Getting a Closing Costs Credit?

Flickr photo credit: jferzoco

It isn’t unusual for a home buyer to ask the seller, in their written offer, to give a specific dollar credit at closing to pay some of the buyer’s closing costs.

And with mortgage folks favoring 20% down payments then that credit can really help with the other typical closing expenses.

Does your offer?

Offering to pay some of the buyer’s costs has been a strategy used by new home builders for years. They understand that their “net profit” is the same, and offering a credit can really motivate a home buyer who is struggling to come up with the cash to close when deciding to purchase. As long as the numbers add up, then, it’s a deal! Remember, these guys are in the sales business.

Okay, this post is tailored to what I am seeing in the Northern Virginia real estate market so my inside might not jibe with what your situation is elsewhere… but please read on to learn a little.

A couple of clients recently mentioned to me that their lenders started to give then advice on how to spend those valuable dollars, and both times it seemed to benefit the bank! Luckily they said something to me because it smelled like a sneaky tactic to help the bank make a bit more money (or profit).

One lender suggested that the buyer pay an extra 1/2 point to buy down the interest rate. In that case, the extra $975 payment at closing dropped their rate by an 1/8th of a point or 0.125.

Monthly savings: about $37. My recommendation was to apply that $975 to other “real” closing costs… because later they would probably want to buy furniture or curtains for the new place.

The other lender seduced my client with a promise to pay up to $100,000 in closing costs. But when we were putting together the offer to buy a home, he told me that the loan officer suggested he ask the seller to pay some of those closing costs.

“What?”

The sales contract that we use in Northern Virginia is very specific that the lender has to approve where the closing credit is being spent. It can’t be used for the down payment or prepaying taxes, but there are plenty of expenses where the money can be used such as:

• Home Owner’s Association Fees
• Home Warranty
• Survey
• Appraisal
• Title Company Costs
• Home Owners Insurance

My advice, as a real estate agent, is to look at your current estimated expenses with your agent to make sure you are using the total credit before you start to add additional points to your new mortgage expense.