How Seller-Paid Closing Costs Are Applied at Closing – Portland’s Fee for Service Real Estate Company, PointClickandPack.com
Seller paid closing costs are basically a paper transaction. There are costs for the buyer for getting a loan. These include origination fees, loan processing fees, escrow fees & recording fees. Your lender can send you a break-down of these costs if you don’t already have a copy. In addition, your loan could include an escrow account to pay your taxes and insurance with your mortgage payment. If you choose to have an escrow account then there are typically 6-12 months worth of padding to set up this account initially and these reserve funds are collected by your escrow officer at closing. Think of your escrow account as simply a bank account for the house. When you sell, you will be refunded any unused portion in the account. But during your ownership, your bank will take care of your property tax payments and home insurance payments each year. (They pad the account at the onset so that they don’t need to ask each buyer for more money when taxes and insurance rates go up each year). These reserve funds to set up your escrow account are called “pre-paids.” In loans where the buyers have a 20% down payment or more, the buyers can choose to pay their own taxes and insurance each year, in which case they would not have pre-paids. When you close, you will need to provide the balance of your down payment (your earnest money deposit goes towards your down payment) plus your closing costs and pre-paids. When the seller agrees to pay a portion of these, (let’s say $5,000 just to have a number), then that simply shows up as a credit on your closing statement. So at closing, you will need to bring $5k LESS to the closing table while the seller nets $5k LESS from his profit. This is why it’s a paper transaction, because neither party actually shows up with this money at closing. Let’s say you want to pay your own taxes and insurance, and therefore you don’t have pre-paids, and your closing costs come to $3k. You would then talk to your lender about buying down your interest rate so that you come up with another $2k in closing costs and thus have a less expensive mortgage payment. Or, you would ask the seller to do $2k worth of repairs prior to closing and then contribute $3k towards your closing costs. Any unused portion of closing costs gets credited back to the seller, so it’s important to know exactly how much your loan needs in costs before negotiating this as part of the transaction. The closing cost contribution has absolutely NOTHING to do with the seller’s costs to close. The seller will have some closing costs related to escrow and recording fees, but they pale in comparison to loan costs and these show up as a debit on the seller’s closing statement meaning that the seller’s profit is reduced by that amount. Please contact me if you want additional information. You can reach me at Phyllis@PointClickandPack.com or 503-421-2407.