Can a Seller Cover Closing Costs?

Closing costs represent expenses beyond a property’s purchase price that both buyers and sellers incur to finalize a real estate transaction. These fees cover various services and administrative actions necessary for property ownership transfer. While sellers typically bear a larger portion of closing costs, often due to real estate agent commissions, they can contribute towards a buyer’s closing expenses. This practice, known as seller concessions, can reduce the upfront financial burden for buyers and is a common element in real estate negotiations.

Allowable Seller Contributions

Sellers can contribute towards a range of closing costs that buyers typically pay, helping to offset their out-of-pocket expenses at settlement. These include:
Lender fees: Charges from the mortgage provider for processing the loan. These can include loan origination fees, often ranging from 0.5% to 1% of the loan amount, discount points (upfront payments to reduce interest rate), and underwriting fees for evaluating the loan application.
Title company fees: Costs to ensure clear property ownership. These include title insurance premiums, often around 0.5% of the sales price, title search fees, settlement or escrow fees (varying from approximately $200 to 0.5% of the purchase price), and recording fees (typically less than $200) for officially registering the deed and mortgage.
Attorney fees: Where required by state law, for legal document preparation and review.
Appraisal fees: Paid to an independent appraiser to determine the property’s market value, generally ranging from $300 to $600.
Pre-paid expenses: Such as prorated property taxes and homeowners insurance premiums, often collected at closing to establish an escrow account.
Other eligible costs: Including courier fees, credit report fees, and homeowners association (HOA) transfer fees.

Contribution Limits and Regulatory Guidelines

Specific financial limits govern the amount a seller can contribute to a buyer’s closing costs, with these restrictions primarily depending on the type of loan the buyer secures. These limits are in place to help prevent inflated property values and protect the interests of lenders. A key rule across all loan types is that the seller’s contribution cannot exceed the buyer’s actual closing costs.

Conventional Loans

For conventional loans, which are not government-backed and often adhere to Fannie Mae and Freddie Mac guidelines, the maximum seller contribution depends on the buyer’s down payment.
Less than 10% down payment: Up to 3% of the sales price.
10% to 24.99% down payment: Up to 6% of the sales price.
25% or more down payment: Up to 9% of the sales price.
For investment properties, the seller’s contribution is capped at 2% of the sales price, regardless of down payment.

Federal Housing Administration (FHA) Loans

For FHA loans, sellers and other interested parties can contribute up to 6% of the sales price or appraised value, whichever is lower. If the total contributions exceed this 6% threshold, the excess amount is treated as an inducement to purchase and will reduce the FHA loan amount dollar-for-dollar. This mechanism ensures that the property’s value is not artificially inflated by excessive seller contributions.

Veterans Affairs (VA) Loans

Veterans Affairs (VA) loans offer unique flexibility regarding seller contributions. Sellers can contribute up to 4% of the sale price, plus reasonable and customary loan costs. The 4% limit applies to specific items, including prepayment of property taxes and insurance, cost of appliances or gifts from the builder, discount points exceeding 2% of the loan amount, payoff of buyer’s judgments and debts, and the VA funding fee. Standard closing costs, such as loan origination fees, do not count towards this 4% limit.

United States Department of Agriculture (USDA) Loans

For United States Department of Agriculture (USDA) loans, sellers may contribute up to 6% of the sales price towards the buyer’s reasonable closing costs. Any amount contributed by the seller that exceeds the buyer’s actual closing costs must be applied as a reduction to the loan principal. This ensures that concessions are directly tied to the buyer’s legitimate expenses.

Negotiating and Documenting Seller Contributions

The process of securing seller contributions typically begins during the offer stage. Buyers can propose that the seller cover a percentage or specific dollar amount of closing costs. This negotiation can be influenced by market conditions, with sellers potentially more willing to offer concessions in a buyer’s market.

Once an agreement is reached, it is important to formally document the seller’s contribution within the real estate purchase agreement or sales contract. The language in this document should be clear and precise, detailing the exact amount or percentage the seller will contribute and for what purpose. This contractual agreement provides a legally binding record of the agreed-upon terms for both parties.

At the time of closing, the seller’s contributions are reflected on the Closing Disclosure (CD), a standardized form that itemizes all costs and credits for both the buyer and seller. The CD will show the seller credit as a reduction in the amount of cash the buyer needs to bring to close the transaction. These contributions are typically deducted from the proceeds the seller receives from the sale of the home.