I get this question a lot.
What I generally seek to help people understand is that this terminology is a little misleading. My seller’s often balk at the idea of “paying for someone else” to buy their home. Buyers are often misinformed by lenders as to what’s really happening when we ask a seller to pay some or the entire buyer’s closing costs.
First of all, let’s explore a couple of terms. There is a difference between DOWN PAYMENT and CLOSING COSTS. Closing costs are those fees associated with obtaining your loan. Most loan programs will allow certain closing costs to be paid by the seller and in SOME loans, such as VA Loans, they REQUIRE the seller to pay certain things. DOWN PAYMENT is the money the bank expects you to come out of pocket with to put down on your house. This is NOT payable by the seller but in many instances it can be “gifted” from a friend or family member with the right documentation that shows you are not required to pay it back. For FHA loans, 3.5% is required down payment, but FHA also allows up to 6% seller contribution to closing costs.
Every situation is different but when you ask the seller for closing cost help, you need to look carefully at how much you ask for. You might ask for 6% assistance, but if the payable items only total 4.5%, you’ll not be getting that extra 1.5% to use elsewhere. So why would you want seller contribution to your closing costs? It’s quite simple really. While the way it is worded is that the seller is “contributing” to your closing costs, the way it really comes out is that you’ve basically “financed” that money into your loan. The seller netted less and you paid more than the seller received, so that’s where the idea of seller contribution comes from, but ultimately, you’re basically borrowing that money along with your mortgage.