August 14th, 2019 2:01 PM by Robin Bain
Buyers, sellers, and sometimes
even real estate agents get confused with how closing cost credits work.
Closing cost credits are a great
tool to help buyers pay their closing costs and have more money after
closing. This is important because buyers often have lots of expenses
such as making repairs, upgrades, buying furniture, etc. Closing cost
credits don’t hurt the seller in any way. In fact, they help sellers
because many buyers cannot buy without them.
Confusion about Closing Cost Credits
Some buyers think that they will
actually receive money back at closing that they can walk away with for their
own use. That is no longer allowed; around 2009 all mortgage companies
and regulators put a stop to it. Buyers instead can use this money toward
all allowable closing costs such as pre-paid interest, escrows, taxes, etc.
This enables the buyers to bring less money to closing. If the credit covers
the entire closing cost amount then the buyer would only need to bring the down
payment to closing.
Sellers often think THEY are
actually paying the buyer’s closing costs and may even say or think “I am not
paying their closing costs.” Though it may sound that way on the offer, sellers
are actually not paying the closing costs. The buyer just inflates their
price in order to get the credit.
a Typical Closing Cost Credit:
Closing Cost Credit
Net Sale Price
$395,000 (Sellers should pay
attention to this number)
Questions from Buyers and Sellers
Q: What do Buyers typically pay
for closing costs?
Q: What are the typical closing
Typical closing costs range from
1% to 5% of the home’s price.
Q: Why would I still need to bring
money to the closing if I’m getting a closing cost credit from the sellers?
Buyers should understand that
their total closing cost could be more than the credit they requested. At
the time of the offer, it is impossible to determine exactly how much the
closing costs/escrows/prepaid interest, etc. will be on the day of the closing,
because those numbers change based on the exact day of the closing. At
the time of the offer, the closing cost credit is always an estimate of what
the closing costs will be, and you should always take a credit for slightly
less than the amount of the closing costs, because if your credit is too high,
it could result in the seller getting more money, or a delay in the closing.
Q: How much of a closing credit am
I allowed to ask for, is there a limit?
It all depends on the type of
loan. Some loans only allow credits of 2% and some go up to as much as 6%.
Q: Can the credit be put towards the down payment?
No, it cannot. The down
payment needs to come from the buyer.
Q: What do Sellers typically pay
for closing costs?
Q: Why does the buyer need a
closing cost credit? I never had one when I bought.
The closing cost credit simply frees
up money for the buyer. The reason a seller never had one maybe because either
the credits were not available at that time or the purchase price at that time
was much lower.
Q: Does a Seller pay stamp
fee on the offer amount or on the net sale price?
Sellers do pay stamp fees based on
the offer amount. Sellers should remember that the typical stamp fee in
Massachusetts is $4.56 per thousand.
Both Buyers and Sellers
Q: Who is responsible for paying
closing costs and for which fees?
Both buyers and sellers can expect
to pay closing costs.
Q: What if the closing costs
aren’t that much and there’s money left over?
It is very important that the
buyer works with their mortgage broker and buyer’s agent to come as close as
they can with how much of a closing cost credit they will need. It is
actually better to request a credit that is slightly less than the expected amount
so that you don’t have an excessive credit.
If the closing cost credit exceeds
the actual closing costs, technically, the parties would have to do an
amendment to the contract and adjust the purchase price. However, this is
normally so late in the process that all of the paperwork and loan
documentation would need to be adjusted and it could result in a delay in the
closing. Therefore, it is always wise to err on the side of caution and
put a closing cost credit in the offer that is slightly less than what you
think the closing costs will be.
Q: Does the appraisal need to
come in at the offer price or at the net sale price?
The appraisal does need to come in
at the Offer Price. This is usually not an issue.
Q: If the buyers request a credit
after a home inspection, what are the benefits of giving the credit towards
closing costs vs price reduction?
This is another case where sellers
just need to pay attention to the net number (see chart above). Whether the
buyer requests a decrease to the offer price or requests a closing cost credit
really does not matter to the seller. It’s the same either way.
With respect to the buyer, the
benefit of a credit instead of a reduction in the sales price is that it will
allow a buyer to keep cash on hand to do repairs, etc. If a buyer and
seller negotiate a price reduction following the home inspection, it won’t
actually give the buyer money to do the repairs. By doing a credit, the
buyer essentially “puts cash in their pocket” by virtue of the fact that they
are bringing less money to the closing.
Massachusetts License Number Broker MB1498 Dana Bain NMLS #18693 Robin Dunbar Bain NMLS #18699 Licensed by the State of New Hampshire Banking Department- License Number 5430-MBR Premiere Mortgage Services Inc. NMLS #1498 is a licensed broker and not a lender. We arrange but do not make loans.