In most areas, sellers may pay a portion of the buyer’s closing costs, often to make the property more attractive. You may also have a buyer who is strapped for cash, ask you to pay closing costs.
Seller credits for buyer closing costs in the Bay Area, typically involve negotiating a set amount, often no more than 6% of the sales price, and applying it as a settlement through escrow. Be aware, however, that there are potential complications that can result.
Here is what you should be aware of.
In general, you can expect closing costs to be between 2-4% of the purchase price of your home in the Bay Area. A great deal depends on origination fees and points the lender charges to make the loan, which are disclosed on the buyer’s Good Faith Estimate.
For a $300,000 home, closing costs will be between $3,000 and more than $12,000.
Recurring Costs (Prepaids)
Recurring fees will be paid over and over, and includes:
- Fire insurance premium
- Flood insurance
- Property taxes
- Mutual or private mortgage insurance premiums
- Prepaid interest
- Non-Recurring Closing Costs
These fees are just paid once, and include one-time charges for:
- Escrow or closing
- Wire fees
- Attorney fees
- State, county or city transfer taxes
- Home inspection
- Natural Hazard Disclosures
Crediting the Buyer for Closing Costs
Buyers should always discuss with their lender, an offer that involves the seller crediting closing costs because not all lenders in the Bay Area will allow it.
If the buyer will finance 100% of the purchase price, most lenders limit the credit to just 3% of the purchase price. Lenders may allow a seller to credit up to 6% of the purchase price in some cases, depending on the buyer’s down payment and credit score.
Under no circumstances will a lender allow a borrower to get cash from a seller at closing.
The biggest problem with crediting for closing costs is the buyer’s lender must approve all closing costs, which must appear correctly on the HUD-1 settlement statement at closing. Because closing costs are rarely more than $3,500, the lender will probably deny a proposed credit of $8,000. Sometimes sellers try to include a contract provision that automatically reduces the purchase price of the home by the amount of the credit rejected by the lender, which will cause delays and force the lender to re-underwrite the loan.
If you want to credit the buyer for closing costs, make sure your agent uses acceptable language in the agreement to avoid problems. Do not:
- Give the buyer a personal check at closing,
- Tell the title company to give the buyer a check and reduce your proceeds, or
- Have your real estate agent write the buyer a check.
- All three of these may be illegal and considered loan fraud in the Bay Area.
Benefits of Crediting Buyer’s Closing Costs
Despite these pitfalls, there are benefits to crediting the buyer for closing costs, including:
- Higher sale price.
Some buyers can increase the purchase price to encourage you to cover closing costs. Many will increase their offer dollar-for-dollar according to the credit.
- Buyer incentive.
The seller’s credit is a strong incentive for buyers in markets where inventory surpasses demand. To compete, you can offer a seller credit alongside a great marketing strategy.