Closing costs buyer or seller for cheaper down payment.

[Nicholas Sambrick]

We are looking to buy a property that we are planning on house hacking and want to get in for as little up front costs as possible. The seller has a number they want to get for it. Would it make sense to add an extra 10k on to the purchase price and stipulate  that seller pays all the closing costs? Would I be able to get into the property for just the down payment amount without the additional closing costs, as long as costs do not exceed 10k?  I am going to be using traditional bank financing. 

[Eric Veronica]

@Nicholas Sambrick in order for this to happen the home would have to appraise high enough to support the purchase price. Maybe it will happen and maybe it will not.

Another approach that many of my investor clients take is using lender credits or “reverse points” to offset closing costs. So let’s say you are purchasing a home and you will be taking out a $300,000 loan. You ask me, the loan officer, my current interest rate for a 30 year fixed. I offer a par rate (no points) of 4.00%.  I also offer you lower out of pocket option whereby increasing the rate 4% provides you a 2% credit from the lender equaling $6,000. You can use this $6,000 credit to pay for title fees, home insurance, taxes, appraisal fees etc. 

The monthly principal and interest payment at the par rate of 4.0% is $1,432. At 4.4% the payment increases to $1,502. Only $70 month for a $6,000 decrease in funds needed at closing.

The argument against this approach is that the lower interest over 30 years will always cost you less over the long run. This is true, in theory.  In reality no one ever seems to keep a mortgage that long. This approach keeps you nimble and liquid. 

Did Interest rates drop a half point the year after you purchase and you want to refinance? 

Did the property experience substantial appreciation after a year or two and you want to do a cash out refinance to finance your next investment?

Did your renter receive a big inheritance and now wants to buy the home for cash at a 20% premium? 

These types of  opportunities do happen. Being able to make these types of transactions knowing that you didn’t just spend $6,000 in sunk closing costs is a nice spot to be in.