ChitownLiving | Chicago Real Estate + Life

So after days of negotiating, my buyer client and seller reach a purchase price of $350,000.  Both parties are happy.  Then my client remembers the session at the very beginning of the house hunting process where the details of closing costs were explained and calculated.  In Chicago, closing costs can be a big chunk of change, expecially City of Chicago Transfer Tax Stamps.  Welcome to Chicago.  Then the question, “We heard there is a way to roll closing costs into the purchase price.  Is this true?”  And so begins my explanation of how this works.  A simple concept, but sometimes a full understanding is lost in translation, so I decided to put it in writing.  The scenarios below are simplified to illustrate the point.  We assume the following:

• $350,000 purchase price
• $5,000 in closing costs
• 30 year fixed at 6.25% mortgage
• Loan to Value of 80%

Without Closing Costs Rolled In: Based on an 80% LTV, the total mortgage amount would be…    $350,000 x          80% = $280,000 The cash required at the closing table would be…    $350,000 x          20% =    $70,000 +      $5,000 closing costs =    $75,000 The monthly mortgage payment would be… $280,000 amortized over 30 years @ 6.25% equals a monthly payment of $1,724.01.   With Closing Costs Rolled In: Now the scenario changes a bit.  We still negotiate to a price of $350,000, however, in this scenario, the buyer wants to keep as much cash in their pocket as possible.  The buyer agrees to pay $355,000 in return for the seller issuing a closing cost credit of $5,000.  This amount appears as a credit on the HUD or RESPA. Based on an 80% LTV, the total mortgage amount would be…    $355,000 x          80% = $284,000 The cash required at closing would be…    $355,000 x          20% =    $71,000 +      $5,000 closing costs =    $76,000 -      $5,000 seller closing cost credit =    $71,000 The monthly mortgage payment would be… $284,000 amortized over 30 years @ 6.25% equals a monthly payment of $1,748.64.   Comparing The Two:

• Loan Amount - The buyer mortgage amount increases when rolling closing costs in, $284,000 vs. $280,000, but they come to the table with less cash out of pocket.
• Out of Pocket Cash - The buyer keeps cash in their pocket.  Instead of having to come up with an additional $5,000 to cover closing costs, the buyer is essentially financing the closing costs with the assistance of the seller, called a seller concession.  In the scenarios above, the buyer’s monthly payments increase by $24.63 per month.
• Sales Price - The seller records a higher sales price on paper.

  Caveats:

• Work with your lender closely when thinking about rolling in closing costs.  Certain lenders and loan programs have restrictions.
• Make sure you can borrow up to or over the new loan ammount.
• The property must appraise out.  If paying close to list, with little or no money down, there must be justification for the increased price.

Should you do this?  This is not for me to say.  Like any financial strategy, it is a technique that must be a good fit for your financial situation.  Work closely with your lender throughout your transaction to avoid any issues.