Can the Seller Pay All Closing Costs?

Closing costs are fees and expenses incurred during a real estate transaction, beyond the property’s purchase price. Sellers often contribute to buyer closing costs, and understanding these parameters is important for both parties.

Permissibility and Contribution Caps

Sellers are permitted to contribute to a buyer’s closing costs. These contributions, often called seller concessions or credits, reduce the cash a buyer needs at closing. Specific limits on seller contributions exist, determined by the buyer’s loan type.

For conventional loans, the maximum seller contribution depends on the loan-to-value (LTV) ratio. If the LTV is 90% or less, meaning the buyer is putting down at least 10%, the seller can contribute up to 6% of the sales price or appraised value, whichever is less. For LTVs greater than 90%, the seller contribution is often capped at 3% of the sales price or appraised value. Investment properties usually have a lower cap, often around 2% of the sales price regardless of the down payment amount.

Federal Housing Administration (FHA) loans allow sellers to contribute up to 6% of the sales price or appraised value (whichever is less). This 6% cap covers various costs, including discount points, origination fees, and other closing costs.

Veterans Affairs (VA) loans offer flexible seller contribution rules. Sellers can pay for all “reasonable and customary” closing costs, including the VA funding fee, title insurance, appraisal fees, and recording fees. Additionally, VA loans permit sellers to provide up to 4% of the loan amount in seller concessions, covering prepaid expenses like property taxes, insurance, and discount points. This 4% limit is separate from “reasonable and customary” closing costs, allowing total contributions to exceed 4%.

While common guidelines exist, lender overlays or regional practices may vary these limits. Lenders often have more restrictive internal policies than broad agency guidelines. Buyers and sellers should confirm the precise limits applicable to their transaction with their lender or real estate professional.

Types of Costs Eligible for Seller Contribution

Seller contributions apply to various buyer-side closing costs. For example, loan origination fees, covering lender administrative costs, are commonly covered by seller credits. Appraisal fees, for determining home value, are also frequently included.

Common eligible expenses include credit report fees for credit history pulls. Title insurance premiums, the lender’s policy, are also often covered. Escrow fees, charges for an impartial third party holding funds and documents, can also be paid by the seller if typically the buyer’s responsibility.

Recording fees, for officially recording the new deed and mortgage, are another cost sellers contribute. Prepaid expenses are also frequently eligible for seller contributions. These include prorated property taxes and homeowner’s insurance premiums for the first year of coverage. Homeowners association (HOA) dues, if applicable, can also be covered as a prepaid expense.

Discount points, optional fees paid to reduce the mortgage interest rate, are another expense sellers can contribute towards. Each discount point typically costs 1% of the loan amount and can result in a lower monthly mortgage payment for the buyer. These eligible buyer costs differ from expenses generally the seller’s responsibility, such as real estate commissions, attorney fees, or specific transfer taxes. Seller contributions are explicitly for the buyer’s closing costs, not the seller’s own transactional expenses.

Financial and Transactional Considerations

Seller contributions must be documented within the purchase agreement or sales contract. This ensures all parties are aware of the arrangement. Without explicit mention in the contract, a seller cannot unilaterally pay a portion of the buyer’s closing costs. The contract will detail the specific amount or percentage of the sales price the seller agreed to contribute.

Seller concessions can influence the appraisal process. If the purchase price appears inflated to absorb contributions, this could concern the appraiser and lender. The home’s appraised value must support the loan amount; excessive concessions might be scrutinized if they suggest the property’s true market value is lower than the sales price. The appraiser assesses the property’s value independently, and the sales contract, including concessions, is part of their review.

Loan underwriting involves reviewing all financial aspects of the transaction, including seller contributions. Lenders examine contributions to ensure compliance with program limits. If contributions exceed permissible amounts for the loan type, the buyer typically covers the difference out-of-pocket. Alternatively, the lender may adjust the loan amount downward to meet guidelines, impacting buyer financing.

Seller contributions directly impact the cash a buyer needs at closing. By covering a portion of closing costs, these contributions reduce the buyer’s out-of-pocket expense. This reduction improves buyer liquidity and makes homeownership more attainable, especially for those with limited upfront savings. The financial benefit makes seller concessions a common negotiation point.