Closing Cost Assistance
TLDR: Closing cost assistance, also referred to as seller subsidy, is cash equivalent of how much the seller will give back to you at closing. It reduces your cash to close and the amount that the seller ultimately receives for the property.
You can think of closing cost assistance as a cash rebate at closing. The purpose closing cost assistance serves is to alleviate the burden placed on buyers of bringing oodles of cash to closing.
When you make your offer (and if the market isn’t too competitive), it’s prudent to begin negotiations by asking for seller assistance, also known as seller subsidy, seller assistance, and closing cost assistance. Why would the seller give assistance? Whether the seller lowers the purchase price or offers you a seller subsidy of the same amount, both actions end up netting the seller the same amount while making it easier for you to afford the purchase. If the seller wants to sell, they'll typically be willing to negotiate.
Example
If a house has been listed on the market for $225,000 for a few weeks, you may decide to make an offer for $215,000 and ask for $5,000 in closing assistance. That would net the seller $210,000. To the seller, that would be no different than offering $210,000 with no closing assistance. Similarly, if you were to offer the seller $220,000 and ask for $10,000 in closing assistance, the seller would net $210,000. When looking at offers, sellers are going to be most concerned about what they net.
Beware: The Caveats of Seller Subsidy
The seller subsidy may only be applied to closing costs, not to the down payment.
If you increase your offer on the house to account for increased seller subsidy, the house must appraise for the increased purchase price–your lender won’t cover any dollar amount above the appraisal.
For example, if you offer $230,000 on a house and request $20,000 in seller subsidy to help cover your closing costs, effectively netting the seller $210,000, it's the same as offering the seller $210,000 outright.
However, if similar properties are selling for $215,000, the house may not appraise for $230,000, so you’ll be in a pickle with the lender.
How much should I ask for?
In highly competitive markets, it’s not uncommon to be declined any seller assistance at all. In average markets, 2-3% is a common ask with the initial offer. For exceptionally inexpensive properties, seller subsidies of 5% are not abnormal.