Written by Attorney-Broker Michael T. Chulak
Often, first time buyers are short of the cash needed for the down payment, closing costs, and reserves required by most lenders. One way to overcome the buyer’s shortage of cash is for the seller to pay some or all of the closing costs. Of course, sellers who are willing to pay some or all of the closing costs generally offset their cost by asking a higher price for the property being sold. When this happens, the buyer is effectively financing the closing costs and paying them over time.
Who pays the closing costs is determined by the market and partly by the ability of the parties to negotiate a favorable transaction. In addition, the type of lender involved in the transaction is also a major factor.
With conventional loans, the seller may only pay non-recurring closing costs. These do not include pre-paid items or items to be paid in advance (such as mortgage insurance or hazard insurance). The seller’s contribution is limited to the amount the buyer is putting down. If the buyer puts ten percent or more down, the seller may contribute up to six percent. If the buyer puts less than ten percent down, the maximum the seller may contribute is three percent.
With a VA loan, the seller may pay all of the closing costs. The buyer can purchase with no down payment and pay no closing costs.
With an FHA loan, the seller may pay all of the closing costs. However, the buyer must make at least a three percent investment in the property, consisting of closing costs, the down payment, and/or pre-paid items. The three percent can be from the buyer’s own funds or from a family member’s gift.
Call attorney Michael T. Chulak at 818-991-9019 or 800-565-2232 for a no cost initial consultation regarding any legal matter.