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Who pays Closing Costs?



Buyers who ask for a closing cost credit are often first-time homebuyers. They might be obtaining a Federal Housing Authority (FHA) loan or Department of Veterans Affairs (VA) loan, programs whose generous terms enable people with little in the way of upfront reserves to become homeowners. The FHA requires buyers to make a down payment of only 3.5 percent of the home's purchase price; the VA requires no down payment at all.

Many of these types of buyers do not have the ready cash to pay the closing costs, which, while they can vary tremendously depending on the municipality, typically range from 2 to 5 percent of the home's purchase price. However, better-heeled buyers may also lack the liquidity to pay closing costs that can run into the tens of thousands of dollars, especially after they've made the 20 percent down payment that conventional mortgages require. So those buyers, too, might ask the seller for closing cost assistance.


How Much Can a Closing Cost Credit Be?

Although the seller needs to be amenable to the idea, naturally, the matter of paying the closing costs isn't totally up to him. The buyer's mortgage lender usually sets restrictions as to how large the credit can be. Some lenders limit it to 3 percent of the purchase price, for example. Nor do lenders like the credit to exceed the actual amount of the closing costs.


How Much a Buyer Can Expect to Pay for Closing Costs

As a rule of thumb, closing costs to buy a home run about 2 to 4 percent of the purchase price, with the average around 3% of the sales price. Much depends on the points and origination fees a lender charges to make the loan, which used to be disclosed on the buyer's Good Faith Estimate, but today is now called a loan estimate.

The total closing costs to purchase a $300,000 home could cost anywhere from approximately $6,000 to $12,000 or more. Typically, the funds cannot be borrowed because that could raise the buyer's ratios to a point where the buyer may no longer qualify for a loan.


Article credits to ELIZABETH WEINTRAUB

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