Best Ways to Keep Closing Costs Low
Many home buyers, particularly first-timers, have a challenging task when it comes to the down payment and closing costs. A great solution for buyers to bring in less cash to closing is for the seller to help with some of the sales costs is by offering a credit at closing.
There is a limit on the maximum amount that the seller(s) are able to credit at closing for the buyer. Usually lenders allow within the range of 3- to- 6% of the signed purchase contract. With the median home value in Orange County of $761,000, that amount could fall between $21,000 to $42,000. Of course most sellers won’t allow a credit that high unless it’s a home valued over $2 million.
The majority of lenders will only allow a credit for the buyers’ closing costs that are paid on a one-time basis such as title insurance, settlement, underwriting, processing and origination fees. Other costs that are recurring like mortgage interest, property taxes, and hazard insurance are for the most part not allowed. But there are some lenders, who do not have restrictions on the type of closing cost credit. When sellers give the buyer a credit it is often called a seller “concession” or contribution.
Keep in mind that the credit from the seller is not permitted to be over the actual costs. For example, if you get a credit up to $12,000, and your costs are only total $8,000, the most you will get is $8,000. So, you might want to look into buying the interest rate down since you have $4,000 more to play with.
Here’s a simple solution to obtain the most for your buyer…
“Ask the seller to credit buyer up to $XX,XXX for non-recurring closings costs and prepaid items to include, and miscellaneous debts.”
*Please ask your own agent, broker, and other professional legal support to review that it meets local, state, federal requirements. We’re not your real estate agent, lawyer, or risk mitigation specialists.
How to Get Your Lender to Pay Closing Costs
When its suitable, choose a low- or “zero-closing cost” loan. This choice is the opposite from paying discount points, origination and underwriting fees.
With a low-cost or zero-closing cost mortgage, the lender pays the closing costs on the borrower’s behalf. In return for this benefit, the mortgage interest rate offered to the borrower by the lender is increased.
For example, the following pricing is for a 15-year, $400,000 loan with a 20 percent down payment:
- 3.50% 2.7 discount points, and 1 percent origination
- 3.75% 1.36 discount points, and 1 percent origination
- 4.125% zero discount points, and .75 percent origination
- 4.375% zero discount points and a rebate of .75 percent (you can use rebates to cover costs, such as underwriting, settlement/closing agent and / or title insurance)
Who is Allowed to Pay Buyer’s Closing Costs on FHA Loans?
In California, and across the country, sellers are permitted to pay a part of the buyer’s closing costs when an FHA loan is used.
Based on the guidelines in HUD Handbook 4000.1, home buyers who are obtaining an FHA loan to buy a home may receive seller concessions that can be applied to their closing costs. HUD allows the seller to credit up to 6% of the sales price toward the buyer’s closing costs.
The handbook further states:
“Standard Interested Parties may contribute up to 6 percent of the sales price toward the Borrower’s origination fees, other closing costs and discount points.”
The term “interested party” refers to sellers, real estate agents, home builders, developers, or other parties who have an interest in the transaction. With an FHA loan, these “interested parties” are allowed to pay up to 6% of the sales price toward the buyer’s closing costs.
