Purchasing real property is not always straightforward. It’s not as simple as paying a certain amount to the seller and a percentage to the real estate broker. Both the buyer and seller often incur a lot of added costs, such as capital gains taxes, transfer taxes, and the like. These are called closing costs, which can range anywhere from 1% to 10% of the total purchase price. Oftentimes, the key to a smooth transaction would be to ask your realtor which particular costs will be charged to you, and which will be charged to the buyer.
When you’ve already paid a large sum for a down payment or equity (as banks prefer to call it), you might not have extra spending money to pay for closing costs. You have several options of minimizing this added cash expense. You can negotiate for the home seller to pay for it, or you can have this cost added to the total purchase price, so that in essence, you will include it in your mortgage, and the seller will pay back the money to you.
Negotiate beforehand. The best way to convince a home seller to pay your closing costs is to negotiate well. In the first place, you will likely negotiate for a lower selling price with the seller. In the course of your negotiation, you can ask the seller to shoulder the closing costs. Cognizant of transaction costs, fees and taxes, most sellers and realtors actually have a net price in mind, when selling a house. This means their gross selling price less any realtor’s fees and government taxes. Any extra is an added bonus. Talk to your realtor (whether or not it’s the same realtor as the seller’s agent) if you can arrive at a price in which the buyer will have enough excess to pay for closing costs.
Inflate the total price. Additionally, you and the seller can inflate the total price of the purchase, such that the amount equivalent to the closing costs will be included in the total price. This way, a portion of the mortgage you will be applying for with the bank will actually be intended for closing costs. If this is the case, the seller will essentially return to you the excess amount, which will be for paying the closing costs. In practice, the money doesn’t actually get returned to you, but rather through the realtor, who does the legwork in paying for these taxes and fees.
Include it in your mortgage. If the bank is agreeable, you can always ask for an extra few thousand dollars to be included in your loan amount, to cover for the closing costs. This will depend, though, on the maximum loanable amount that the bank will give you. In turn, this is dependent on two factors: the assessed value of the property, and your earning capacity.
The amount that the bank will lend you will not depend on the selling price of the property, but on the assessed value (which a professional assessor from the bank will determine). Of this, only a certain percentage can be loaned to you, usually anywhere from 60% to 80%. The balance is paid through your equity, which is actually your down payment. If your loan can accommodate a few thousand more, then you can use this to pay for closing costs.
Secondly, your earning capacity will determine how much the bank can lend you, in particular the amount of amortizations you can pay per month. This is usually computed as 30% of your net take-home income. Therefore, if the bank determines that you can afford to borrow a few extra thousand based on your monthly income, then this can be used to pay for closing costs.
In either case, the bank will not give you the extra cash outright. Rather, this will be paid directly to the seller. Therefore, you and the seller will have to agree on who exactly pays which items in the list of closing costs. It will be a good idea to include this in your sale agreement, or you can execute a separate contract to this effect.
Buying a house involves a lot of negotiation. Be polite but firm in your dealing with a seller. If he sees that you are serious in buying the house, and that you are a responsible homeowner, he will likely consider your requests.