It can take years to save up a down payment to buy your first house, but this isn't the only mortgage-related expense you have to worry about.
Buying a house also involves closing costs. These are fees paid to your mortgage lender for processing the loan. It’s a laundry list of fees, which can include an application fee, a credit report fee, an appraisal fee, a loan origination fee, etc. There’s no flat fee for closing costs. Rather, these fees vary depending on where you live, and range between 2 percent and 5 percent of the sale price.
For many buyers—especially first-time buyers—closing costs are another hurdle to homeownership. But just because you don’t have thousands lying around for closing doesn’t mean you can’t purchase a home. There are ways to get around closing costs, and what you might not realize is that some homebuyers have their closing costs paid by the seller.
Getting a seller to pay your closing costs results in paying less money out-of-pocket. The problem, however, is that some sellers don't have enough home equity to cover your closing costs in addition to their realtor’s commission. Even if a seller has ample equity, he’s not obligated to pay this expense. He might say this is your problem to figure out. In this case, you’ll need to put on your negotiating hat and work your magic. You can’t make a seller pay your closing costs, but there are ways to sway his decision in your favor.
1. Don’t Offer Less Than the Asking Price
If a home purchase is dependent on a seller paying your closing costs, this isn’t the time to make a low-ball offer. You need to get on the seller’s good side, and the best way to do this is by offering the full asking price for the house. Selling a house for less than the asking price means the seller walks away with a smaller profit. And if he has a smaller profit, he might not be able to pay the closing costs.
2. Ask the Seller to Increase the Asking Price
In some cases, a seller’s asking price is just enough to pay off the mortgage balance and realtor commissions. Therefore, there isn’t any cushion to pay your closing costs.
You can either walk away from the property and look for another house, or you can ask the seller to inflate the asking price and apply the extra money to closing. For example, if the asking price for a property is $200,000, you can submit an offer for $205,000 with the understanding that the seller will offer a $5,000 credit to pay your closing costs.
This plan can work in theory, just know that it’s subject to the appraisal. The home appraisal (or the property’s value) must be high enough to compensate for the inflated asking price.
3. Buy a House As-Is
It’s not unusual for homebuyers to ask sellers to make changes or repairs to a property. Some buyers include a clause in their bid stating that the “offer is subject to a satisfactory home inspection.” A home inspection can uncover minor or major problems with a property, and you have every right to ask a seller to fix these issues. Just know that the more updates and repairs a seller makes to the home, the more he’ll spend getting the house ready to sale. This can drain his pocket to the point where he’s unable to pay your closing costs.
This doesn’t mean you should ignore a home inspection report, but you might have to choose between the seller paying for home repairs or your closing costs. If the repairs aren’t urgent, you can buy the property as-is in exchange for the seller paying the closing costs, and then slowly repair the house yourself.
4. Negotiate a Percentage of the Closing Costs
Realistically, the seller might not be in a position to pay all of your closing costs. Rather than walk away from the deal, see how much the seller can afford to pay. He might meet you halfway and pay a percentage of the closing costs.
If you don't have money to pay the remaining balance, ask your mortgage lender to wrap the closing costs into your mortgage. This will increase your final mortgage balance, so you’ll have a slightly higher mortgage payment. You’ll also pay interest on the closing costs. In cases where a seller can’t pay any of your closing costs, your lender might be able to offer a no-closing cost mortgage if you agree to a higher mortgage rate.
Were you able to convince a seller to cover your closing costs? How did you do it? Let me know in the comments below.