SANTA CRUZ (August 3, 2008) - More often than not, a prospective homebuyer will automatically want to offer less than the asking price for a home. After all, it is a buyers’ market where there are more sellers than buyers and in order to make a deal, most sellers are willing to give, at least up to a point.

However, there is more than one way for sellers to make their homes more attractive to buyers. Giving on the sales price may not be as big of a help as contributing to the buyer’s closing costs. While each situation is different, merely lowering the sales price by $10,000 will lower the cash required to close by just $2,000 (based on a 20 percent down payment) and will only lower the monthly payment by $50 per month.

One big challenge many buyers face is coming up with the cash for the down payment and closing costs. Instead of a price reduction, if the buyer who is short on cash were to receive the $10,000 from the seller to pay for the closing costs, the buyer would immediately experience the ‘savings’.

To take this concept to the next level, let us assume that a motivated seller with a house priced at $625,000 is willing to either lower his price by $20,000 or contribute $20,000 to the buyers’ closing costs. To truly maximize the effectiveness of this seller contribution, the buyer will use the money to pay for a permanent reduction in interest rate. It should be common knowledge that lower rates are available if the buyer is willing to pay more for the loan origination fee. For example, paying an additional four points (four percent of the loan amount or $20,000 on a loan amount of $500,000), will permanently lower the interest rate on a 30 year fixed rate from 6.375 percent to about 5.75 percent. This will lower the payments over $200 per month or $72,000 over the life of the loan.

Looking at it another way, at the lower rate of 5.75 percent a buyer is required to have an income of $97,000 per year to qualify for this loan. On the other hand, at a rate of 6.375 percent, the borrower would have to have an income of $103,000 per year.  The lower rate and resulting payments will obviously allow more people to qualify for the home.

Hopefully this information will help more buyers and sellers to think outside of the box when negotiating the terms of a home purchase. Sellers need to talk to their listing agents about offering this as a sales concession and buyers need to talk to their agents about the pros and cons of asking the seller for this kind of help with their closing costs vs. simply asking for a lower sales price.

Lenders typically allow sellers to pay the buyer up to 6 percent of the sales price in closing costs but they do not allow sellers to give cash to the buyers for any other reason such as to pay for repairs.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.