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my wife and i are looking to buy a house. we've been pre-approved and found a house we're serious about.
i'd like to come out of pocket as little as possible, as we are expecting a kid in march. so, i was thinking about asking the seller to cover closing costs. i don't really have a clear understanding on how this works, but i believe the purchase price is lowered by the amount set for closing costs, but then it's just rolled into our mortgage.
so, the house is listed at $167k. if i offer $160k and seller pays up to 6% of closing costs, does that mean the purchase price is $150,400, but we actually pay a mortgage in the amount of $160k and the seller gets the full 160k in the end?
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If you offer 160k and the seller accepts, why would the purchase price be anything but 160k?
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OK here is the deal, this is from someone who works in the industry.
Your contract is for 160k with 6% seller paid closing costs.
The Math works this way
6% 160k =9,600
So the seller gets 160k for the purchase of the house he is selling, and he is giving you 9,600 to pay for your closing costs out of that 160k. So the seller is seeing 150,400 of which he still has to pay the Real estate agents commission out of. the commission is still on the 160k price (usually about 6-7% for both seller and buyer agent) so in reality he only gets a check for about 140,800
The money can be used for things like
All of the normal costs (usually about 1500 in Michigan more in NY, I think about 3000)
Discount Points
Tax Prorations
Funding your escrow account
9600 should cover all or almost all of your closing costs unless the Mortgage person is really dumping on fees. Many mortgage brokers(yes I am one too) will work the deal so that the closing costs are say 5500 and then add on fees to "use" up all of your 6% instead of using the leftover money to lower the rate on your mortgage. The fees he is adding go right into his pocket. Rates are low now so you may never notice this... beware
When a seller pays your closing costs it isnt free money, what makes it a "deal" is that it takes you less cash to buy the home. You don't "save" any money -- you just save it for now. The costs get amortized over the life of the loan.
Last edited by Augie (2012-09-04 11:49:57)
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Augie wrote:
When a seller pays your closing costs it isnt free money, what makes it a "deal" is that it takes you less cash to buy the home. You don't "save" any money -- you just save it for now. The costs get amortized over the life of the loan.
I see your point about it being amortized over time, but he does get $9600 he never had. For example, you take out a loan to buy my car for $10,000 and I agree to hand $2,000 back to you after the sale is done. You esentially buy the car for $8000 it is just now you have $2000 in your pocket that you borrowed from the bank. Sure you pay some interest.. but you still saved $2000 (just as easily we could of agreed to $8,000 selling price). Sure, you own the bank $10,000 but you could pay back $2000 right away if you want and you now only owe $8000 (so however you slice it you save $2000 compared to paying me $10,000).
He could also maybe do that later with an equity loan (assuming the house can be appraised for 160 if you buy it for 150,400 with no closing costs paid).
I look at it this way. The seller will accept a "cash" offer for 150,400 just as likely as accepting 160,000 plus 6% of closing cost. Either way the seller is getting 150,400.
If the house is priced right for the market I'd guess it would close that deal you are proposing. If you don't have the closing money up front I'd guess you need to be closer to the asking price.... But then again, it never hurts to try to get the lowest price possible (and with today's market you never know). I have to admit I never understood why people focus on closing cost rather than the price of the house. When I bought my house I saved money for down payment and closing costs and then focused on getting the house price where I wanted it. But, I guess keeping the money in your pocket longer is one reason.
p.s. I could be way off on this..... it does get confusing...
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