Why Should I Pay the Home Buyer's Closing Cost?

Why Should I Pay the Home Buyer's Closing Cost?

Question: I received an offer on my home that I have for sale, and in the purchase contract the buyer is asking me to pay for his closing costs. I don't think I should have to pay any of the buyer's costs. When I purchased this home the previous owner didn't pay any of my costs. Why should I pay this buyer's cost?

Answer: It is very typical these days for a buyer to ask a seller to pay for closing costs. In fact, probably around 30% of  buyers will include it in their offers. It's usually worded in the Purchase Contract similar to this: "Seller to pay for Buyer's closing costs, points and/or prepaid expenses" 

Let's first explain what these items are. Closing costs include the attorney fees, title insurance, bank fees, etc. Points are funds that the buyer pays at closing to get a better interest rate. Prepaid expenses include insurance, taxes and interest. The total amount of the cost varies with the purchase price, down payments, loan program and the day of the month that the property closes, but typically run 2% to 5% of the mortgage amount.

Now that we know what closing costs are, why should you, the seller, be responsible for paying them? What we really want to look at is how much will you be actually receiving after paying the closing costs. For example, if someone offers you $300,000 but they want you to pay $5,000 in closing costs, you are actually going to receive $295,000 at the closing table ($300,000-$5,000=$295,000). If you are happy with receiving $295,000 then what's the problem with paying it to make the deal work? If you're not happy with the bottom line you can always give a counter offer. Just don't take away the buyer's closing costs. So say, if you really looking for $310,000, then counter at $315,000 and say you'll pay the $5,000 towards closing costs (for a net of $310,000).

A home buyer has to come up with the down payment, plus additional expenses once he moves in. Not to mention moving costs. It's in the buyer's best interest to try to keep as much cash in the bank as possible to cover these and any unforeseen expenses. Really, what the buyer is actually doing is financing his closing costs, because you would have accepted $310,000... and he is buying it for $315,000. So, even though it says in the contract that the seller is paying the closing costs, in reality the buyer is paying for them himself (over the life of the 30 year mortgage).

So, don't get hung up on paying a buyer's closing cost. If you can come to an agreed upon price, concentrate on doing what you can to get the buyer to the closing table. Paying for closing costs is a no brainer that doesn't affect you as long as you look at the bottom line.

Jim Armstrong

President/Broker

Armstrong Field Real Estate

Guidelines For Determining Your Home Purchase Price Range

Shopping for a home, especially your first one, can be tough when you’re not sure how much you can afford. If you've wanted to live the dream of owning your own home, but haven’t been sure where to start, I've put together a few tips that can make it easier to get a handle on where to start.

The American Dream

1. Tax benefits usually mean you can afford more than your rent. Interest deductions on taxes typically translate into significant savings. Many people find they can afford about 33% more than their current rent. To get an idea of what this might be for you, multiply your current rent by 1.33.

2. A home price three times your gross income is usually a reasonable place to begin. For example, if your household made $75,000 last year, you could begin looking in the $225,000 range to start.

3. Know how much you can put down. Ideally, you’d want to have 20% of the home’s price set aside for a down payment. On a $200,000 home, this would be roughly $40,000. You can definitely put down less money, as low as 3%, but it may result in higher interest rates (which translate to higher monthly payments). It will still be better and most likely less expensive than renting. If you are a veteran, you can buy a home with no money down, and still get the lowest interest rates.

4. Determine your “debt factor.” Lenders will often cite the 28/41 rule when it comes to your debt. This means that your mortgage (plus taxes and insurance) shouldn't exceed 28% of your gross monthly income. Your total payments (credit card, car loan, etc.) plus your mortgage shouldn't come to more than 41% of your gross monthly income.

The Realtors at Armstrong Field Real Estate specialize in helping first-time home buyers getting themselves lined up for home ownership. Contact one of our Massachusetts Realtors today.

A Heads Up on Down Payment Gifts

Ready to buy your first home? Have a down payment ready to go? Before you apply for that mortgage, here’s something you should know about disclosing the source of your down payment.

Q: Part of my down payment was a gift from my parents. How will this impact my mortgage application?

A: It depends on the type of mortgage you’re applying for.

You should be prepared to explain your gift with documentation. While FHA loans typically will permit a down payment from a family source, your more conventional mortgage will expect at least 5% of the funds to have come from you.

One of the keys to ensuring this process goes smoothly is having documentation to back up your claim. Bank statements showing the source of the money (and when you received it) are a good place to start, along with a letter signed from your generous benefactor declaring the gift.

As a rule, you should be careful of any large deposits to your account (besides your regular pay).

I urge you to talk to a mortgage professional for complete details as they pertain to your specific situation.

Need a referral to a qualified mortgage broker? I’d be glad to share with you the names of people I know and trust. Contact me today for a referral: Jim Armstrong - 978-394-6736

or email me

Common credit myths about buying a home

(ARA) - Whether your annual earnings range well into six figures or are on the more modest end of national salary averages, you know you'll probably need credit to buy a home. While you likely know how important credit is to your home-buying plans, you may not be aware of the truth behind some common credit myths.

Myth: If your bills are paid and you've never defaulted on a loan, mortgage or credit card bill, you don't need to worry about your credit report or credit score.

Truth: Many factors influence your credit score, and payment history is just one of them. When calculating your score, credit bureaus also consider length of credit history, types of credit used and ratio of credit available to credit used. Even if your payment history is good, scoring lower on one of the other factors could lower your overall credit score.


Myth: As long as you know your credit score, you don't need to look at your credit report before applying for a mortgage.

Truth: A lender will certainly look at your credit report, so you should know what's on it before they do. Errors may occur on a credit report, and if there are any negative marks on your credit history you'll want to know about them - and address them - before a lender asks.


Myth: Checking your credit score is a hassle, and it can't really help you manage your credit in the long run.

Truth: Websites like FreeCreditScore.com make it easy to check your credit score. Keep in mind that lenders use a variety of scores when evaluating credit worthiness, and the one you obtain online will vary from what a lender might see. Still, any score can be a valuable educational tool that helps you better understand how lenders view your credit. FreeCreditScore.com's Credit Score Center can help you understand how your score is calculated, which factors impact it and the best time to apply for credit.


Myth: If your credit is not perfect, you won't be able to get a mortgage.

Truth: Lenders are more strict than they've been in the past and a good credit score and report can certainly make you a more appealing prospect to them. However, a score in the lower range doesn't mean you can't get a mortgage at all. But a higher score is likely to net you more options - and better terms.


Myth: When you apply for a mortgage, the lender could share your personal information (including your credit score and history) with other companies.

Truth: The law limits how banks and other financial institutions can use your information and to whom they can disclose it. If you're not sure how a lender may use your information, ask. Depending on the situation, you may be able to limit disclosure of your information.


Home prices and interest rates are still low across the country, making it a good time to buy a house, real estate experts say. Knowing the truth behind some common credit myths - and understanding your own credit history and score - can help you take advantage of the many opportunities still available for home buyers.

Qualified Residential Mortgage Harms Home Buyers With Good Credit and Housing Recovery

In the midst of a very fragile housing recovery, the government is throwing a devastating, unnecessary and very expensive wrench into the American dream. First time homebuyers will have to choose between higher rates today or a 9-14 year delay while they save up the necessary down payment. And 25 million current homeowners would be locked out of lower refinancing rates because they lack the required 25 percent equity in their homes.

High down payment and equity requirements will not have a meaningful impact on default rates. They will, however, require millions of consumers, who are at low risk of default, to either put off buying a home or pay unnecessarily high rates. The government is penalizing responsible consumers, making homeownership more expensive or simply out of reach for millions. Regulators need to develop a final rule that encourages good lending and borrowing without punishing credit-worthy consumers.

As part of the financial reform legislation, Congress designed a clear framework for improving the quality of mortgage lending and restoring private capital to the housing market.  To discourage excessive risk taking, Congress required securitizers to retain five percent of the credit risk on loans packaged and sold as mortgage securities.  However, because across-the-board risk retention would impose significant costs on responsible, creditworthy borrowers, legislators also created an exemption for “Qualified Residential Mortgages,” defined to include mortgages with product features and sound underwriting standards that have been proven to reduce default.

Unfortunately, regulators have drafted proposed Qualified Residential Mortgage (QRM) rules that upset the important balance contemplated by Congress.  Rather than creating a system of penalties to discourage bad lending and incentives for appropriate lending, regulators have developed a rule that is too narrowly drawn.  Of particular concern are the provisions of the proposal mandating high down payments.  Other aspects of the proposal – such as the proposed debt-to-income ratios and credit standards – will also raise unnecessary barriers for creditworthy borrowers seeking the lower rates and preferred product features of the QRM.  

The proposed QRM exemption requires a high down payment – proposed at 20 percent, with even higher levels of minimum equity required for refinancing – despite the fact that Congress considered and rejected establishing high minimum down payments because they are not a significant factor in reducing defaults compared to other underwriting and product features.  In fact, the three sponsors of the QRM provision have sent letters to the regulators saying that they intentionally did not include down payment requirements in the QRM.

Requiring down payments of 20 percent or more is deemed by some as “getting back to basics.” However, well-underwritten low down payment home loans have been a significant and safe part of the mortgage finance system for decades.   The proposed QRM exemption ignores these data and imposes minimum down payments of 20 percent, and equity requirements for refinancing borrowers of 25 percent or 30 percent.  

As a result, responsible consumers who maintain good credit and seek safe loan products will be forced into more expensive mortgages under the terms of the proposed rule simply because they do not have 20 percent or more in down payment or equity.  In other words, the proposal unfortunately penalizes qualified, low-risk borrowers. The QRM should be redesigned to align with Congressional intent: encourage sound lending behaviors that reduce future defaults without harming responsible borrowers and lenders. 

http://www.realtor.org/topics/qrm/qrm_whitepaper

Why You Should Not Buy a Car

When you get a raise or accumulate some savings, you may find yourself confronted by an innate instinct of modern civilized men and women: The desire to spend money. It begins simply, by going out to restaurants, then accelerates to purchasing clothing, electronic gadgets, and since North Americans have a special fondness for the automobile, you may even buy a "brand new car." If you're married or ambitious, a few months later your thoughts eventually turn toward buying your own home.  Or a move-up home, if you are already a homeowner.  Next, you contact a loan officer to get prequalified for a mortgage loan.  You state your desired price and how much you can put down.  You provide your income and may even supply pay stubs and W2 forms.  The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).   "If only you didn't have this car payment... Debt-to-Income Ratios and Car Payments You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner's association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and... ...car payments. How a New Car Payment Reduces Your Purchase Price For example, suppose you earn $5000 a month and you have a car payment of $400. At current interest rates (approximately 8% on a thirty-year fixed rate loan), you would qualify for approximately $55,000 less than if you did not have the car payment.   Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender. However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being. Do not buy the car.  Buy the house first.

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