Getting Some Help with Closing Costs

Recently, I've been working with a lot of first time home buyers trying to take advantage of the homeownership stimulus tax credit. One common trait of this segment of the market is the lack of a lot of cash to put towards the transaction. Unlike a "move up" buyer who is selling a home and using the proceeds from that sale towards their next purchase, the typical first time buyer is usually scraping money together from savings in order to buy their first home.

Though the seller typically pays the Realtor's commission in a real estate transaction, the buyer still has fairly significant closing costs. These include, but are not limited to: title insurance premiums and fees, transfer tax, mortgage fees, tax escrows, and recording and notary fees. In the average transaction, these could easily add up to 4 or 5 percent of the sales price of the home. Add those costs to the down payment, which for an FHA mortgage is a minimum of 3.5%, and buyers are looking at a pretty scary number due at closing.

Fortunately, there is something known as a Seller's Assist that can be used as a tool to essentially finance some of the buyer's closing costs.

 

Here's a scenario using round numbers for the sake of making it easy to understand:

John and Mary are first time buyers and have been looking at houses and they finally found one they really like. The seller is asking $100k, the house is really worth $95k, and the seller would take $92k for it.

They have two basic options (and a million variations, but let's just look at the two main ones here)

Offer the seller $92k
or
Offer the seller $95k and ask for a $3k seller assist

 

In both cases, the seller will net the same amount of money ($92k), but in the second instance the buyers will receive a $3k credit to apply towards their closing costs. Their mortgage will be based off of the $95k, so their monthly payment will be a bit higher, but they will have to come up with less cash to go to settlement on the home.

Typically lenders will allow a seller's assist up to a maximum of 6% of the purchase price, not to exceed closing costs. Essentially, that means a buyer cannot get cash back at closing. If a buyer negotiates a seller's assist greater than what their closing costs will be, they can however increase their closing costs to be able to receive the full amount of the seller assist.

Now you're probably thinking; why on earth would a buyer want to increase their closing costs, why not just reduce the assist to the exact amount? Well, the answer is pretty simple. A buyer could buy "discount points" from the lender to bring down their interest rate on the loan.

Now the buyer is using the seller assist as a means to finance closing costs and bring down the interest rate of the loan. So even though the mortgaged amount will be a bit higher with the seller assist option, the payment could possibly be the same, if not lower than that option with no assist, and the buyer has put less cash into the home.

The exact purchase price offered and the amount of a seller assist asked for will vary depending on the buyer's particular financial situation. Be sure that you understand all the options and have explored several different scenarios before entering into an agreement of sale.