Disadvantages of Seller Paying Closing Costs

Most home buyers know that they need a down payment to buy a house, but many aren’t aware that they also need to pay closing costs. These additional costs can make it difficult for people to afford the upfront costs required to buy a home.

Luckily, there may be ways to avoid having to pay these costs upfront, including having the seller pay them.

What Are Closing Costs?

Closing costs are processing fees that are paid to your lender when you purchase a home. These fees are used to compensate the lender for processing your loan. They are also used to pay for other components of the home buying process, including the home appraisal, home inspection, and title search.

How Much Are Closing Costs?

It’s hard to calculate the exact cost of closing costs since they vary by lender. To start, it might be helpful to look at the averages. In the state of Florida, on average, buyers pay 2.5% of the value of their loan in closing costs. This equates to $4,147 without taxes and $8,213 with taxes, on average.

Who Usually Pays Closing Costs?

Both buyers and sellers pay closing costs that cover different things. For example, a buyer pays closing costs to cover things like the home appraisal, home inspection, loan origination fee, title search fee, underwriting fee, etc. Meanwhile, the seller pays closing costs to cover things like real estate agent commission, transfer fees, and title insurance.

For the buyer, closing costs usually add up to anywhere from 2% to 5% of the loan amount. Keep in mind that closing costs are higher for the buyer and add up to anywhere from 6% to 10% of the sale price of the home.

The buyer is usually required to pay their own closing costs in cash upfront when they close on a home, in addition to their down payment. Sellers, on the other hand, can pay their respective closing costs with the equity they get when they sell their homes.

Why Would a Seller Pay Closing Costs?

Sometimes, a seller offers to pay closing costs for a buyer if they’re looking to sell their home quickly. Offering to do this is appealing to buyers and effectively increases their buyer pool if they don’t have to worry about closing costs. Note that sellers also have to pay their own closing costs on top of agent fees and commission.

5 Disadvantages of Seller Paying Closing Costs

While having the seller pay your closing costs sounds great, there are actually quite a few disadvantages that you should consider before going this route.

1. You Pay a Higher Sales Price

When the seller pays your closing costs, they certainly aren’t doing it for free. Instead, having the seller pay your closing costs almost always comes with a higher sales price.

For instance, say that a seller has their house on the market for $350,000. You don’t want to or aren’t able to pay your closing costs yourself, so you ask the seller to pay your $10,000 in closing costs. As a result, you end up offering $360,000 for the house to cover these costs.

2. The Home Appraisal Might Fall Short

While that extra $10,000 in the sales price may seem relatively insignificant since you’re dealing with hundreds of thousands of dollars, it could impact the appraisal process. Lenders require that the house be appraised to ensure that they’re not lending you more than it’s actually worth.

During this process, a professional appraiser will visit the property and take notes about its condition. From there, they will research comparative properties that have recently been sold in the surrounding area. Based on the features and condition of your home compared to others, the appraiser will come up with the value of the home.

So let’s say an appraiser comes out to look at the house you now have a $360,000 contract on. After looking at the house and the comparables, the appraiser says that it’s only worth $350,000 — the original sales price.

This means that the lender will only give you $350,000 for the house, and you’ll have to come up with the extra $10,000 yourself — basically forcing you to pay the same amount that you would have paid in closing costs. If you’re not able to cover the difference in the appraisal value, you could end up losing the house.

3. You Pay More in Interest

Borrowing money is never free, and the more money you borrow, the more you’ll pay in interest. So since you’re buying the house with a more expensive purchase price to avoid paying closing costs, you’re borrowing more money. This, of course, means that you’ll end up paying more money in interest at the end of the day.

But just how much extra are you paying? Let’s say that you are using a 30-year fixed-rate conventional loan to purchase your home with a 3.5% interest rate. Let’s also say that you’re putting down the minimum amount of 3% on the home. With a purchase price of $360,000, you would be left with a monthly payment of $1,568.

However, let’s leave everything else constant but use the original asking price of $350,000. In this scenario, your monthly payment would be $1,525 per month — a difference of $43 per month.

And while $43 might not seem like a lot, it quickly adds up to $516 per year and $15,480 over the term of your 30-year loan.

4. You Need a Bigger Down Payment

If you’re short on cash and are having trouble paying your closing costs, the odds are that you’re putting down the minimum amount of 3% of the home’s purchase price.

With your new negotiated purchase price of $360,000, you would have to put down $10,800. If you stuck to the initial asking price, your down payment would be $300 less at $10,500.

5. Your Offer Isn’t Competitive

Last but certainly not least, asking the seller to pay your closing costs doesn’t exactly make you a competitive buyer. After all, there are buyers out there willing to pay thousands over the asking price to win the house.

There are even buyers out there willing to waive all contingencies, including the inspection contingency, to win the house. Finally, there are cash buyers who are preferable to sellers. Sellers don’t have to worry about securing financing, and they can close the deal quickly.

In such a competitive market, it’s going to be tricky for you to find sellers who are willing to pay your closing costs since there are likely several other buyers lined up who aren’t asking for this concession. You have to put your best offer forward and be prepared to offer over the asking price, and waive contingencies for particularly desirable properties.

Advantages of Seller Paying Closing Costs

The main advantage of having the seller pay your closing costs is that it lowers the upfront costs of buying a home. If you’re a first-time homebuyer with no home equity to pull from, it can be extremely difficult to save up enough money to cover at least a 3% down payment and an additional 2% to 5% in closing costs.

For the $350,000 house we mentioned earlier, these numbers would equate to you having to save at least $17,500 to purchase this house. Again, this estimate is on the lower side, and closing costs tend to vary significantly from lender to lender, so you may end up having to pay even more upfront for a $350,000 house.

3 Alternatives to Seller Paying Closing Costs

If you’ve decided, based on these disadvantages, that it’s probably not the best idea to ask the seller to cover your closing costs.

Here are three alternatives to consider:

1. Pay Them Yourself at Closing

Perhaps most obviously, rather than having the seller pay your closing costs, you could pay them yourself at the time of closing. With the right amount of planning and diligent saving, it’s definitely possible for you to save up the extra money that you need for closing costs.

In lieu of eating out multiple times a week or buying coffee every day, put that money in a savings account instead so that you can put it towards your home buying costs.

2. Wrap Them Into Your Loan

If you’re still not able to save enough money to cover your closing costs, you may want to consider wrapping your closing costs into your mortgage loan. Many lenders allow borrowers to avoid paying closing costs upfront at the time of closing and instead add them to their loan amount.

For example, with your $350,000 house and your $10,500 minimum down payment, your loan would be $339,500. However, if you were to ask the lender to roll $7,000 in closing costs into your loan, your new loan amount would be $346,500.

Just remember that a higher loan amount means higher monthly payments and paying more in interest over the term of the loan. To see how it would impact your monthly payment, let’s use your $350,000 house with a 30-year fixed-rate loan with an interest rate of 3.5%.

If you were to pay your closing costs upfront instead of rolling them into your loan, you would be paying $1,525 per month on a $339,500 loan. However, if you were to roll your closing costs into your loan amount, you would have to pay $1,556 per month on a $346,500 loan.

This seemingly small difference of $26 over the term of your loan adds up to a total of $11,160 extra — over $4,000 more than the initial difference of just $7,000.

3. Negotiate With the Lender

Finally, you could negotiate with the lender to lower your closing costs. These costs are all determined by the lender, and there may be room to negotiate. While you may not be able to negotiate your closing costs down to zero, you may be able to negotiate them down from 3% of your loan value to 2%.

This makes it easier for you to afford to pay your closing costs upfront without asking the seller to pay for them.

Minimize Your Closing Costs With Vaster

Vaster understands that it can be challenging to cover your closing costs, which is why we have capabilities in-house to be flexible with our borrowers. While we are a direct lender, we also work as a broker and have an expansive lender network that allows us to find the best rate and terms to better fit your mortgage needs.

So reach out to our lending experts to see how we can help you purchase the home of your dreams!