If you're using a mortgage loan to pay for the home, your lender will likely order an appraisal , basically assessing the home's value. If the home appraises for the new sales price, you're in the clear, and your lender will give you the funds you need to buy the house.
If the home doesn't hit that new, higher sales price, though? Then, you'll have some trouble. Your mortgage lender will only give you the appraised amount, and you'll need to make up the difference between the appraised value and the final sales price out of pocket. If you can't cover the balance, it may mean losing out on the home altogether. When a seller concession leads to a higher mortgage loan amount, it means more in interest costs, too. Down payments are calculated as a percentage of your total loan balance.
For example: On an FHA loan, you need to make at least a 3. Even if the concessions result in a higher home price, there's still an added cost to the seller -- at least if they're using a real estate agent.
And those commissions? They come straight out of the seller's pockets. Though it's likely not a deal breaker for most sellers unless you're asking for some serious concessions , it might make them more hesitant to work with you.
They may be less willing to make repairs or to negotiate if your appraisal comes in low, and they may be more apt to throw in the towel if something goes awry. If you're in a bidding war, asking for closing-cost concessions can send you to the bottom of the pile competition-wise. After all, why would a seller pay even a penny more if there's another home buyer willing to foot the full bill? It just doesn't make sense. The truth is the type of market you're in should play a big role in whether you ask for concessions or not.
If you're in a buyer's market and you have the upper hand, asking for closing costs might not hurt your chances. But in a seller's market?
Concessions are an outright deal-killer. As you can see, there are a lot of disadvantages of a seller paying closing costs. In a buyer's market, or just to make the deal go through, you might agree to pay some of the closing costs. This is referred to as a seller concession, seller contribution or seller credit — these terms all mean the same thing. Agreeing to cover the cost of necessary repairs found during the home inspection is a common seller concession.
If your buyer isn't paying with cash , the total amount of seller concessions may be limited by what type of home loan they're using. Loans backed by government agencies, such as the Federal Housing Administration, have their own limits on seller concessions. Though it's not exactly a closing cost, it is important to keep in mind that unless you own your home outright, a sizable chunk of your profits will likely go toward paying off your current mortgage.
You may be hit with a fee for paying off your mortgage early. Look at your mortgage documents to see whether you have a prepayment penalty. If there are any liens or judgments against the property, you'll have to pay those before it can be sold. These may be uncovered in the title search. Last, if you have a second mortgage , like a home equity loan or a home equity line of credit , those will need to be paid in full before you can sell.
These can also be subject to prepayment penalties. And there you have it! You have a better picture of what closing costs are and how to navigate the home purchasing process. While you're reviewing how you want to manage the purchase expenses for your new home, remember to make time to find the best homeowners insurance coverage before closing day.
Use our instant home quote tool today to build a policy customized to your unique needs. Want to spruce up your apartment without losing your security deposit? Learn about these DIY projects for renters that work for small budgets and spaces. At Home.
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Home Ownership Mortgage. Table of Contents Expand. What Are Typical Closing Costs? Why Are Closing Costs Necessary? Types of Fees With Closing Costs. How to Reduce Closing Costs.
The Bottom Line. Key Takeaways Closing costs are the fees and charges in excess of the purchase price of the property due at the closing of a real estate transaction. Both buyers and sellers may be subject to various closing costs. Closing costs may include fees related to the origination and underwriting of a mortgage loan, real estate commissions, taxes, and insurance premiums, as well as title and record filings.
Closing costs must be disclosed in advance by law to buyers and sellers and agreed upon before a real estate deal can be completed. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Related Articles. Mortgage Understanding Your Mortgage. Partner Links. Related Terms Closing Costs Closing costs are the expenses, beyond the property itself, that buyers and sellers incur to finalize a real estate transaction.
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