Closing cost assistance can take the sting out of coming up with the cash needed to close on your mortgage. There are a variety of programs that provide help with closing costs, but you’ll usually need to meet certain requirements to qualify.
Don’t assume you won’t be eligible — there are programs available to people with incomes up to $160,000, for example. Here’s everything you need to know.
How Does Closing Cost Assistance Work?
Closing cost assistance comes in several different forms: grants, forgivable loans, low- or no-interest loans and deferred loans. Grants and forgivable loans do not need to be paid back as long as you meet the program requirements. Low- and no-interest loans and deferred-payment loans do need to be paid back.
Closing costs often run about 2% to 5% of the home’s purchase price and include:
— Appraisal fees.
— Origination fees.
— Attorney fees.
— Closing fees.
— Document fees.
— Title search and insurance fee.
— Inspection fees.
— Deed recording fees.
— Escrow deposits.
[Read: What Are Closing Costs?]
Your closing costs are in addition to your down payment. So if you’re buying a $400,000 home and putting 10% down ($40,000), you’ll need roughly $8,000 to $20,000 on top of that for closing costs. That’s a total of up to $60,000 in cash due at closing. Your exact costs will be listed on the closing disclosure form you receive before closing.
You can often use the funds from a down payment assistance program toward closing costs, too.
Programs Offering Help with Closing Costs
There are specific programs available to help first-time homebuyers with closing costs. You can find these programs at the federal, state and local levels. Some don’t even require you to be a first-time homebuyer.
National Programs
Nationwide programs that offer closing cost assistance include:
— Freddie Mac Home Possible. The Home Possible mortgage from Freddie Mac lets buyers use “sweat equity” to cover their closing costs. That means you can use your labor and construction skills to cover your closing costs instead of cash. Very low-income borrowers can receive a $2,500 credit toward closing costs for a Home Possible mortgage or HFA Advantage mortgage through the BorrowSmart program.
— Fannie Mae HomeReady. The HomeReady mortgage from Fannie Mae also provides a $2,500 closing cost credit for very low-income borrowers.
— FHA loans. When you take out a mortgage backed by the Federal Housing Administration, you have the flexibility to use different funding sources to cover your closing costs, including rolling them into your loan.
— VA loans. If you qualify for a loan backed by the U.S. Department of Veterans Affairs, it’s possible you won’t be required to pay the VA funding fee if you meet certain requirements. This can help lower your closing costs. And since you may also qualify for a $0 down payment loan, you could stretch your cash savings further.
— USDA loans. Loans from the U.S. Department of Agriculture are zero-down-payment mortgages, which frees up your cash for closing costs. Plus, you can use other funding methods, such as seller contributions, to cover your closing costs.
[Read: Best FHA Loans.]
Local and State Programs
Every state — as well as the District of Columbia, Puerto Rico and the Virgin Islands — has a housing finance authority, or HFA, that is charged with helping residents access affordable housing.
For example, the Pennsylvania Housing Finance Agency offers the HOMEstead Downpayment and Closing Cost Assistance Loan, which provides up to $10,000 in closing cost assistance, in the form of a no-interest second mortgage loan, provided you meet income and purchase limits.
In South Carolina, SC Housing offers forgivable down payment assistance that can be used toward closing costs.
Washington state residents can qualify for homebuyer assistance even with incomes up to $180,000.
Find your state’s HFA to explore what options are available to you based on where you live. Don’t forget to check your city and county resources, too. For instance, Los Angeles residents may qualify for purchase assistance loans that cover closing costs. Other programs may be applicable to certain targeted counties or redevelopment areas.
Nonprofit Organizations
Nonprofit organizations can be another source of closing cost assistance. For instance, the Texas State Affordable Housing Corporation is a nonprofit that was created to help Texans buy affordable homes.
TSAHC offers down payment assistance that can cover your entire down payment, leaving that cash available to be used for closing costs and reducing your out-of-pocket expenses. Check with various nonprofit groups in your city to find out whether they offer similar assistance.
[Related:A Guide to First-Time Homebuyer Programs]
Where To Find Closing Cost Assistance Grants
There are several ways to find closing cost assistance.
— Check with your state’s HFA. Find your state’s housing finance authority to begin your search for closing cost assistance. They’ll provide a list of programs and can connect you with participating lenders.
— Ask your lender. Your lender should have extensive knowledge and experience in helping borrowers find appropriate loan programs. Lenders can also access DPA One by Freddie Mac, which is a tool that helps match borrowers to homebuyer programs.
— Look for DPA programs. Don’t miss out on help that goes by a different name. Down payment assistance, or DPA, can often be used for closing costs as well. Check with your selected program to see whether you can also use the funds toward your closing costs.
How To Qualify for Closing Cost Assistance
Eligibility requirements will vary depending on the homebuyer assistance program you use, but in general, you can expect to see the following types of requirements:
— Income. You may need to have an income at or below a certain threshold, often tied to your area’s median income.
— Credit score. Some programs have a minimum credit score requirement.
— Loan amount. The purchase price and loan amount may need to be within certain parameters, with larger loans potentially ineligible for assistance.
— DTI. Your debt-to-income ratio, or DTI, may affect your eligibility if it’s too high.
— Property type. Many programs specify that the property must be a single-family, owner-occupied home.
— Location. Some state housing finance agencies provide additional assistance for buyers in particular counties or regions.
— Homebuyer education. Depending on the program, you may be required to complete a homebuyer education course to qualify.
[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]
Other Ways to Reduce Closing Costs
The tradeoff for using closing cost assistance is that it could raise the interest rate on your primary or first mortgage, says Christina McCollum, a producing market leader with Churchill Mortgage in Benton City, Washington.
In addition to exploring grants and other closing cost assistance, consider one of the methods below to reduce your costs on settlement day.
— Negotiate seller contributions. Matt LaMarsh, an Atlanta-based licensed real estate agent at Engel & Völkers, has helped his buyers decrease closing costs by more than 35% by negotiating seller contributions. Keep in mind that in hot markets, a seller may be less inclined to accept an offer with seller concessions attached. Also, with certain loan products, the proportion of closing costs covered by the seller may be capped.
— Apply a family gift. The amount you can receive and apply toward your costs typically isn’t limited, but the giver may need to pay a gift tax beyond a certain amount. In 2024, borrowers can receive up to $18,000 from any individual without the giver incurring a gift tax.
— Shop for a smaller loan. Because the closing costs on a mortgage are typically proportional to the total loan amount, you may be able to save money by focusing your search on more affordable properties and shopping for a smaller loan.
— Roll costs into the loan. Another option is to have your closing costs rolled into your mortgage. Keep in mind, though, that adding closing costs will increase your loan principal and therefore the interest you’ll owe.
— Lender credits. Lender credits can be a way to trade a higher mortgage rate for lower closing costs. However, McCollum warns that in higher interest rate environments, these arrangements are rarely an option. Mortgage lenders understand that buyers with these rates will refinance within a year two. “It’s not really a strategy someone can deploy right now,” she says. “But maybe if the market changes.”
The most important advice for reducing your costs, LaMarsh says, is to put a financial plan in place far ahead of when you plan to purchase a home.
“Have a plan eight to 12 months in advance,” he says. That gives you time to become an educated homebuyer and arrange your finances.
McCollum advises buyers to think big-picture. “People should have a long-term vision in the real estate market,” she says. “Something that costs $350,000 today could cost $425,000 next year. People should look at rates and expenses as a long-term placement.”
After all, you can always refinance later — but you could be priced out altogether if you wait to buy.
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Where to Get Help With Closing Costs originally appeared on usnews.com
