Many of the answers here seem to be incomplete, wrong, or unnecessarily or overly specific. Wayne Beals's answer being a notable exception here, and for full disclosure purposes Wayne and I work for the same real estate brokerage and out of the same branch office.
However I'd like to try to shorten the explanation and hopefully answer your question generally. "Seller pays closing costs" means for all practical purposes that the seller will credit the buyer of the subject property a certain amount of money at the time of the closing.
As Charlene correctly states "you have to make sure that your lender will allow the seller to pay closing costs, and what percentage they will allow, and if there are specific things they won't allow." In my experience most lenders will allow you as a buyer to receive a closing cost credit from the seller up to the equivalent of 3% of the purchase price of the property that you are buying, although there are a few lenders (and I'd suggest very few if any given the tightening of lending underwriting guidelines) that will allow a buyer to receive a closing cost credit from the seller up to the equivalent of 6% of the purchase price of the property.
You should try to think of the down payment as a separate item as many lenders will require you to put in a certain percentage of either the purchase price or the closing costs yourself, and many lenders will require you to provide proof of having your own down payment prior to the closing (seasoning of funds- ask your lender about this term because it's not really relevant to your question).
For example if you're buying a property that costs $200,000.00, and your purchase agreement with the seller states that you will receive a closing cost credit of 3% of the purchase price, then at the time of the closing you will see reflected on your HUD 1 or RESPA settlement statement a line item credit to you of $6,000.00.
As you asked in your follow up question if your closing costs (title company fees, attorney's fees, loan origination fees, etcetera) only total $5,000.00, then at the time of the closing with your $6,000.00 closing cost credit and only $5,000.00 in closing costs you as the buyer have a $1,000.00 "surplus" of funds. Typically lenders will also have restrictions on how that "extra" money is handled. Most lenders do not want to see the buyers receive cash from the closing table, although some lenders will allow buyers to walk away with a relatively small sum (often between $1,000.00-$2,500.00 cash out to the buyer).
So in the situation described above many lenders will require you to do what is called a "principal reduction" at the closing. A principal reduction is when the lender takes any excess or surplus money that you have "coming to you" as the buyer in the transaction and the lender applies those excess funds toward paying down your mortgage's principal amount by the exact amount of the excess.
So to try to summarize this example:
you have a $200,000.00 purchase price
a $200,000.00 loan
a closing cost credit excess of $1,000.00.
At the time of the closing the Title company (who will typically perform the closing in Illinois) will cut a check to your lender for $1,000.00 (the amount of your excess credit from the seller). So when your loan officially starts with your lender, you will have a loan principal amount of $199,000.00 instead of $200,000.00. The excess funds from the closing cost credit that you would have otherwise received as cash back to you at the time of the closing instead are given to you by way of paying your lender that excess amount to reduce the principal amount of your loan. Does that make sense?
Two more quick points:
what your lender charges you should be completely separate any considerations of the amount of credits that you may receive from the seller and
the Realtors's commission(s) have nothing to do with seller credits directly to a buyer.
If your lender anticipates you having excess funds at the closing and is encouraging you to pay discount points to buy down your interest rate, then you need to have a talk with them regarding how long you're planning to stay in your property and how quickly you could "recover" or make up the amount of buy down that you've just paid. For example if you pay $2,000.00 in loan discount points and your mortgage payment as a result is $200.00 per month less than it would be without paying the discount points, then you would "recover" your points paid to by down the rate in 10 months.
I know this answer runs a bit long, but let me know if I can clarify anything that is not clear here. Good luck to you.
Broker Associate, Sudler Sotheby's International Realty
Closing cost for a buyer include such items as origination fees, mortgage discount points, transfer tax stamps, prorated interest payments, mortgage insurance premiums, title insurance, appraisal fees, etc.
At the closing, you are bringing a certified check in the amount your lender directs you to bring. Accounting at closing is handled on a HUD-1 Settlement Statement. This form is mandated by the Real Estate Settlement Procedures Act (RESPA), which regulates real estate transactions. The "HUD," or "RESPA, " as it's sometimes called, is a ledger of credits and debits to the buyer and the seller. This ledger of debits/credits include all the closing cost and credits involved in the transaction, as well as all pro-rations for taxes, interest, rents, income, etc. You will also see all commissions on this form. At the end of the HUD (line 1400) is Total Settlement Charges. This is the amount due to/from the respective seller and buyer.
I hope this answers your question. If the seller offers to slip you a check across the closing table, check with your attorney! All closing credits from the seller will be detailed on the RESPA.
As far as getting points lowered if the seller pays closing cost...I am not a lender and can't shed light on this. If you have some hesitation as to the product or deal the lender is putting in front of you, I encourage you to bring another lending in on the process to make sure your getting a competitive loan.
I've attached a link that you may find useful. It has a concise explanation of the closing process, which will help shed light on how the transaction will proceed and the terminology you will encounter. They also have a sample RESPA for for you to review.
Best of Luck
Here's what you should know. FHA allows a 6% seller credit conventional loans allow a 3% seller credit. To simplify some of the anwers, that means if you have the following costs, the seller can pay for them. These are examples, not exact costs
Title Costs- $1200; Transfer Stamps- $2300- Lender Costs- $1000-equalling $5000. Lets say for example that you are buying a $200k property.
Rather than negotiating the abosule lowest price from the seller, perhaps $195, you offer $200k, and ask for $5k from the seller for closing costs.
You always have the option of "buying" down your interest rate. So if the market rate was 5.25%, and you really wanted a 5% loan, the lender allows you to buy the rate down. The money required to buy the rate down can also be included in the seller credit, provided it doesn't exceed the 6% or 3% maximum allowed.
*In every state, there's one final document that buyer and seller and the closing agent sign, and it's called a "HUD-1 Settlement Statement." HUD, for short.
*That document breaks down and lists individually all the monies associated with the transaction. From the loan amount, to whatever the bank is charging the buyer for the loan, (fees and points, the latter including origination and discount points), title examination, deed preparation, insurance, property taxes, all the way down to courier fees for loan payoffs. Everything.
*There are two columns on the HUD: one for the buyer's side of the transaction, and one for the seller's side. *Each state differs in what is customary to be charged to the seller, and what is charged to the buyer. For instance, in NC where I am, the transfer taxes are charged to the seller, as is the deed preparation, and the realtor fee. Customary buyer's charges are the title examination, the title insurance, the home inspection, the loan points and fees. Property taxes and HOA dues are pro-rated--the buyer and seller each are charged a portion of the year's fee based on the length of time they will own the property that year. And a portion of the same will appear on both the buyer's and seller's side.
Now, when a listing says "Seller pays closing costs" we here in NC perceive that to mean that the seller will pay ALL costs associated with the closing: everything on the seller's side, and everything on the buyer's side too. That offer to pay closing costs must be written into the purchase agreement. NC makes us put an actual figure on that, i.e. up to $4000, or whatever figure we determining after doing the math for our client.
BUT, you have to make sure that your lender will allow the seller to pay closing costs, and what percentage they will allow, and if there are specific things they won't allow. Different lenders/loan products have different rules about that.
When your lender says they can get your points down if the seller is paying closing costs, that means for a fee (which the seller will ostensibly pay in this scenario), usually 1 to 2 percentage points of the loan, they can lower your rate from say, 6% to 5.825%. (1% of 200,000 for example, would be a $2000 discount point fee, which would appear on the HUD, which would become part of your closing costs that the seller would pay!)
Does that make sense? go talk to your realtor about this issue, and have them get specific with you, maybe even do a preliminary HUD for you after having received a good faith estimate from your lender. and don't hesitate to ask should you need further clarification, but your agent should be able to explain this to you with greater authority given your state and loan information. Best of luck!
I don't believe in points, as you can easily pay an extra amount every month, or an extra mortgage payment every year, and lower your interest that way without having to pay points.
Why are these answers so long? :)
It may be worth it to you to still pay the closing costs but most agents won't highlight this little fact with you.
I am not an agent or a broker. Actually I am in the same boat you are in. Trying to determine what that actually means. According to all of these agents and brokers answers I bet you are probably more confused now then what you were before. I know after reading all of this, I am. It's like you need a masters in economics or a masters in "bullsh*t" to understand any of it.
I found a couple nice articles that explains it in "laymen's" terms. Basically to sum it up:
When a seller pays your closing costs, what makes it a "deal" is that it takes you less cash (out of pocket) to buy the home. You don't "save" any money -- you just save it for now.
Youâ€™re paying your own closing costs either way. If you pay them in cash, you can watch the money come out of your checking account. If â€œthe seller pays the closing costs,â€ all youâ€™re doing is exchanging one price discount for another. Your money stays in your checking account because you are paying more for the home and financing the closing costs.
If the answers so far haven't confused you thoroughly, allow me to wade into the water without muddying it further.
I am a woman of few words so here goes: "seller pays closing costs" means in brief: there are costs associated with the purchase and transfer of a property from seller to buyer; excluding the down payment monies, these are referred to as closing costs. Many times buyers can come up with the down payment required (3% minimum of purchase price depending on loan type) but the additional thousands of dollars in "closing costs" make a purchase unattainable without help. SO - the seller says he will pay those costs which are payable at settlement. Conventional financing allows 3%; FHA allows up to 6% of purchase price to come from seller and credited to buyer at closing. Got it? For specific details which ARE specific from transaction to transaction and state to state, and loan product to loan product, seek the advice of a Realtor in your area. That's what we do! Hope I helped.
If you have more questions or need my help, I welcome your call to determine how I can best help you.
Closing costs for the seller are things like survey, transfer stamps (taxes for the state, county, and sometimes city), Title work, and property taxes! Yes that s right more taxes! Remember you have property taxes that have to be paid for the time you lived in the home for this current year. Since they are not due yet you give a credit to the buyer for these so it is the buyers job now to see that they are paid.
There can be other costs to based on where you are buying or selling and buyers have closing cost too. This is what they want you to pay. The loan origination fee, the title insurance, sometimes the attorney fee, if there are any buyers stamps (more taxes), and others. Normally when seller pays closing costs its is a flat amount worked out! This is what I would do for my Seller.
Just Remember this. NON of this can happen with out the buyers money. So even if something is coming off your side of the deal, its still due to the fact the buyer had the financing.
Please consult with are Realtor that you trust. They know the market on a day to day bases.
Broker's commission and Attorney fee's are paid by the seller by agreement.
Recording expenses are paid by the seller to clear title
Transfer tax are paid by the seller for state and county
Title expenses are paid by the seller for title search
Loan fees paid by the Seller if prepayment penalty applies
Survey fees are paid by the seller if required to pay by sales contract
Don't take that into account with your lender, that's smoke and mirrors. The best loan is the best loan, separate from seller-paid closing cost concerns.