In addition to making a down payment when you buy a house, you will have to pay closing costs. These are the fees associated with getting a mortgage loan and may include a loan origination fee, appraisal fee, inspection fees, title insurance and recording fee. Although they vary, closing costs generally average about 2 to 5 percent of the home’s purchase price, says Zillow. But when you don’t have the extra cash, there are options available for avoiding paying closing costs out of pocket.
Talk to different lenders about a no-closing-cost mortgage. As a tradeoff, you will have to pay a higher interest rate -- usually another 0.25 to 0.50 percent -- than you would if you pay closing costs, notes Bankrate. This is an option if you don’t have the money to pay closing costs up front. An additional benefit is realized if you don’t intend to remain living in the home for longer than five years -- because the extra interest that you pay will still be less out of pocket than if you had paid closing costs
Contact your local housing authority or community development office or the Home Partnerships Investment Program (HOME) office nearest you. Inquire whether you qualify for the American Dream Downpayment Initiative (ADDI) which assists first-time home buyers with low incomes by giving them money for a down payment and closing costs. ADDI is capped at the greater of $10,000 or 6 percent of the home's purchase price, according to HUD guidelines at the time of publication.
Ask the seller to add the closing costs to the price you offer to pay for the home. If the seller agrees, you take out a bigger loan, pay the seller the purchase price you initially negotiated and then use the extra money to pay your closing costs. It saves you having to come up with the cash. Since you are actually adding the costs to the loan amount, you will be paying for the costs over the loan term, points out RealEstateABC.com.
Ask the lender to roll the closing costs into your mortgage loan. Before you can finance the closing costs, the lender must qualify you for the higher loan amount and you can’t exceed your loan-to-value ratio. Depending on your income and credit rating, a lender may give you a loan for up to 95 percent of the home’s appraised value, according to Zillow. If a lender gives you a loan that exceeds 80 percent LTV, it usually comes at a higher interest rate and you need to buy private mortgage insurance.
Accept the money for closing costs as a gift from a family member. Whether you are applying for a mortgage loan backed by the Federal Housing Administration or from a conventional lender, the lender will require that the person giving you the money sign a gift letter. The letter must state the amount of the gift and that you don’t have to pay back the money. In addition, the person must provide documentation showing he had the money to give you as well as how he transferred the funds to you, points out Eleanor Thorne, a North Carolina mortgage expert.
- Zillow: What Are Closing Costs and How Much Are They Typically?
- Bankrate: Is No-Closing-Cost Mortgage for You?
- RealEstateABC.com: Asking the Seller to Pay Closing Costs
- Zillow: Qualifying for a Mortgage?
- NC FHA Expert: Borrowing Money for Your Home from Your Family
- HUD.gov: American Dream Downpayment Initiative
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