Asking The Seller To Pay Buyer’s Closing Costs

Question

“In Canada is it acceptable to ask the seller to pay buyer’s closing costs?  Do banks allow this?  I can see a scenario where I put in an offer at an amount above the seller’s asking price equal to my expected closing costs with the condition the seller pays my closing costs. Not sure if banks would grant a mortgage though under these conditions.

Jason – Ottawa, Ontario

Answer

Yes, most banks will accept a real estate contract that states the seller will pay the buyer’s closing costs, up to a maximum of approximately 6%. However, some may reduce the sale price (and as a result, mortgage loan amount) by the amount the seller is paying to the buyer. This ensures they are loaning what the ‘actual’ sale price is, not just what the sales contract states.

On the other hand, some people believe a seller can do whatever they want with the sales proceeds. This includes paying your closing costs or giving a ‘cash back’ at closing for repairs. This can be done with a side agreement or an addendum to the real estate contract. Most times a bank will simply ask for the initial real estate contract, and if changes are made at a later stage, they don’t care and never ask for them. So it is possible to do what you are asking.

Remember… when financing a property like this, there is little room for error in your financial analysis of the property. I don’t recommend this type of arrangement for your first deal, as there is no room for mistakes. Your best bet is to finance a property with a small down payment (as little as 5-10% is available). Most people learn better when there’s a bit of money on the line, so just use a small amount of capital and consider it your ‘education fund’. Once you have some experience, you can look into creative ways to finance your deals and reduce the down payment required.

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Paul Blacquiere

Founder and Editor at Spirepoint Wealth
Paul is an entrepreneur, investor, speaker, educator and publisher. He is founder and editor at Spirepoint Wealth, a financial education company dedicated to helping people improve their finances, create more cash flow and build long-term wealth.
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  • Alfi says:

    Hi Paul,

    Do you know currently which bank will accept the credit back/ cash back clause and not reduce the sale price?

    I have tried locating them with but have no luck.

    Please share your expertise with a new-born real estate investor looking to buy with no money down for his & his family brighter financial life.

    Thanks!

    Al

    • Paul Blacquiere says:

      Hi Al,

      Unfortunately you’re taking the wrong approach to using cash backs. Even if you found a lender that didn’t mind the seller paying your closing costs, you still have to come up with a down payment.

      Too many times I see new investors want to buy property for nothing down because they don’t have any money. I recommend starting with a small down payment 5%-10%, and you’ll need to be approved with CMHC.

      Your best bet is to deal with a good mortgage broker who knows his lenders’ rules inside-out. The mortgage broker may have other recommendations for secondary lenders if you don’t want to pay CMHC premiums.

      I see you’ve already requested information from my recommended Investors Mortgage Broker, so that’s a good start (for those reading this comment, go here for more details – https://www.spirepoint.com/products-services/investor-services/mortgage-financing/ )

      The thing to keep in mind with nothing down deals is that you have absolutely NO insulation from market value fluctuations, so if you are forced to sell your property for any reason, right when the market drops, you could be forced to PAY someone to buy your property — not good.

      It’s better to have a bit of money in the property so you don’t have that problem, and your monthly payments will be lower too.

      Hope this helps

      Paul


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