Closing costs may seem like a strain when added to your down payment and other home buying costs. Here are some strategies that might help you reduce the potential burden of these costs.
Ask For Seller Concessions
Seller concessions are a way for the seller to assume some of the buyer’s costs and reduce the demand on their cash at closing. Simply put, the seller agrees to pay some of the buyer’s costs. In a seller’s market, it may be harder to negotiate concessions since sellers have the upper hand. In a buyer’s market, however, a buyer can potentially ask sellers to assume some of the closing costs without reimbursem*nt.
Government regulations limit the amount a seller can pay toward a buyer’s costs. That’s because the government doesn’t want to inflate housing prices by allowing sellers to, for example, agree to sell their house for $200,000 but offer to pay $50,000 in seller concessions. For this reason, the FHA limits seller concessions to up to 6% of the purchase price.
Negotiate With Your Lender
The saying “it never hurts to ask” applies to mortgage lenders as well. For example, your lender may be willing to waive a courier or wire transfer fee for you upon request. Though you won’t always get something waived, there’s always a chance you could. Don’t be afraid to negotiate with your prospective lender. The worst they can do is say no.
Accept Gifts From Benefactors
There are rules in place regarding the use of gift funds when applying for a mortgage. Home buyers getting conventional mortgages will find that they must be able to account for the money in their bank accounts. Lenders will generally want you to explain any gift that’s over half the amount of your household’s monthly income.
If your parents give you a $10,000 gift toward your home purchase, and that $10,000 suddenly appears in your bank account as you begin the home buying process, you’ll likely have to provide a gift letter to prove that those funds do not need to be repaid.
With an FHA loan, you must comply with the FHA’s regulations to qualify. It allows you to use gifts from these sources toward your down payment and closing costs:
- Borrower’s employer or labor union
- A close friend with a clearly defined interest in the borrower
- A charitable organization
- A governmental agency assisting low/middle-income families or first-time home buyers
Home Buyer Assistance Programs
There are a wide variety of programs at all levels of government and housing nonprofits whose mission it is to help first-time or low- and moderate-income wage earners attain homeownership, which remains one of the most important ways to accumulate wealth in the U.S.
First-time home buyer assistance programs are generally available to anyone who hasn’t lived in a home they owned for the past 3 years.
The Department of Housing and Urban Development (HUD) maintains a database of all local resources offering home buying assistance. Take a look and see if your state or city offers assistance that can help you get to closing with the cash you need.
FAQs
Because FHA closing costs include the upfront MIP, an FHA loan can have average closing costs on the higher end of the typical 3% – 6% range. That doesn't diminish in any way the value of getting an FHA mortgage, with its low down payment, lower interest rates and flexible underwriting.
Can buyer pay all closing costs on an FHA loan? ›
Every FHA loan includes closing costs, but they can be reduced. While closing costs are generally considered to be the responsibility of the homebuyer, you may not have to pay for everything yourself. One of the biggest advantages of an FHA loan is the ability to avoid large upfront costs.
What closing costs can be rolled into FHA loan? ›
FHA closing costs include an upfront mortgage insurance premium (MIP), lender and third-party fees and prepaid expenses. If you don't have the cash to pay FHA closing costs, you can finance these fees with your mortgage.
What is the credit limit for closing costs on a FHA loan? ›
For all FHA loans, the seller and other interested parties can contribute up to 6% of the sales price or toward closing costs, prepaid expenses, discount points, and other financing concessions.
Who pays closing costs on an FHA loan? ›
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
Are FHA loans difficult to close? ›
In March 2021, another Ellie Mae Origination Insight Report revealed that FHA purchase loans had a closing rate of 77.2% compared to 78.6% for conventional purchase loans within a 90-day cycle.
What is the lowest down payment for an FHA loan? ›
The minimum down payment required for an FHA loan is 3.5%. Keep in mind that you'll need a credit score of 580 or higher to be eligible for the 3.5% down payment. You'll have to put 10% down if you have a credit score of 500 – 579.
Do most sellers accept FHA loans? ›
While some sellers aren't fans of FHA loans, plenty of sellers would be happy to accept an FHA mortgage. Whether you decide on an FHA loan or a conventional loan, you'll want to be ready to make an offer on a home without delay. Get prepared and start the mortgage approval process today with Rocket Mortgage®.
What is the minimum credit score for a FHA loan? ›
Minimum credit score
FHA loans allow borrowers with a credit score of 580 or above to purchase a house with a down payment as low as 3.5% of the purchase price. Borrowers with credit scores between 500 and 579 need at least 10% down.
Can you get money back at closing with FHA? ›
The FHA's cash-out program allows you to cash out a portion of your equity and loan up to 85% of your home's value. You can receive less or up to $500 cashback when closing either a “no cash-out” refinance or a streamlined refinance.
In simple terms, yes – you can roll closing costs into your mortgage, but not all lenders allow you to, and the rules can vary depending on the type of mortgage you're getting. If you choose to roll your closing costs into your mortgage, you'll have to pay interest on those costs over the life of your loan.
Can you buy down points on FHA loan? ›
Yes. You may pay upfront points to obtain an even lower FHA loan interest rates for the life of the loan. This may be a great option for those who are planning to stay in their home for a longer period. Generally, for each point paid, you'll receive a ¼ point reduction in your rate.
Is it better to ask for closing costs or lower price buyer? ›
“If all things are equal on the offers, it's generally in the best interest of the seller to accept an offer with a lower price than it is to accept an offer with a higher price and a closing costs credit,” says top-selling Antioch, California listing agent Rick Fuller.
What is the most seller can pay in closing costs? ›
For a conventional loan, sellers can pay your closing costs up to 3% of the property's purchase price if your down payment is less than 10%. If your down payment is 10% or more, the seller credit increases to 6% of the purchase price.
What happens if seller credit exceeds closing costs? ›
Credits for closing costs cannot exceed actual closing costs. Seller credits can cover both recurring (interest, insurance & property taxes) and non-recurring (title, escrow, appraisal, etc.) closing costs. Credits cannot ever exceed actual closing costs, however, or they simply go unused.
Why are FHA loans less desirable? ›
Responsibility for Repair. The other major reason sellers don't like FHA loans is that the guidelines require appraisers to look for certain defects that could pose habitability concerns or health, safety, or security risks. If any defects are found, the seller must repair them prior to the sale.
What is the biggest advantage of an FHA loan? ›
FHA loan benefits include low down payments, great interest rates, easier credit rules, and financing for 1-4 units.
Is an FHA loan more expensive? ›
FHA loans sometimes have more favorable interest rates than conventional loans — but the difference is often offset by the greater number of fees, including the MIP charges, that they have.
Why is closing on a house so expensive? ›
The costs can include everything from appraisal fees, title search fees and title insurance, to fees for a home inspection, property survey and any attorney's fees. You may also be charged to record your deed along with property transfer taxes.
