Are you starting to worry about closing costs, and wondering if you can lower them? There are several ways that your closing costs can be minimized to cut the amount you owe at signing. Typically, you can discuss these options with your loan officer who will find out if any of the following are possible:
Mortgage options with lender credits allow you to reduce your costs at closing by having your lender “pay” the closing costs for you. However, this option will typically come at the cost of a higher interest rate.
It might just be a hike of 0.125% in exchange for the credit, but over 20 or 30 years that fraction of a point of interest can add up. Consider all of your options before financing your closing costs with lender credits.
Seller Credits: Are They Worth It?
A seller credit can be a creative way to reduce the funds to close on your home purchase. Once you and a seller have an agreed upon purchase price, a seller credit can be negotiated and added on top of that price point in the form of a credit. That credit could then be applied towards the applicable closing costs and prepaid items associated with buying the home. Since the credit is just added on top of the agreed upon purchase price, it wouldn’t adversely affect the seller’s bottom line.
But is a seller credit worth it? The short answer to this question is yes, but it may only be doable if the increased purchase price can be supported by comparable sales in your area. The reason that it can be worth it is that by negotiating a seller credit, you’re able to reduce the up-front cost of getting into a home.
The seller credit can be applied towards the following items:
- Prepaid items including property taxes, homeowner’s insurance and daily interest.
- Title insurance that protects you and your lender if a problem arises after closing.
- Discount points used to buy down your interest rate.
- Inspection fees for required home inspections prior to underwriting approval
- Recording fees for documenting your home’s purchase with local government agencies
- Appraisal fee to cover a third-party appraisal of the home to determine the market value.
- Escrow closing fees to coordinate signing of your final loan documents and money disbursement.
Agents typically assume that all lenders are the same, and that your lender is charging you massive fees, so they will put substantial seller credits on the table. However, a large seller credit may not be the best path to take if your closing costs are low, you are working with a lender who doesn’t charge a lot of extra fees, or you have negotiated with your lender to have fees lowered or waived.
While being able to cover closing costs and prepaid items without having to come up with extra cash is nice, in many cases with large seller credits, you can end up with a lot of unused credit that forces your lender to figure out how to apply the excess credit to your loan. Since seller credits can’t be used towards your down payment, your lender may end up having to apply the excess credit in the form of mortgage discount points to reduce your interest rate. A lower rate is great, but if it can potentially come at a significant cost and the overall positive impact on your loan may be minimal.
Dropping the purchase price is often a better use of the excess money instead of dropping your rate. It may be worth it to try and get the seller to agree to a combination of seller credit and reduction of purchase price instead of just a large seller credit. The lower purchase price can make a lot more financial sense than having excess seller credit. Reducing the amount you have to borrow can save you thousands more in interest over the timeline that you keep your mortgage versus the lower rate. Unfortunately, you may get some push back from some listing agents about dropping the purchase price for reasons other than the seller’s best interest. Lower purchase prices adversely affect their commissions and don’t look as good in their home listing stats.
Agents and buyers should definitely consult the Loan Officer before negotiating for a large credit that may not be worth it. If your closing costs are high to the point that you’re worried about being able to cover them, a seller credit could make a lot of sense.
Real Estate Agent Credits
In some cases, if you use a buyer’s agent, they may be willing to rebate part of their commission to you. Some states don’t allow this to be done before or at closing, but if you can manage to cover closing costs you can receive some or all of the money back from your agent afterwards.
Closing costs shouldn’t prevent you from pursuing home ownership. Where there’s a will, there’s a way! You have multiple options to help reduce these costs and make your dream a reality.
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