Closing Costs – Who Pays?

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“I’m going to ask the seller to pay my closing costs!” “Theseller will pay your closing costs!” “Let’s ask the seller to pay your closingcosts!”

I hear these phrases from buyers, buyer’s agents and lendersall the time.  Seller paid closing costsis not an accurate description of what is really going on and it creates muchunnecessary stress in the negotiating process.

I’m not paying the buyer’s closing costs!  Is the response I hear from sellers. 

Let’s see if I can explain how this works.  Buyers, you need to understand the seller isnot going to pay anything for you.  Youare going to finance those closing costs. Sellers, you are not really paying anything. 

Both buyers and sellers have their own closing costs.  For the seller the typical charges are anowner’s title insurance policy, a fee to have a title company representativemake sure all the documents are signed correctly and that they get recordedcorrectly with the county government, a pro-ration of taxes and homeownersassociation fees and the real estate commission.  Buyers have loan fees, a lender’s titleinsurance policy, a fee to have a title company representative sit down andmake sure all your mortgage documents get signed correctly and both the deedand mortgage get filed correctly, home owner’s insurance and the money to set upan escrow account will be collected at closing, plus any up front mortgageinsurance if you are not putting at least 20% down, etc. 

So, let’s look at an example:

Buyers make an offer of $200,000 and want the Seller to pay$5,000 in closing costs.  The Buyer’sREAL offer to the Seller is $195,000.  ($200,000– $5,000 that the buyer is asking to have back = $195,000)

Let’s say the Seller would be willing to accept an offer of$200,000. In order to hit that number, the offer price would have to be$205,000.  ($205,000 – $5,000 the buyeris asking to have back = $200,000)

The reasons that buyers might want to roll the closing costsinto their loan might be that they don’t have the extra money to pay for boththe down payment and the closing costs up front or they want to keep some oftheir cash in their bank accounts to make improvements to the home. 

That being said, I do not understand Buyers asking theseller for closing costs if they are putting a substantial amount down orpaying cash.  Why not just negotiate alower purchase price?  Remember in theexample above, the Seller was willing to accept $200,000 for the property, butraised the price for the Buyer wanting closing costs?  If you are paying cash, and raising the saleprice to cover closing costs, it just complicates the accounting. 

What it boils down to is this – all the “seller paid closingcosts” are added on to the purchase price and loan.  No one is going to give someone they don’tknow money to buy their property without adding it back in somewhere else.  Seller paid closing costs is not an accuratedescription, and I do wish we had a different phrase that more accuratelyrepresented what it truly is.