Surprising Ways to Cover Closing Costs and Make Your Home Purchase Dream a Reality

Buying a home requires cash.  Lots of it.   Not only do you need the required down payment, you’ll also need closing costs – which in some markets can be as much as 6% of your loan amount. 

A ‘Seller’s Concessions’ is a common technique used industry wide to help defray the cash outlay for buyers.  This happens when the seller contractually agrees to cover a part or all of your closing costs from the sale proceeds.  This not only reduces your cash outlay as a buyer, but it also provides a greater positive impact on your loan qualification.

 For example, if you were planning on a 5% downpayment on a home and negotiated a $25,000 price reduction, your out of pocket spend would only be reduced by $1,250.  ($25,000 X 5%). If instead, you negotiated a $25,000 closing concession, your cash out of pocket savings would be $23,750.   ($25,000 – $1250 additional downpayment).   This makes your underwriting qualification easier as far as sourcing the cash to close is concerned.  

 So what happens if your seller is unwilling or able to contribute to your closing costs?  

Are out of luck?  Not at all.  – Most mortgage guidelines allow other parties to step in to contribute to your closing costs. These include:

Builder, Developers, and Individual Investors may cover a portion of the closing costs as a sales incentive or to facilitate the sale of their higher-priced homes.  While sellers themselves – they can offer both direct closing cost credits and upgrades that have real can equivalents like upgraded appliances and warranties not calculated into closing concession limitations. 

Seller’s and Buyer’s Real Estate Agents: While less common, the realtors on a transaction may contribute the buyer’s closing costs as part of the contract terms.  Closing credits from these folks can be used to offset additional inspection or a cost for a repair that the seller should pay for but is unable or unwilling to cover.

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: 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 household 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. These gifts do not have to be a cash deposit to a buyer’s account. They can be in the form of a direct payment to a vendor’s cost such as appraisal, homeowners insurance, or owner’s title policy on behalf of the buyer. 

Eligible donors and allowed amounts 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.

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