There are times when buyers (particularly first-time buyers) are often short the cash they need for the down payment and closing costs. One way to overcome this shortage is to ask the seller to pay a portion of the closing costs. How much the seller is allowed to contribute depends on the type of mortgage loan that you are pursuing.

Here is a breakdown on what you can expect to ask the seller to pay during negotiations based on loan type. This does not mean that any seller has to pay any of your costs. The loan simply lets them, if they so choose.

Conventional Loans

When you get a conventional loan, the seller is allowed to pay only non-recurring costs. These costs do not include pre-paid items or items to be paid in advance (such as mortgage insurance or hazard insurance). The seller’s contribution is also limited to the amount the buyer is putting down. If the buyer puts 10 percent or more down, the seller may contribute up to 6 percent. If the buyer puts less than 10 percent, the most the seller may contribute is 3 percent. Most of the time in loans over $125,000, 3% will cover these costs.

VA Loans

When you get a VA loan, the seller may pay all the closing costs (this is known as a “VA-No-No” – the buyer pays no down payment and no closing costs). Sellers who agree to pay the closing costs often put a ceiling on the amount they will pay. Again, most of the time in loans over $125,000, 3% will cover most of these costs.

FHA Loans

When you get a FHA loan, the seller may pay all the closing costs up to 6%. However, the buyer must make a minimum of 3.5% down payment investment in the property. The 3.5% percent can be from the buyers own funds or from a family member’s gift. Again, most of the time in loans over $125,000, 3% will cover most of these costs.

Asking the Seller to Pay a Portion or All of Closing Costs

The seller’s willingness to contribute to closing costs is often driven by market conditions and negotiations, which is the way in which the request is made to the seller.

As your real estate agent, I can help you prepare an offer that balances the purchase price and request for closing cost assistance with the dynamics of the current marketplace. For instance, in a seller’s market we may increase the offered purchase price to offset the request for closing cost assistance.

Remember – When you ask the buyer to pay a portion or all of your closing costs, in essence you are financing the closing costs. This is because the seller’s contribution is typically offset by a higher purchase price. And it is this higher purchase price that is financed with your mortgage loan.

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If you’re looking to buy and sell in the Nashville area market, be sure to use my mortgage calculator.