The first step to determine if you are eligible for a closing cost assistance program is to understand if you can qualify for a mortgage. If you cannot qualify for a mortgage, then closing costs are not really an issue. Plus, in most cases, the qualification requirements for a mortgage are similar to the requirements for closing cost assistance programs.
Multiple factors determine your ability to qualify for a mortgage including your credit score, employment history and debt-to-income ratio. If you meet the credit score and employment requirements for a mortgage, the next step is to determine what size mortgage you can afford.
The loan amount you qualify for impacts what price home you can afford to buy. Additionally, your mortgage amount also affects your closing costs as some fees are charged based on the size of your loan or property purchase price.
The mortgage amount you qualify for depends on your monthly gross income and debt expenses. The higher your income and lower your debt expenses, the higher the loan amount you can afford. Other factors such as your mortgage rate and length also determine what size loan you can afford.
The lower your rate and longer your mortgage, the higher the mortgage amount you qualify for. This is why most borrowers select a 30 year fixed rate loan when they apply for a mortgage.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford
Because borrower qualification requirements vary by mortgage program, we recommend that you get pre-approved for your mortgage at the same time you start your outreach to learn about the closing cost programs available to you. Getting pre-approved provides a competitive advantage when you shop for a home and also enables you to identify and proactively address issues before you apply for the mortgage.
Use our free and easy-to-use get pre-approved form to get approved and compare mortgage proposals from multiple lenders. The form is no obligation, requires minimal personal information and does not impact your credit.
Getting pre-approved enables you to confirm the mortgage amount you qualify for plus the lender may be familiar with closing cost assistance programs that apply to you. Going through the pre-approval process with a lender should also provide you with a better understanding of the closing costs you are required to pay. This information should enable you to have more productive discussions with closing cost assistance providers.
In addition to researching the recommendations provided by the lender, closing cost assistance programs are typically provided by HUD-approved housing agencies or commissions. These are non-profit state or local organizations that provide a wide range of housing programs including homebuyer assistance programs.
Visit the HUD website below and select your state to learn about mortgage closing cost assistance programs that you may be eligible for.
HUD State Resources Website
When you contact your state or local housing commission it is important that you verify that the organization is approved by HUD. Additionally, most housing commissions offer closing cost assistance programs in conjunction with participating lenders so they may be able to recommend a lender who has experience working with applicants who apply for the program.
It is also important to understand how the program you are applying for works. Most mortgage closing costs programs are grants that you do not need repay as long as you live in the property for a certain number of years but you should confirm the details for your specific program.
Review How Closing Cost Assistance Programs Work
Closing cost assistance eligibility requirements vary by location and program provider but there are several points to focus on to make sure that you qualify. We outline some of the main qualification guidelines below.
Borrower income limits. Many programs use income limits that restrict how much money a borrower can make. The income limit is usually 80% to 100% of the area median income (AMI) for the census tract where the property is located. It is important to understand the applicable income limit for your closing cost assistance program upfront to make sure that you do not earn too much money to qualify.
Borrower asset limits. Some closing costs assistance programs also apply applicant asset limits that cap how much money you have in the bank or investment accounts. Programs are intended for home buyers with limited resources so if your assets are too high, you may not be eligible.
Mortgage limits. Most closing cost programs apply the limit used by the first mortgage program including conforming, FHA and VA loan limits. These limits vary by county and put a cap on your maximum mortgage amount. This also means you cannot use the program with larger, jumbo mortgages.
Property type. Most programs apply to single-unit, owner-occupied primary residences. In short, this means that you can only use the program if you buy a home, condominium or co-op that you live in. Second homes, vacation homes and investment properties are usually not eligible for closing cost assistance programs. Additionally, most programs do not permit multifamily properties although a small number do if you live in one of the units.
Mortgage type. Many closing cost assistance programs can only be used with a fixed rate mortgage which means interest only and adjustable rate mortgages (ARMs) are not eligible.
Ownership of other properties. Applicants typically cannot own any other homes to be eligible for a closing cost assistance program.
Homeownership Counseling Class. In many cases, applicants are required to take a homeownership counseling class to qualify for a closing costs assistance program. The class covers issues such as your mortgage payment and the total cost of owning a home.
The list above outlines many of the most common mortgage closing cost program eligibility requirements but program providers may use additional guidelines. It is important that you understand all qualification requirements before you apply for a program.
Finally, an increasing number of lenders are offering their own closing cost assistance programs. We recommend that you contact multiple lenders in the table below to learn more about program availability. Additionally, these lenders may know of mortgage closing cost programs that are applicable to you.
"Bridging the Down Payment Gap: Preparing for the first-time homebuyer opportunity." Publication Number 855. Freddie Mac, October 2016. Web.