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This webpage discusses the idea of bidding higher on a home in exchange for the seller paying closing costs of the same amount. Is it also permissible to bid higher and request the seller pay for (some or all of) the down payment, too?

The benefit, from a buyer's perspective, for having either down payment or closing costs paid for is that the buyer is saving dollar-for-dollar on upfront costs in exchange for a slightly higher monthly payment. Over the lifetime of owning the home (say 5-10 years) the accumulated excess monthly payments will be less than the upfront savings (sometimes substantially).

A possible complication here is that the home doesn't appraise for the higher sale price, which may complicate financing. But assuming this isn't an issue, are there other gotchas to be aware of?

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This answer addresses only the “gotcha” part of your question. For the “is it permissible” part, check with your lenders.

You don’t actually save anything via this scheme. Instead, you end up paying more.

Say you buy a $200k property and take out a mortgage with $50k down and $150k over a few years. You’re proposing to pay $250k in return for the seller giving you $50k towards your down payment.

In the original scheme, your loan is $150k, you contribute $50k and pay off $150k + associated interest over time.

In your proposed scheme, the purchase price has gone up to $250k but the seller contributes the down payment. So you contribute $0 and pay off $200k + associated interest over time. You avoid having to find $50k upfront, but you now need to repay $50k more than the original scheme (so that balances out), but since you are borrowing more, the associated interest will also be more.

The seller’s $50k has already gone into the down payment, so there’s nothing balancing out the extra interest you need to pay.

It may also be bad for the seller because the taxable base for their capital gain has now gone up by $50k. They might be able to offset this against the $50k upfront payment they gave you, but it’s an extra hassle for them.

The main gotcha from this is that the scheme doesn’t give you free money. After accounting for everything, you’re paying more by increasing the loan and decreasing the down payment.

  • Thanks for the thought, I realize I was unclear: my plan is to take out a 30y mortgage and live in the home for at most 10 years; mostly likely 5 years, so the extra interest would not accumulate substantially according to my calculations. – bcf Jan 6 at 15:28
  • @bcf You'd still need to repay the principal, which would be inflated by any down payment the seller pays on your behalf. Using my example, the house's 'real' price would still be $200k + appreciation but you'd need to sell it for at least $250k to cover the principal of your loan. – Lawrence Jan 6 at 15:34
  • @Lawrence you'd have to receive $200k to clear the loan. In your example you increased the loan from $150k to $200k (it was only the sale price that increased to $250k, not the loan). @ bcf the thing to be aware of here is that you reduce your equity in the home (unless it really is worth the inflated price, but that's unlikely because it would essentially mean that the current seller is giving you equity for nothing in return), this can be risky - if house prices in your market decline, you could end up owing more on the house than you are able to sell it for. – CactusCake Jan 7 at 19:56
  • @CactusCake Well spotted. Yes, the loan principle was $200k, so a sale price of $200k clear would cover it. – Lawrence Jan 8 at 0:08

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