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As you’ve been saving up to buy your first home, you’ve probably given a lot of thought to how much you can afford for the down payment. While the down payment deserves a lot of thought, don’t forget about your closing costs. Closing costs are generally 3% – 5% of the home sale price – that’s thousands of dollars! This means you’ll need a plan in place to pay off your closing costs on closing day.
So, here’s the good news: You don’t have to deal with closing costs alone. There are closing cost assistance programs that can help make your dream of becoming a homeowner come true.
Understanding how these closing cost assistance programs work – and how to take advantage of them – can help you make that final step toward homeownership.
What Closing Cost Assistance Is
Like a down payment assistance program, closing cost assistance helps aspiring home buyers – especially first-time home buyers – cover the costs of buying a home. Many of these programs are geared toward low-to-moderate income earners and assist higher-income earners in more expensive home buying cities, like New York City and San Francisco.
How Closing Cost Assistance Works
Closing cost assistance isn’t a single program. It’s part of a network of down payment assistance programs that work at the federal, state and local levels, all designed to help you become a homeowner. Qualified borrowers can choose to put the money they get toward their closing costs or their down payment.
These programs are offered by a wide variety of organizations, including your state or local housing authority, housing finance agency, nonprofit organizations, community development organizations and even grant funds sponsored by mortgage lenders.
There are five main types of closing cost assistance:
- Closing cost grant: You don’t have to repay the money from a closing cost (or payment assistance) grant.
- Forgivable loan: You don’t have to repay the loan if you live in the home for a specified number of years. If you sell too early, you’ll have to repay the loan based on how long you lived there.
- Deferred-payment loan: It’s like a forgivable loan, except there’s no loan forgiveness. You defer (think: postpone) payment on the loan until you sell the home.
- Zero-interest or low-interest loan: This is like a second loan that you can take out in addition to your mortgage. Taking out the second loan lets you borrow more than you need to buy your home.
So instead of borrowing 100% of the home’s value, you may be able to borrow up to 105% of the loan value, giving you extra money to cover closing costs. You then repay the difference while you pay your primary mortgage.
Two examples are the Community Seconds® mortgage offered through Fannie Mae and the Affordable Seconds® mortgage offered through Freddie Mac.
- Lender credit: Some private mortgage lenders offer credits to cover some or all of your closing costs. In exchange for accepting lender credits, you agree to a higher mortgage interest rate.
How much closing cost assistance can I get?
What you get in closing cost assistance will depend on several factors, including your credit score, income, location and the type of assistance you’re applying for.
For example, a grant program that doesn’t require repayment may offer less money than a program that’s set up as a low-interest loan.
Typically, closing cost assistance programs will offer a percentage of the home purchase price to a maximum amount. If you were approved for assistance, you might receive 3% of the purchase price up to a maximum of $10,000.
How can closing cost assistance help?
Let’s say you save up a down payment of $40,000 to buy a $550,000 home or 8% of the home’s purchase price. But, once you begin the home buying process, you realize that your closing costs will be $19,000.
If you need $19,000 to cover your closing costs, then you only have $21,000 (4.2% of the purchase price) left to put toward a down payment. A closing cost program can help you cover part or all of the $19,000, so you can put more of your $40,000 toward the down payment.
Do all lenders accept closing cost assistance?
Not all lenders work with closing cost assistance programs. You’ll have to partner with a lender who does.
Real estate agents and mortgage brokers usually have a network of lenders who work with payment assistance programs. Figure out where a lender stands on these programs as early as the mortgage preapproval stage. Ask if using closing cost assistance will be an issue.
Who Qualifies for Closing Cost Assistance
The criteria to qualify for closing cost assistance typically includes:
- Household income: The income limit is often determined by the area’s median income. (This can be great news for folks living in expensive home buying cities, like L.A. or New York City.) And the limit adjusts based on household size.
- Credit score: Eligible borrowers usually need a minimum credit score of 620 – 640.
- Mortgage loan length: Some programs require a specific mortgage term, like 15 or 30 years.
- Property restrictions: There may be limits on the property price, and the property may need to be a single-family home that’s used as a primary residence.
- Home buyer status: Some programs are only available to first-time buyers. Other programs are offered to repeat home buyers.
- Home buyer education: Many of these programs require that applicants complete a home buyer education program or complete a homeownership course. These courses are often offered online and take a few hours to complete.
Where To Find and How To Apply for Closing Cost Assistance
Closing cost assistance programs are available at the local, state and federal levels. Here are some suggestions on how to find them:
- The Department of Housing and Urban Development (HUD) outlines what programs are available in each state.
- Check with your local and state housing finance agency (HFA) for programs in your area.
- Many lenders offer grant money and programs for down payment and closing cost assistance. You can learn about these through your HFA and the lenders can also provide you with information on programs that they may partner with.
Pro tip: Apply for mortgage preapproval and closing cost assistance at the same time. Your lender needs to know how you’re getting the money to cover your closing costs and how much you’re getting.
These details may help with your preapproval and final mortgage approval.
How long does it take to apply for a closing cost assistance grant?
Applying and finalizing a closing cost assistance grant can generally take up to a month. So ideally, you should get your mortgage preapproval and apply for a closing cost assistance grant or loan before you start shopping for a new home. That way you won’t delay closing on the home.
In some cases, your mortgage lender can add even buffer time to the mortgage approval process on their end to make sure everything lines up well.
Other Ways To Pay Your Closing Costs
If you don’t qualify for closing cost assistance, there are other options to consider:
- Ask the seller to pay: You can negotiate with the seller on seller concessions. See if the seller will agree to pay part of your closing costs. Plot twist: This strategy usually only works in a buyer’s market. And your lender may limit how much of your closing costs the seller can pay.
- Ask relatives for help: Flip through the family photo album and refresh your memory. Is there a generous relative you can ask for a monetary gift or interest-free loan?
- Roll your closing costs into your mortgage: Some lenders allow you to roll your closing costs into your monthly mortgage payments. When you take this route, expect to pay interest on the closing costs. You could end up with a higher monthly mortgage payment.
- Look for ways to lower your costs: Some closing costs, like legal fees, can vary depending on who you hire. Shop around for quality services at a lower price to help reduce your overall costs.
FYI: Your lender is required to provide you with a Loan Estimate form that breaks down which closing cost-related services you can and can’t shop for.
And, in Closing, Discovering Your Options Means Seizing Your Home Goals
Closing costs are a part of the home buying journey, and you must prepare to pay them. Even if you think you have enough saved to cover your costs, it’s worth checking to see if you qualify for closing cost assistance. If you do, it could save you thousands and make your dream of owning a home a little easier on your wallet.
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Fannie Mae. “Helping Borrowers Overcome Down Payment and Closing Cost Barriers.” Retrieved January 2022 from https://singlefamily.fanniemae.com/media/5726/display
Freddie Mac. “Affordable Seconds – Freddie Mac Single-Family.” Retrieved January 2022 from https://sf.freddiemac.com/working-with-us/origination-underwriting/mortgage-products/affordable-seconds