Seller pays closing costs: cash flows

Question

Is it unorthodox to ask the seller to pay for closing costs up front? Also, if this is an okay thing to do, what are the typical mechanics of the cash flows if this is done?

For example, if the seller accepts my offer for a home and I ask the seller to pay closing costs and they agree. As the deal is closing I imagine I am accumulating costs (inspections, appraisals, attorney fees etc) that I am going to have to front. So, does the seller actually pay for costs as they are incurred, or is it just a reimbursement? Or, is it just a deduction from the sale price, which I would not consider paying for anything unless I repay the entire loan.

Answer 1

Some of the items required as part of the home buying and mortgage process are traditionally paid prior to closing. These are usually the items that the buyer purchases as part of the process: home inspection, credit check. These expenses take place early in the process and if the deal falls through due to the inspection or credit history problems the seller doesn't want to get stuck paying for. The buyer will frequently have to write a check for these as they occur.

Other items occur later in the process or even at the very end of the process.

Determining which side pays for each item is a combination negotiation and local tradition. Even for the items that the buyer has to pay for, there can be a negotiation between the buyer and the lender. Sometimes the lender allows the buyer to roll the closing costs into the loan, this does mean that they will be paying interest on the closing costs for years. But not rolling in the closing costs mean that you need more cash on hand. This is in addition to the down-payment and the costs of moving.

The closing costs covered by the seller reduce the size of the check they will receive at the end of the process. Their willingness to kick in this cash is a function of will they still make money on the deal, how many other bidders there were, and do they need the cash to buy their next house.

At settlement the forms identify each item involved and who agreed to pay for it, then each side is credited for the items they paid for already. Then each side either writes a check for the balance due or receives a check for their reimbursement.

Keep in mind there are also money exchanges that take place at the closing that are not covered by the buyer: real estate commissions. There are also items such as interest for the current month, and property tax credit that depend on the day of the month and month of the year.

Sit down with your agent or your lender to get an idea of what you need to pay before closing. Though telling everybody that you will have zero cash to pay for these things may make the lender very nervous about approving a loan.

Answer 2

When you buy a house, the real estate agent or title company normally draws up a big sheet with all the costs and payments involved. There are typically two columns: one for amounts paid to or paid by the seller, and another for amounts paid to or paid by the buyer. Who is responsible for what is a legal question: this is pretty fixed.

But it's very common for the seller to agree to pay some portion of the buyer's closing costs. In any house sale I've ever been involved in, whether as buyer or seller, nobody bothers to say which costs the seller is agreeing to pay. Rather, the seller just agrees to a number. Then somewhere on the sheet of costs there will be a line that says "closing costs paid by seller" or some such wording, and then it shows a minus to the seller and a plus to the buyer. (Or something equivalent, depending on how the sheet is organized.)

The amount is negotiated. When you make an offer, you'll say whatever numbers you are prepared to offer, like "I offer to pay $100,000 for the house, seller to pay $3,000 of closing costs". And whatever other conditions, seller to repair the leak in the roof, whatever.

It makes sense for the seller to pick up some share of the closing costs, because the seller normally walks away with cash in hand while the buyer is struggling to come up with enough cash to make a down payment and pay all the closing costs, i.e. the seller probably can afford to give up some cash while the buyer may be struggling to come up with cash.

The only costs I can think of that I've had before closing day are, (a) Earnest money. (b) Inspection. (c) Credit check or application fee to bank. Earnest money is applied to the purchase price at closing, so it's pretty much a moot point. The application fee is a potential deal-breaker. I've never heard of a seller agreeing to pay this, but I guess they could. But if you can't get the loan, you probably won't buy the house, so the seller would be out money for nothing.

Everything else is normally paid on closing day. They total up all the costs and all the money floating around and at the end the seller gets one check that is the net of everything and the buyer writes one check that is the net of everything, and the realtor or title company deals with getting the money to the right people. So there's normally no issue of paying things as they come up. You do it all at once.