Buying a new home is a very exciting time, but it can also be a financial hurdle if you don’t have a big down payment. It’s not just the down payment that you’ll need to hand over at closing, either. It’s also the closing costs. Some of those can be high, depending on whether you have a mortgage, which lender you use, the state you’re in, and other factors. If you’re not sure you have the funds to make a down payment and cover your closing costs, you can ask for a closing cost credit from the seller of the property. Then you’ll be asked to bring less money to the closing, and that can help you avoid serious problems with your finances even if you can otherwise qualify for your new home.
What is a closing cost credit?
A closing cost credit is money that will be credited to you at closing, so you don’t have to pay so much to close your transaction. It can save you hundreds or even thousands of dollars, helping you afford your new house. This credit comes from the seller. When you write your offer to buy the house, you can ask that the seller pays closing costs, or that they pay a certain dollar amount or a certain percentage of your closing expenses. Not all sellers will agree to these kinds of credits, but there is no harm in asking. Often people who only have a small down payment or are trying to hold onto as much cash as possible will be the ones to ask for these credits. There are some states where the law requires that a buyer pay certain costs, but the seller can pay the rest if they agree to that.
Who benefits from these credits?
The buyer is the only one who benefits from the closing cost credit. It makes no difference to the real estate agent or the title company, and it costs the seller money. While the seller won’t actually need to bring money to the closing table to pay for the credits, unless they owe too much on their home and must pay at closing to clear the mortgage, the amount the seller receives will be reduced by the amount of the credit. Buyers, though, can benefit a lot from these credits, and may save a lot of money on the purchase of their home. There’s no real reason not to ask the sellers to pay at least some of your closing costs, unless you feel you may alienate them or that they may reject your offer.
What if your credit is turned down?
When you’re buying a house, you should take a careful look at your credit and make improvements so you can have the best chance at qualifying for your loan with a good interest rate. That’s not the only type of credit that matters, though. The closing cost credit is also important, and something that you can be turned down for. The seller may decide that they don’t want to give you any help with your closing costs, and so they will either reject your offer or they will counteroffer without the closing cost assistance. You can decide at that time whether you can cover your own closing costs, or whether you need to locate another house with a seller that will be more likely to pay your costs for you.
Can you work with the seller?
Working with the seller may be possible, depending on how much they want to sell the house. There could be other concessions that would work for the deal, and it’s worth talking to them about that. For example, sometimes you can offer a bit more for a sales price, and then the seller will pay your closing. You’re really paying those costs because your mortgage is higher, but you won’t have to bring that money to closing. That only works if you’re able to get a mortgage that’s a little bit higher, though. Otherwise, it’s not a good way to try to get your closing costs paid.
Will it stop you from buying the house?
Not getting a credit toward your closing costs shouldn’t stop you from buying the house. However, for some people it might. If they can’t come up with the extra amount they need to pay for those costs, they won’t be able to go through with the deal. Most people try not to cut their finances that close, but there are times when it can happen and there is only so much that some buyers can do about that. In some cases, a buyer might elect to purchase a less expensive house, instead.
How much do closing costs add up to?
As you make plans to purchase a home, you’ll naturally wonder how much you’ll be paying for the closing costs. Unfortunately, there’s no clear answer. It depends on your state, on the cost of the house, and on other factors, such as how much your lender is charging for a mortgage origination fee. All of those things come into play, and you probably won’t know exactly how much your closing costs will be until you get very close to closing. The title company will call you with the total amount, but your real estate agent can estimate for you so you’ll have a relatively good idea of what you’ll need to pay.
2 Point Highlight
Buying a new home is a very exciting time, but it can also be a financial hurdle if you don’t have a big down payment.
When you’re buying a house, you should take a careful look at your credit and make improvements so you can have the best chance at qualifying for your loan with a good interest rate.
