When the time comes to make an offer on your dream home, asking the seller to pay your closing costs can almost seem like you’re tempting fate. Not only are you hoping to get a great deal on the purchase price, but you’re also expecting the person to cover some or all of the up-front expenses that come with getting a mortgage.
The fear is that you’ll spook the seller and wind up losing out on a property you love. The good news is you may be able to construct your offer in a way that ensures the seller doesn’t “lose” money despite paying those costs.
Let’s take a closer look.
Crafting the offer
We’ve talked about VA loan closing costs in detail before. They’re a part of every mortgage deal and home purchase, regardless of the loan type. Some are costs associated with originating the loan, and others cover things like prepaid taxes and homeowners insurance, inspection fees and more. Sellers can pay all of the costs involved with originating the loan and up to 4 percent of the loan amount in concessions, which basically represent anything of value outside of those origination costs. According to the VA Seller Concession Rule, concessions can include things like the prepaid expenses mentioned above and paying off a borrower’s collections or liens.
Getting preapproved for a VA home loan will give you a pretty clear estimate of your likely closing costs. You’ll walk into most negotiation situations knowing how much money you’ll need to bring to the table at closing (unlike most homebuyers, one thing you won’t need is money for a down payment). It’s important to have this information before you start shopping for houses and making offers on homes.
How to get the seller to pay closing costs
Let’s say you’re preapproved for up to $225,000, and your closing costs are likely to be about $4,000. You and your VA loan-savvy real estate agent hit the road and start looking at homes. You find one you love listed for $230,000. Now, depending on where in the country you’re purchasing, there’s often some back-and-forth between sellers and prospective buyers. Let’s say this seller expects some give-and-take negotiation, and she’s ultimately set on getting at least $220,000 for the property. You can make an offer near your max, say $224,000, and stipulate in the contract that the seller will pay your closing costs from the proceeds of the sale. You would give the seller $224,000, and she would turn right around and use $4,000 of that to cover your costs, leaving her the $220,000 she would ultimately settle for. The seller doesn’t “lose” any money in an arrangement like this. But you’ll need at least one thing to go right in order to make it work.
Appraisal is key
The VA property appraisal is an important stage for every home purchase, but it’s especially critical when you structure a deal in this way. If the home fails to appraise for at least the purchase price you agreed upon, you’re suddenly unable to get those closing costs covered. The lender is going to lend the lesser between the purchase price and the appraised value.
So, if you agree to buy a home for $224,000, but it turns out the home is only worth $220,000, the lender isn’t going to give you a dime more than $220,000. At that point, you’re facing another round of negotiation with the seller or possibly walking away from the deal entirely. Appraisals do fall short, but don’t let that scare you. You do have the option to challenge the VA appraisal if it seems low, but it’s still common to have sellers pay most if not all of a VA homebuyer’s closing costs in many parts of the country. That may be less of an option in more competitive housing markets, but you really won’t know until you start talking with lenders and real estate agents. Having sellers pay closing costs is what allows countless VA borrowers to move forward with their purchases. There’s no guarantee a seller will agree or that the home will appraise, but it’s important to know and understand your options.
If you have questions about closing costs, VA appraisals or prequalification you can talk with a Veterans United loan specialist any time at 855-524-7279 or get a quote online today for free.