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Disadvantages of Seller Paying Closing Costs

TLDR

What You Need To Know

  • A home seller might pay for a buyer’s closing costs to solidify a deal if a buyer doesn’t have enough cash to cover the down payment and closing costs on their own
  • Certain loans limit how much (and what) a seller can contribute toward the buyer’s closing costs
  • Seller concessions are a nice perk for buyers short on cash; however, it’s important to consider disadvantages for the buyer if the seller pays for their closing costs

Contents

If you want to sell your home, costs associated with closing will probably end up being roughly 10% of the home’s sale price. Between real estate agent commissions, attorney fees, transfer tax and escrow fees, home sellers have to pay up before they get paid. Homebuyers also have to fork over thousands of dollars in closing costs to pay for expenses like title insurance, transfer taxes, mortgage origination fees and more.

Even though you could spend a pretty penny on seller closing costs, when potential buyers might ask for seller concessions (aka seller assists) when negotiating an offer, should you? It might seem counterproductive for a seller to give the buyer money to purchase their home, but seller concessions are actually quite common.

Though seller concessions offer some distinct advantages for both the seller and buyer, they aren’t always the right choice. Keep reading to learn why and when you might want to pay for part of a buyer’s closing costs as well as the risks and disadvantages of seller concessions. 

Why Would a Seller Pay for a Buyer’s Closing Costs?

As a seller, there are a couple of reasons you might want to pay for a buyer’s closing costs. A home seller might pay for a buyer’s closing costs to solidify a deal if a buyer doesn’t have enough cash to cover the down payment and closing costs on their own.

Other reasons a seller would pay for a buyer’s closing costs include standing out in a buyer’s market or if they’re looking to attract more buyers to potentially get to the closing table faster.

Are There Limits to Sellers Paying Closing Costs?

Seller concessions can help bring home ownership within reach for many buyers. But, if the buyer is taking out a mortgage, certain loans could limit how much (and what) a seller can contribute toward the buyer’s closing costs. 

Concession limits

  • Conventional loan concessions: For primary homes and second homes, Fannie Mae has different limits for seller contributions based on the loan-to-value (LTV) ratio.[1]
  • If the LTV is greater than 90% (in other words, if the buyer’s down payment is less than 10%), seller concessions are limited to 3% of the sales price.
  • If the LTV is between 75.01% and 90%, seller concessions are capped at 6% of the sales price.
  • If the LTV is 75% or less, seller concessions can be as high as 9% of the sales price.

Conventional loans for investment properties limit seller concessions to 2% of the sales price.

  • Federal Housing Administration (FHA) loan concessions: Sellers can contribute up to 6% of the sales price or appraised value (whichever is less) on home purchases with FHA loans.[2]
  • Veterans Affairs (VA) loan concessions: Concessions on VA loans are limited to 4% of the home’s value.[3]
  • United States Department of Agriculture (USDA) concessions: USDA loans limit seller concessions to 6% of the sales price.[4]

What Disadvantages Does the Seller Have When Paying Closing Costs?

Before paying for a buyer’s closing costs, sellers should be aware that doing so comes with disadvantages. 

You could pay higher closing costs and fees

Say you receive a great offer that’s $10,000 higher than the next best offer. Sounds great, right? Well, sure, but remember that many of the closing fees you pay are based on a percentage of the sales price. In other words, a higher selling price equals higher closing costs. 

So, if you sell your house for $400,000 instead of $390,000, you’ll have to pay roughly an extra $500 – $600 in real estate agent commissions alone. 

You could have less profit

If you offer seller concessions and don’t get that higher offer you were hoping for, your profit could suffer. Some buyers may be willing to pay a higher sales price if you pay for part of their closing costs, but if you have a buyer who doesn’t, you could walk away with less. 

You could be at risk of fraud

Though it might seem harmless, failing to disclose seller concessions can be fraudulent. Seller concessions must be disclosed to the lender and appear on the closing statement.

What Are Disadvantages for the Buyer if the Seller Pays for Closing Costs?

Seller concessions are a nice perk for buyers short on cash; however, it’s important to consider disadvantages for the buyer if the seller pays for their closing costs.

You could have mortgage approval issues

If you plan on financing your new home purchase, your lender will probably require a home appraisal. If the appraisal amount comes back below the purchase price, most mortgage lenders will ask you to cover the difference. 

For instance, if you’re buying a home for $400,000 and that includes seller concessions (and you would have agreed to $390,000 without seller concessions), but the appraisal comes in at $390,000, the loan amount will remain the same and you’ll have to put another $10,000 toward the down payment.

You could need a larger down payment

Your down payment represents a percentage of the purchase price. If you agree to pay $400,000 for a house instead of $390,000, you’ll have to come up with an additional $1,000 if you want to put down 10% or an additional $2,000 if your down payment is 20%.

You could have higher mortgage payments

Offering a higher purchase price in exchange for seller concessions is a trade-off; you’ll pay less at closing, but will likely have higher mortgage payments. Borrowing more money means paying more interest, so make sure you’re comfortable taking on the monthly payment before saying yes to a higher purchase price.

Is It Worth It for the Seller To Pay Closing Costs?

It’s often worth it for the seller to pay closing costs in a strong buyer’s market, if the buyer is willing to pay a higher sale price or if the seller is looking for a quick sale. Sellers who are thinking about paying closing costs for the buyer need to remember that there are some drawbacks to offering seller concessions. And they always have to disclose any closing credits they’re giving the buyer.

  1. Fannie Mae. “Selling Guide.” Retrieved August 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-4-Asset-Assessment/Section-B3-4-1-General-Asset-Requirements/1032996781/B3-4-1-02-Interested-Party-Contributions-IPCs-08-04-2021.htm

  2. United States Department of Housing and Urban Development. “Section A. Calculating Maximum Mortgage Amounts on Purchase Transactions.” Retrieved August 2022 from https://www.hud.gov/sites/documents/4155-1_2_SECA.PDF

  3. United States Department of Veterans Affairs. “Chapter 8. Borrower Fees and Charges and the VA Funding Fee.” Retrieved August 2022 from https://www.benefits.va.gov/WARMS/docs/admin26/m26-07/Chapter_8_Borrower_Fees_and_Charges_and_the_VA_Funding_Fee.pdf

  4. United States Department of Agriculture. “Chapter 6. Loan Purposes.” Retrieved August 2022 from https://www.rd.usda.gov/files/3555-1chapter06.pdf

ICYMI

In Case You Missed It

  1. When a home is sold, buyers and sellers typically pay thousands of dollars each in closing costs

  2. Sellers who pay for buyer closing costs might pay higher closing costs when offering a seller assist, and seller profits might actually be lower when the sale price is higher

  3. Buyers who receive money toward closing costs may run into loan approval issues and should prepare to put more money down and pay more for their monthly mortgage

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