Should the Seller Pay the Buyer’s Closing Costs?

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Selling or buying a home and getting approved for a mortgage can be a taxing process, even for those who have done it before. Laws and standards change, and for most of us, we only do it a few times throughout our lives. Closing costs are the biggest upfront financial investment, especially for the buyer. For both parties, the process and jargon involved can be cryptic and confusing. To find out the current local closing costs for home buyers and sellers see our updated reports.

To help demystify the process, we’re breaking it all down here to help you better understand what to expect and when sellers may be asked to pitch in on the buyer’s closing costs.

Let’s start with the basics.

What are Closing Costs?

Both buyers and sellers wind up forking over a substantial amount of money during a real estate transaction.

If you’re the buyer, you’ll be expected to produce the most: a down payment—a big chunk of money on its own—as well as half the escrow cost, buyer’s title insurance, along with earnest money (typically a part of your downpayment, the full cost of any home inspections, and the full cost of the appraisal.

If you’re the seller, you’ll pay for half the escrow, owner’s title insurance, and some government fees depending on what county you live in. The seller’s closing costs are typically far less than what the buyer’s upfront costs are, but are still significant.

Why and When are Sellers Asked to Pay Closing Costs?

For obvious reasons, everyone involved in a real estate deal wants to pay the least money possible and get the most value.

When: Sellers are typically either asked to pay for buyer’s closing costs when the initial offer is made, or during the inspection period if the buyer finds things wrong with the house that trouble them.

Why: during the offer. A buyer request for help with closing costs doesn’t mean they’re not qualified. In fact, most buyers these days are pre-qualified well before they start making offers. However, if a buyer is putting down the bare minimum for their downpayment and asking for help with closing costs, that could be a bad sign. If the buyer is low on cash there’s a much higher level of risk that the buyer’s financing will fall apart at the last minute. Unfortunately in most local offer forms, financing contingencies last until the day of closing and if the buyer has any additional financial trouble along the way or their lender’s underwriting discovers some last minute bad financial history connected the buyer, the home sale can fail at the last minute, putting the seller in a terrible position. If the buyer is putting in a low downpayment and asking for seller paid closing costs, it might be advisable to check with their lender as to their level of confidence in closing the sale. Keep in mind though, the lender is not required to divulge much about the buyers financial condition. One could also ask the buyer or buyers agent why the buyer is putting so little down and asking for so much in closing costs, and in a rare case it may not be due to a lack of available funds (such as a VA loan with a zero downpayment requirement).

Why: during inspections. If the buyer finds the home has repairs they don’t want to take on, they will often ask for a seller credit toward their closing costs to compensate. Not only can this be a fair way to compensate the buyer for home problems, it is the easiest way to do so. If the seller agrees to take on the repairs called out during the inspection period themselves, those repairs are often subject to the buyer’s approval once they are done and must be done prior to close. This can create an endless and contentious negotiations loop. Seller repairs can cause all sorts of problems for a home sale, they can fail to get done in time or the buyer can refuse to approve how the repairs were completed. If the seller needs to compensate the buyer for serious issues found during a home inspection, in my opinion, offering a seller credit toward the buyers closing costs is the best way to do so. Giving the buyer credit toward their closing costs (as opposed to just reducing the price) puts immediate funds back in the buyers pocket they can use for those repairs.

Potential Problems When the Seller Pays the Buyers Closing Costs

During the offer. As mentioned above, this could mean the buyer isn’t as financially sound and so there is a greater risk of the sale failing due to the buyer’s financing contingency. But there is at least one more reason to consider, let’s say the offer is for $600,000 and the buyer wants the seller to also credit them $10,000 toward their closing costs (a net offer of $590,000 to the seller). The seller is going to pay real estate commissions and title / escrow costs based off the $600,000 figure and not the $590,000. This means the seller will often be paying a few hundred dollars more in final closing costs. (Keep in mind you can ask your real estate agent to base their commission off the net minus buyer closing costs, but depending on the listing contract you signed, they may or may not agree to do so.) Local listing contracts may already calculate commissions off the net, or they may by default simply calculate off the sales price. Keep in mind all commissions are negotiable (but not always adjustable after you sign the contract).

During inspections. I do not see a problem with offering the buyer a credit to their closing costs in lieu of the seller performing repairs on the home or lowering the price to compensate the buyer. The only problems I’ve seen come up here is when the buyer and buyer’s agent fail to check with the lender to make sure they know what the lender’s cap is on what the seller can pay for the buyer. Some lenders have caps on the amount they will let the seller pay toward the buyer’s closing costs. If the seller agrees to pay more than the buyer’s lender will allow, it creates an instant transaction complication.

Yearly Real Estate Market Conditions for Closing Cost Requests

In hot sellers markets it is almost unheard of for buyers to ask for the seller to pay some or all of their closing costs in an offer, but in colder buyers market the request for the seller to help the buyer with closing costs is common and often expected. To find out the current state of our local real estate market, check out our most recent, in-depth monthly real estate market report.

Seasonal Real Estate Market Conditions for Closing Cost Requests

There is a good time of the year to sell a home (every year) and a bad time. There is a best month of the year to sell a home and a worst. Our real estate market has significant seasonal swings that favor either buyers or sellers. We write regular reports on the best time to sell and the best time to buy. Even in hot real estate years we find sellers giving closing costs in the bad season of the year, and in the cold real estate years we find buyers not asking for closing costs during the sellers’ hot months.

Make the Most of Your Real Estate Sale

We’ve been helping homeowners sell their homes in the Portland metro area for over 20 years, and we know transactions can get complicated at times. That’s why we recommend always having a trusted real estate agent by your side throughout the process. Our top 1% seller’s agents are the place to get started. Call us or chat with the bot on our site. We’re ready and waiting to provide you with the support and guidance you need.

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