Disadvantages of Seller Paying Closing Costs

Are There Limits to Sellers Paying Closing Costs?

Seller concessions can help bring home ownership within reach for many buyers. But, if the buyer is taking out a mortgage, certain loans could limit how much (and what) a seller can contribute toward the buyer’s closing costs. 

Concession limits

• Conventional loan concessions: For primary homes and second homes, Fannie Mae has different limits for seller contributions based on the loan-to-value (LTV) ratio.^[1]

• If the LTV is greater than 90% (in other words, if the buyer’s down payment is less than 10%), seller concessions are limited to 3% of the sales price.
• If the LTV is between 75.01% and 90%, seller concessions are capped at 6% of the sales price.
• If the LTV is 75% or less, seller concessions can be as high as 9% of the sales price.

Conventional loans for investment properties limit seller concessions to 2% of the sales price.

• Federal Housing Administration (FHA) loan concessions: Sellers can contribute up to 6% of the sales price or appraised value (whichever is less) on home purchases with FHA loans.^[2]
• Veterans Affairs (VA) loan concessions: Concessions on VA loans are limited to 4% of the home’s value.^[3]
• United States Department of Agriculture (USDA) concessions: USDA loans limit seller concessions to 6% of the sales price.^[4]

What Disadvantages Does the Seller Have When Paying Closing Costs?

Before paying for a buyer’s closing costs, sellers should be aware that doing so comes with disadvantages. 

You could pay higher closing costs and fees

Say you receive a great offer that’s $10,000 higher than the next best offer. Sounds great, right? Well, sure, but remember that many of the closing fees you pay are based on a percentage of the sales price. In other words, a higher selling price equals higher closing costs. 

So, if you sell your house for $400,000 instead of $390,000, you’ll have to pay roughly an extra $500 – $600 in real estate agent commissions alone. 

You could have less profit

If you offer seller concessions and don’t get that higher offer you were hoping for, your profit could suffer. Some buyers may be willing to pay a higher sales price if you pay for part of their closing costs, but if you have a buyer who doesn’t, you could walk away with less. 

You could be at risk of fraud

Though it might seem harmless, failing to disclose seller concessions can be fraudulent. Seller concessions must be disclosed to the lender and appear on the closing statement.

What Are Disadvantages for the Buyer if the Seller Pays for Closing Costs?

Seller concessions are a nice perk for buyers short on cash; however, it’s important to consider disadvantages for the buyer if the seller pays for their closing costs.

You could have mortgage approval issues

If you plan on financing your new home purchase, your lender will probably require a home appraisal. If the appraisal amount comes back below the purchase price, most mortgage lenders will ask you to cover the difference. 

For instance, if you’re buying a home for $400,000 and that includes seller concessions (and you would have agreed to $390,000 without seller concessions), but the appraisal comes in at $390,000, the loan amount will remain the same and you’ll have to put another $10,000 toward the down payment.

You could need a larger down payment

Your down payment represents a percentage of the purchase price. If you agree to pay $400,000 for a house instead of $390,000, you’ll have to come up with an additional $1,000 if you want to put down 10% or an additional $2,000 if your down payment is 20%.

You could have higher mortgage payments

Offering a higher purchase price in exchange for seller concessions is a trade-off; you’ll pay less at closing, but will likely have higher mortgage payments. Borrowing more money means paying more interest, so make sure you’re comfortable taking on the monthly payment before saying yes to a higher purchase price.

Is It Worth It for the Seller To Pay Closing Costs?

It’s often worth it for the seller to pay closing costs in a strong buyer’s market, if the buyer is willing to pay a higher sale price or if the seller is looking for a quick sale. Sellers who are thinking about paying closing costs for the buyer need to remember that there are some drawbacks to offering seller concessions. And they always have to disclose any closing credits they’re giving the buyer.