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Will Seller's Pay Your Closing Costs?

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The above “Closing Costs” would be the funds that the Buyer would need in order to complete the purchase (close) on the home.  The Buyer likely included an Earnest Money deposit when they submitted the Purchase Contract, and that would be applied to the above total. So if they paid $1,000 in Earnest Money, then they would need a Certified Check for $4,900 at Close of Escrow. 

These costs are based on a “100%” Loan, when the Buyer is borrowing 100% of the purchase price of the property.  Both the VA and USDA offer a 100% Loan, but if Buyers do not qualify for these programs they will usually obtain an FHA Loan. 

An FHA Loan requires a 3.5% down payment, so the Buyer would need the following funds at Closing:

In both cases, the Buyer will need a substantial amount of cash at closing  Many Buyers today either do not have all of the funds required to purchase a home or would prefer  keeping as much cash as possible in order to cover all of the other costs of moving. Seller’s (Lenders) understand this and will usually agree to pay some of the Buyer’s Closing Costs.

The Lender will often authorize an amount that is up to 3% of the Purchase price. The contract could be written that way (as a percentage) or you could simply use a dollar amount.  On a $200,000 purchase price, the contract could say either “Seller will pay $6,000” or “3% of the Purchase Price” towards Buyer’s Closing Costs.   

Answer: When the Lender states they will not pay for a specific item on the closing statement.

But wait a minute!  The Lender agreed to pay $6,000.  They cannot renege on a deal.  That’s not fair!!!

Welcome to the world of Short Sales & Lenders.  Lenders make up their own rules, often on the spur of the moment. You may receive a verbal approval, even a signed contract, but the Lender may still change the rules.

The Lender’s approval is in the form of a Letter of Acceptance in which there is usually a line that states, “Seller Concessions” or something similar.  The letter approves the total amount, but the Lender may not allow payment of certain items.

The Lender may decide to disallow a specific expense on the “Closing Statement”.  The Government approved closing statement is called a HUD-1, and the Buyer and Seller are given one to approve prior to closing on the sale.  The HUD-1lists the details of all expenses and payments in the sale, and it is on this document that the Lender may disapprove of an item.

For example, a Lender will almost always not pay for a Home Warranty, even if they have “agreed” to on the Purchase Contract.  Let’s assume the Lender has authorized paying a total of $6,000 in Buyer’s Closing Costs, and $500 of those costs is for a Home Warranty.  The Lender refuses to pay that amount and it becomes a Buyer’s cost at closing. The extra $500 that the Lender approved for closing costs becomes more money for them, and they do not feel guilty for taking it.

Another fee the Lender will often refuse to pay are “Discount Points”.  These fees are considered optional and they benefit the Buyer by lowering the interest rate on the loan.  Many lenders will refuse to pay that cost as it is “elective” and not a required expense of the Buyer.

Sometimes (actually often) Lenders do not make any sense as to what Buyer’s costs they will or will not pay for.  For example, there is a fee charged by the governing municipality (Pima County in Tucson) to record the sale of the property.  It is a “Recording Fee” and is required for every sale.  I have had a Lender refuse to pay that fee! No explanation, just take it or leave it. 

As Lender approval of the HUD-1 is the final step standing in the way of completing the sale, Buyers often accept the Lenders terms, even though it is their loss.  The alternative is to re-open the negotiations, which can have unpredictable results. 

The best way to prepare for this is to find out the Lender’s policy in advance, and then write the terms of the contract to your best advantage.

So the answer to the question, “Will Seller’s Pay Your Closing Costs?” is a qualified “Yes”.  They will usually pay some or all of those costs, up to a point, but you must also find out what their policy is with regards to specific costs, or risk becoming unpleasantly surprised later.

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