The total cash required to close a home purchase can be a real hindrance for homebuyers, especially in high-cost markets. Aside from the downpayment required from a buyer, the additional settlement cost in some markets can total as much as 6% of the loan amount. A common solution used to reduce this cash requirement is a ‘seller’s concessions,’ contract – where the seller agrees to cover a part of the buyer’s closing costs from the sale proceeds as provision of the contract.
Some sellers, however, may not be willing or able to contribute to the buyer’s closing costs. If making a deal depends on defraying some of these costs for the buyer, both FHA and conventional guidelines allow other parties to step in. Apart from the seller, contributions to the buyer’s closing costs can come from:
- Seller’s and Buyer’s Agent: While less common, the seller’s or buyer’s real estate agent may contribute a portion of their commission to help cover the buyer’s closing costs as part of the contract terms. Used strategically, it’s a great tool to use in those tight cases and where your buyer and seller are just shy of that all-important ‘meeting of the minds’ necessary to solidify a sale.
- Builder, Developers and Investors may offer incentives to buyers, such as covering a portion of the closing costs to facilitate the sale of their higher-priced homes. Offering to pay a portion of the closing cost can have a much greater positive impact on the buyer’s qualification than simply discounting the sale price.
- Lenders can often structure the financing offered to a buyer to include some contribution to the buyer’s closing costs as part of the loan terms. The opportunity exists on most loans, subject to specific eligibility criteria and pricing restrictions. It’s something buyers and realtors should routinely explore with their loan officer at the onset of the loan application.
- State or Local Housing Programs: Certain state or local housing programs provide down payment assistance or closing cost grants to eligible buyers. In higher-cost areas, these programs are a bit more difficult to utilize because buyers who can afford the higher-priced homes generally have incomes that exceed the income limitations imposed by these programs.
- Gifts from Family or Friends: Buyers can receive gifts from family members or close friends to cover closing costs. However, these gifts usually require documentation and specific guidelines. Eligible donors will vary depending on the type of loan the buyer applies for, so it’s critical that any potential donors be cleared with your loan officer.
Remember that the specifics can vary based on the type of loan, local regulations, and individual circumstances. Always consult with your loan officer to explore available options!