Should you ask the seller to pay closing costs when you make an offer on a home? That’s one of the most common questions I get asked when I meet with buyers for the first time. This is especially true with first time home buyers.
Most First Time Home Buyers are overwhelmed by the financial impact buying a home will have on their lifestyle. They know they have many other expenses to cover when they move and the thought of saving on the closing costs relieves some of the burden in their minds.
Firstly, let’s look at the facts: Seller paid closing costs are not really seller paid. They’re actually paid by you the buyer by rolling them into your loan. That may not make sense, so I will explain it a bit better: Imagine you make a full price offer on a home for $150,000 with a clause in there for $2000 for seller paid closing costs. If the seller goes along with that you will finance the home based on a purchase price of $150,000. With the so-called seller paid closing costs the seller’s bottom line is $148,000. Now, if you make an offer on that same home for $148,000 dollars, the seller’s bottom line is exactly the same. You on the other hand will be financing the home based on a purchase price of $148,000.
In this scenario the question is not so much whether you should ask the seller to pay closing costs, as to ask yourself whether you want to finance those costs into your loan, which will translate into a slightly higher mortgage payment every month. Making a lower offer without closing costs ultimately costs you less.
So when should you ask the seller to pay closing costs when you buy a home? Depending on your financial situation the so-called seller paid closing costs may be a good option for you. If you’re tight on cash or want to keep what you have for repairs or new appliances, then asking for closing costs may be the way to go.
Generally speaking it’s a good idea to talk it through with your Realtor to see what the best strategy is for you when it comes to making an offer. There used to be the perception that the offer looked higher when a buyer asked for closing costs. In a market where closing costs have become more standard and sellers are getting more used to seeing the closing cost option, the perception of a higher price is no longer there. Sellers are quick to note that closing costs or a lower price really have the same effect on their bottom line, so that tactic doesn’t work as well anymore.
Short disclaimer: Bear in mind that I help clients buy homes in the Iowa City real estate market. It may be different in your neck of the woods.
