Home Sellers Toss In Closing Costs
1/30/2009So much for curb appeal.
Sure, it takes a welcoming presence to lure homebuyers to your door. But in today's market, it often takes a fistful of cash to get them to the table.
When they come to the closing table, sellers are increasingly picking up the tab for all the ancillary costs buyers incur when purchasing a home.
These closing costs can include a long list of charges, from relatively inexpensive document copying fees to more hefty tabs for reserves for property taxes and homeowner insurance.
Just on the buyer's side -- sellers have their own set of fees -- closing costs might run several thousand dollars or more.
Why Sellers Pay
"This is definitely the age of seller concessions," says home appraiser T.J. McCarthy, an instructor at the Appraisal Institute in Chicago.
In any buyer's market, sellers yield to price cuts and other demands, like leaving behind the hall chandelier.
But writing a four- or five-figure check to cover buyer's closing costs is a concession that's particularly needed to cinch a sale in today's tight credit environment.
FHA Rules Still Allow Sellers' Giving Closing Fees
Lenders have gone back to insisting on an old principle: Every homebuyer needs a down payment.
Coming up with down-payment cash is enough of a problem, especially for first-time buyers, without having to dig further for closing-cost cash.
Federally insured FHA mortgages allow the lowest down payment -- 3 percent -- of the purchase price. That will increase to 3.5 percent at the beginning of 2009, but FHA mortgages will still offer the lowest down payment, with other loans requiring at least 5 percent. That's a key reason why FHA mortgages are quickly gaining popularity.
Until Oct. 1, home sellers could essentially contribute an FHA buyer's down payment by making a contribution to a nonprofit, which in turn would provide a down payment grant to the buyer.
While that practice is now prohibited, FHA rules do allow sellers to give up to 6 percent of the home's purchase price for closing costs. "The thing to remember is that they can give up to 6 percent, but if closing costs only total 4 percent, that's as much as a seller can give," says Don Frommeyer, board member of the National Association of Mortgage Brokers.
Sellers: Prepare To Pay
"We have seen a huge rise in seller contributions," says Minnesota Realtor John Anderson, past chair of the federal housing committee of the National Association of Realtors.
"In better than half of my deals lately, sellers are paying closing costs," says Anderson.
As long as a market giving buyers the upper hand and tight credit conditions persists, this trend will stick, observes JoAnne Poole, past president of the Maryland Association of Realtors.
"I try to educate sellers to be realistic; they may be expected to help buyers with closing costs," says Poole.
Giving Too Much?
The total tab for closing fees can vary considerably. Local real estate transfer taxes, for instance, can add substantially to the total in some areas. And the time of year a purchase is transacted can also impact costs, since lenders may demand more or less property tax be placed in escrow, depending on when they expect the next bill to come due.
In essence, when a seller covers closing costs, he simply nets less from the sale, just as he must subtract the real estate sales commission from his profit, explains appraiser McCarthy.
Closing fees and sales commissions are costs related to the purchase, but they do not directly reduce the purchase price, he adds.
When sellers contributed down payments to buyers through nonprofits, it directly reduced the purchase price, which caused worries among appraisers that recorded sales values were falsely inflated. (Although seller-contributed down payments are now disallowed, FHA rules do allow buyers to receive a cash gift for their down payment from a close relative or friend, and rules still allow buyers to receive grants that aren't contributed by the seller, but directly from charities and housing nonprofits.)
Still, instances can occur when lenders frown on sellers' chipping in big amounts for closing fees.
Red flags may pop up, especially in non-FHA loan transactions. Indeed, sellers can't even contribute to closing fees unless the buyer is making at least a 10 percent down payment with a conventional, non-FHA loan.
But those stricter rules on non-FHA transactions don't really get in the way much of the time with buyers' requests for closing assistance. That's because it's the many buyers with a limited amount of cash who need both a low-down-payment FHA loan and seller help with closing costs.