One of the most common questions we get is what can I do if I can't afford closing costs? The amount of closing costs varies depending on several factors including your lender, loan amount, property value and mortgage program. There are also two types of closing costs -- non-recurring costs, such as lender, appraiser and settlement agent fees that you pay only once when your loan funds, and recurring costs, which you pay a portion of at closing and then continue to pay after your loan closes such as partial interest expense, homeowners insurance and property tax. We provide a comprehensive overview of mortgage closing costs including the difference between non-recurring and recurring items and total estimated expenses for you to review.
While there is no fixed price for closing costs, they generally run between 0.5% and 2.0% of your mortgage amount which means your are required to come up with thousands of dollars to close your loan. In many cases borrowers may have enough money saved for the down payment to buy a home but have not given much thought to other transaction expenses. It can be very challenging to come up with the extra money to pay theses fees especially non-recurring costs that you may not have been aware of. In some cases, borrowers who thought they were ready to buy a home realize they need to wait until they save additional funds. This delay can be incredibly frustrating, especially if you already found a home you want to buy.
While coming up with an extra couple of thousand of dollars on the spot can be challenging, there are solutions available to borrowers. Below we outline several ideas if you can't afford closing costs including grants, gifts, having the property seller pay for all or part of the costs and paying a higher mortgage rate. Ideally, you should consider how to pay for these fees long before you start shopping for a home but that is not always practical. The good news is that several of the solutions below are applicable at any point in the mortgage process. Review the tips below to understand how to pay for closing costs if you find yourself strapped for cash.
One of the most common ways to pay for closing costs is to apply for a grant with a HUD-approved state or local housing agency or commission. These agencies set aside a certain amount of funds for closing cost grants for low-to-moderate income borrowers. These grants are usually structured as a gift as long you occupy the property and do not refinance your mortgage for a specified number of years. If you sell or vacate the home or refinance your loan prior to the specified number of years you may be required to repay all or part of the grant.
Understand How Closing Cost Assistance Programs Work
Borrowers should be aware that applying for a closing cost assistance grant can be a time-consuming process plus housing agencies and commissions typically have a limited amount of funds for these programs. This means borrower should apply for a grant as early as possible in the mortgage process and well before you submit your loan application.
Visit the HUD WEBSITE to determine the closing cost assistance grants offered by HUD-approved state or local housing agencies
A policy change in 2018 allows lenders to offer their own closing cost assistance grants. There are several borrower-friendly guidelines that apply to lender closing cost assistance programs. First, the funds must be a true grant to the borrower and are not subject to repayment, no matter how long you live in the home or have the mortgage. So the assistance is effectively a gift from the lender. Second, the grant funds cannot be used to pay for your down payment, can only go toward paying your closing costs. This is because regulators want homebuyers to have a certain amount of equity in their homes. Finally, the amount of the grant cannot exceed the amount of your closing costs but otherwise there is no limit on the assistance.
Because lender closing cost assistance programs were only permitted recently, they are relatively uncommon. Although not many lenders offer grants, there is no downside to asking your lender if they offer any kind of assistance. Contact lenders in the table below to understand the home buyer assistance programs they offer.
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Some companies offer homebuyer assistance programs, including closing cost grants, to their employees. These are usually larger companies with significant financial resources. Grants offered by your company may impose certain requirements such as your continued employment at the company for a specified period of time so be sure to understand the fine print and any restrictions. You can contact your human resources or benefits department to determine if your company offers homebuyer assistance programs.
Another way to pay for mortgage closing costs is to actually have the property seller pay them. You can negotiate this point with the seller and include any agreement in the property purchase contract. For example, if a home is listed for $250,000, you could make a full price offer and ask the seller to rebate you $4,000 of the purchase price to pay for closing costs. From the seller's standpoint, the rebate is a discount to the purchase price but from your standpoint, the rebate effectively enables you to finance all or part of your closing costs. In this example, you may not have $4,000 on hand to pay for closing costs so having the seller pay for them enables you to buy the home.
In slow-to-moderate housing markets, sellers may be inclined to pay for or rebate all or part of your closing costs as a way to complete the sale. In competitive housing markets, however, sellers may be less inclined to offer buyer incentives. Please note that some mortgage programs limit the amount of funds that sellers can contribute toward closing costs so be sure to work with your lender to understand what is permissible.
A gift from a relative or friend is a great way to pay for closing costs but there are a couple of points to keep in mind. First, any contribution must truly be a gift and not a loan. If you receive a gift that you need to repay, it is considered a loan, regardless of the interest rate or terms. Having an additional loan can negatively impact your ability to qualify for a mortgage so it is very important the funds you receive are a gift with no strings attached.
Also, the gift giver may be required to provide documents such as bank statements to verify the source of the funds. This allows the lender to understand where the money came from and to verify that it is not a loan. So in addition to being generous, the gift giver may be required to share some information with the lender.
While we do not always recommend paying a higher mortgage rate to pay for closing costs it may be the only option for some borrowers. In short, if you agree to pay a higher interest rate the lender provides you with a rebate that can be applied to your closing costs. There are several downsides to this approach. First, paying a higher mortgage rate usually costs you more in the long run because you pay a higher payment every month. You could end up paying thousands of dollars in extra interest expense over the course of your mortgage.
Additionally, because there is a limit to how much your mortgage rate can increase (to protect borrowers from being overcharged), there is also a limit to the size of the rebate you receive. Your mortgage amount usually must be $200,000 or higher for the rebate to cover your costs. If you are considering paying a higher mortgage rate to pay for closing costs be sure to weigh the positives with the negatives and understand the long term interest expense.
Use our MORTGAGE COMPARISON CALCULATOR to compare loans with different mortgage rates and costs
You may be able to lower your down payment and allocate some of those funds to pay for closing costs. For example, instead of making a 10% down payment to buy a home, you put down 5% and use your remaining down payment funds to pay for closing costs. Making a lower down payment increases your mortgage amount and monthly loan payment. Additionally, a lower down payment may mean you pay a higher mortgage rate. Plus, if your down payment is less than 20% of the property purchase price you are typically required to pay mortgage insurance, which is an extra cost for borrowers.
Although a lower down payment comes with certain costs and considerations there are a wide range of no or low down payment programs that offer flexible borrower qualification requirements. Using one of these programs to free up money for closing costs may represent a better financing option. Plus you can combine a low down payment program with a closing costs assistance grant to pay for all or part of your closing costs if you are still short on funds.
Review Best Low Down Payment Mortgage Programs
You can also use the FREEandCLEAR Lender Directory to find lenders that offer numerous low down payment programs
“Learn about loan costs.” CFPB. Consumer Financial Protection Bureau, 2018. Web.