Let’s be real, past generations of home buyers had an easier time coming up with down payments and closing costs. And that was great for them, but times have changed.
For most home buyers today – especially people trying to buy their first home – student loan debt, credit card debt and TWO recessions are just some of the major hurdles to homeownership.
But have no fear!
It’s actually possible for most home buyers to get a no-closing-cost mortgage loan (sometimes referred to as a zero-closing-cost mortgage).
Pros and Cons of a No-Closing-Cost Mortgage
|🏠 It’s easier to get into your first home.|
📦 You have more money to move into your new house and set it up.🛠️ You have more money available for home repairs (expected or unexpected).
|💸 You’re likely hit with higher monthly payments.|
😰 The overall cost of the loan could be higher, especially if you live in the house for more than 5 years.
Before we dive into no-closing-cost mortgages, let’s do a quick run-through of closing costs and how to lower them.
What Are Closing Costs?
Closing costs are upfront fees and expenses (not including the down payment) that a home buyer usually pays on the day their home purchase is completed.
These costs are in addition to the purchase price of the house.
How much are closing costs? 💰
Typically, they’ll run somewhere between 3% and 6%, depending on a variety of factors, like your credit score, down payment amount, location and your mortgage lender’s policies.
Play it on the safe side and plan for your closing costs to run up to at least 6% of the house’s purchase price.
What do home closing costs pay for? 🏠
Closing costs don’t include your down payment, but they do include a whole lot of other stuff!
Common closing costs can include:
- Origination (or application) fee: The lender charges this fee for setting up your mortgage loan.
- Processing (or underwriting) fee: The fee pays the lender’s underwriting employees for processing your loan application.
- Home appraisal cost: This is the cost of the professional home appraisal required by the lender.
- Home inspection cost: The buyer usually pays for the home inspection before closing, but sometimes they’re folded into the closing costs.
- Title search and title insurance cost: Both services verify the seller’s right to transfer ownership of the house.
- Prepaid property taxes: Lenders usually require that you pay 6 to 12 months of property taxes upfront.
- Prepaid homeowners insurance: Lenders need proof that you’ve purchased a homeowners policy before they can approve your loan.
- Escrow fees: An escrow company, which acts as a third party, is paid to hold on to some of the other closing costs, like property taxes and insurance.
- Mortgage points (discount points): Borrowers pay these optional upfront costs to lower their interest rate.
And these are just the tip of the iceberg! There are lots of other fees that could creep into your closing. If you’re getting a government-backed loan, like a Federal Housing Administration (FHA) loan or Department of Veterans Affairs (VA) loan, you’ll see additional fees specific to those types of loans.
How Can You Lower Your Closing Costs?
Before considering a no-closing-cost mortgage, see if you can get your closing costs paid for or lowered.
You’ve got options:
Ask someone else to pay for your closing costs 😁
A lot of first-time home buyers ask the seller to pay their closing costs. This is a common strategy in buyer’s markets. But if you’re in a seller’s market, it could sabotage your purchase offer.
Another option is to ask someone you know to “gift” you the money you need for closing costs. Before you make the ask, learn your mortgage lender’s gift money policy ahead of time. Rules around gift money vary depending on the type of loan you get.
Ask your lender to cut fees like Edward Scissorhands ✂️
Time to get creative and start snipping. Ask your mortgage lender to prune some fees from your closing costs.
Don’t worry, they won’t freak out on you if you make the ask. Lots of home buyers negotiate for lower fees.
Your lender may knock off or knock down a few of your closing costs if it helps you get the house – and helps them close on the loan.
Start with the origination fee. Lenders have a lot of wiggle room on this one. At 0.5% to 1% of the purchase price, the origination fee is also one of the biggest cuts you can make.
When it comes to negotiating lender fees, the stronger your credit score, the stronger your negotiating power. And it never hurts to be respectful and empathetic toward your lender’s loan officer – they’ve got a hard job.
Get help from a loan program 🆘
Depending on your income and other eligibility requirements, you may be able to find a loan assistance program to help you pay for closing costs or pay your down payment.
Even if you only got help with your down payment, that would free up cash for your closing costs.
From a conventional loan to an FHA loan to a VA loan, your lender or real estate agent may be able to connect you to a loan program that you’re eligible for.
How Do No-Closing-Cost Mortgages Work?
A no-closing-cost mortgage can save you from paying some serious coin on closing day.
With this type of mortgage, your lender agrees that they won’t charge you all or a part of your closing costs upfront when you close on your loan.
But your lender isn’t a nonprofit, so there is a tradeoff. Your lender will either fold your closing costs into your mortgage loan’s principal amount, or they’ll bump up your loan’s interest rate.
Every no-closing-cost mortgage has different details. Each home buyer comes with unique financial circumstances, and each mortgage lender has their own fees, rates and policies.
The 2 ways mortgage lenders cover closing costs 🤔
No-closing-cost mortgages are structured in two basic ways:
- Option 1: The closing costs are added to your mortgage loan and spread across your monthly payments for the life of the loan. Even though your interest rate isn’t raised, you’ll still end up paying more in interest because you’ll be charged interest on a larger loan amount.
- Option 2: Your lender covers your closing costs with “lender credits.” You never have to pay the lender back for the covered costs, but in return, you’ll have to accept a higher interest rate on your loan.
How a no-closing-cost mortgage affects your monthly payment 💸
No matter which option you choose to cover your closing costs, you’ll end up with higher monthly payments for the life of your loan.
Ask your lender to explain your options and tell you what your monthly payments would be for each one.
Who Offers No-Closing-Cost Mortgages?
Most mortgage lenders offer no-closing-cost mortgages. Banks, credit unions, mortgage companies all say “yes” to no … no closing costs, that is.
But eligibility requirements will vary between lenders.
In general, a lender will look at a house’s purchase price, your credit score and your debt-to-income (DTI) ratio when deciding if they can offer you a no-closing-cost mortgage.
Shopping for a no-closing-cost lender 🛒
Compare different lenders’ interest rates and fees, including which fees they will or will not cover if you get a no-closing-cost mortgage.
Ask for a loan estimate from each lender. Loan estimates spell out the details of the loan and make it easy to compare no-closing-cost loan offers.
Once you choose a lender, you’ll apply for a no-closing-cost mortgage. It’s the same process as applying for a mortgage loan with closing costs.
Should You Get a No-Closing-Cost Mortgage?
When deciding if a no-closing-cost mortgage is right for you, two things matter most: how long you plan to live in the house and how much you have in savings.
But let’s take a step back for a sec.
First, estimate what your closing costs are likely to be. Plan for the priciest – that would be 6% of the house purchase price. Next, subtract what the seller has agreed to pay for your closing costs (if anything at all). What you’re left with is what you’d have to pay at closing.
Then ask yourself these questions:
- Am I 100% sure I’ll have my closing costs AND down payment in the bank on closing day?
- After paying my closing costs and down payment, will I have enough savings leftover to pay for other homeowner costs?
- Can I afford higher monthly payments?
- What are the chances that I’ll be in this house for more than 5 years?
- Am I already planning to refinance in 5 years or so?
Once you’ve got the nuances of your situation front and center, measure them against this:
|A no-closing-cost mortgage could work if:||A no-closing-cost mortgage might not be a great idea if:|
|Your savings are hurting but your income is healthy and your debt is low. |
You might move or refinance your mortgage in a few years.
You’re eligible for a low interest rate because of your credit score and DTI.
|You get a high interest rate from your mortgage lender.|
You have enough cash to pay closing costs without sinking your savings.
You’re in it to win it, and you plan on keeping your house until it’s paid off in 15 or 30 years. (Side note: There’s also such a thing as a no-closing cost refinance.)
A No-Closing-Costs Closing Thought
A lot of first-time home buyers with thin savings use a no-closing-cost mortgage to move into their first home.
If that’s your situation, it’s important to weigh the benefits of getting into your house now or waiting until you’ve saved up more money for closing costs. We get it. Life stuff may be pulling you toward homeownership even if you’re not sure that you can afford closing costs.
You wouldn’t be the first person to become a happy homeowner with a no-closing-cost mortgage.