seller pays closing costs how does it work?

seller pays closing costs how does it work

When buying a home, closing costs can be a significant part of the expense. These costs cover fees related to the mortgage process, title insurance, taxes, and other settlement procedures. Typically, the buyer is responsible for these fees, but in some cases, the seller may agree to pay some or all of the closing costs. This arrangement can be beneficial for both parties and can help facilitate the completion of the sale. Here’s how it works:

What are Closing Costs?

Closing costs are various fees associated with purchasing a home, which are over and above the price of the property. These costs can include:

Loan origination fees
Credit report charges
Appraisal fees
Title searches and insurance
Survey fees
Attorney fees
Underwriting fees

Typically, these costs range from 2% to 5% of the home’s purchase price.

Why Would a Seller Pay Closing Costs?

Sellers might agree to pay closing costs for several reasons:

Incentivize the Sale: In a buyer’s market, offering to pay closing costs can make a property more attractive compared to others.

Speed Up the Sale: If the buyer is struggling to accumulate enough funds to cover closing costs, the seller paying these costs can help close the deal faster.

Get Their Desired Price: Sometimes, sellers will get their asking price or close to it by agreeing to pay the closing costs, effectively making the higher price more palatable to the buyer.

How Does It Work?

When a seller agrees to pay closing costs, the arrangement is typically negotiated during the sale process and included in the sales contract. The amount or percentage of the closing costs the seller agrees to pay will be specified in the contract. This can be structured in several ways:

Fixed Amount: The seller agrees to pay a specific dollar amount towards the buyer’s closing costs.

Percentage of Closing Costs: The seller agrees to pay a certain percentage of the total closing costs.

Cover Specific Fees: The seller agrees to pay specific fees on the buyer’s behalf, such as the appraisal or title insurance.

Pros and Cons for Buyers


Reduced Upfront Cash Requirement: Paying less at closing increases affordability for many buyers.

Ability to Buy a More Expensive Home: Lower upfront costs can allow a buyer to stretch their budget further.


Higher Loan Amount: If the price includes the closing costs that the seller covers, the buyer may end up financing more and paying more in interest over time.

Market Risk: In a hot market, offering to have the seller pay closing costs might make a bid less attractive compared to others who aren’t asking for such concessions.

Pros and Cons for Sellers


Attract More Buyers: Offering to pay closing costs can draw in more potential buyers.

Potentially Higher Selling Price: Buyers might be willing to meet the asking price if they know they’ll save on closing costs.


Lower Net Profit: Paying the buyer’s closing costs means the seller nets less from the sale.

Tax Implications: Depending on local tax laws, there could be implications for the seller, especially if the market value is affected by the concessions made.

Having the seller pay closing costs can be a strategic decision that benefits both the buyer and the seller, depending on the market conditions and the parties’ financial situations. Buyers should consider how these costs affect their mortgage and long-term financial outlook, while sellers should weigh the potential for a faster sale and higher price against the cost they will absorb. As always, both parties should consult with real estate professionals and financial advisors to ensure that their interests are adequately protected.

Navigating Negotiations

When a seller agrees to pay the buyer’s closing costs, it typically begins as a negotiation tactic. Here’s how to navigate this process effectively:

For Buyers:

Assess Your Needs: Determine how much assistance you need with closing costs before making an offer.

Knowing your financial limits will help guide your negotiations.

Make a Reasonable Offer: While asking the seller to pay closing costs can be part of your strategy, ensure your offer price is competitive. An offer that’s too low plus a request for closing costs might be dismissed in a competitive market.

Be Flexible: If the seller is reluctant to pay all closing costs, consider asking for a portion instead. This can sometimes be enough to help finalize the deal.

For Sellers:

Evaluate Market Conditions: Understand the dynamics of your local real estate market. If it’s a buyer’s market, you might need to be more open to paying closing costs to attract buyers.

Set Limits: Decide in advance how much you are willing to contribute to the buyer’s closing costs. This helps prevent negotiations from eroding your bottom line excessively.

Consider Counteroffers: If a buyer asks you to cover closing costs, consider making a counteroffer that might be slightly higher in price but includes the cost coverage. This way, you can maintain your net profit.

Legal and Tax Implications

Both parties should be aware of the legal and tax implications of a seller paying closing costs:

Legal Requirements: The agreement should be clearly documented in the sales contract, specifying which costs will be paid by the seller. This avoids any misunderstanding and ensures all parties are legally protected.

Tax Considerations: Sellers should consult with a tax advisor to understand how paying closing costs for the buyer might impact their tax situation. In some cases, these contributions can be deducted, but this depends on the specific tax laws and regulations in your area.

Alternatives to Seller-Paid Closing Costs

If a seller is not willing to pay closing costs, there are other options for buyers to consider:

Lender Credits: Some buyers opt for lender credits, where the lender pays the closing costs in exchange for a higher interest rate on the mortgage. This can be a viable option if upfront cash is a challenge.

Gift Funds: Buyers might also consider receiving gift funds from family or friends to help cover closing costs, which must be properly documented to satisfy lender requirements.

Government Programs: First-time homebuyers might qualify for various state or federal programs that assist with closing costs and down payments.

The decision for a seller to pay the buyer’s closing costs is a strategic one that can have various motivations and implications. Both buyers and sellers need to approach this situation with clear understanding and proper guidance from real estate professionals. By considering their financial positions and the current market conditions, parties can negotiate terms that are beneficial and lead to a successful transaction. This practice, while adding complexity to negotiations, can be a valuable tool in making homeownership more accessible or in closing a sale more swiftly.