How to Get Your Closing Costs Paid by Others
Now that you have enough money for your down payment, here’s how to get your closing costs paid by someone other than you.
One of the biggest hurdles for for first time home buyers is coming up with the money for down payment and closing costs. This article will help you buy your first home with as little of your own money as possible.
- What Are Closing Costs?
- Who Can Pay What?
- Closing Costs Paid by Lender Credit
- Seller Credit to Cover Closing Costs
- Real Estate Agent Closing Cost Credit
- Using Buyer Assistance to Pay Closing Costs
What Are Closing Costs?
Qualifying for a mortgage loan to buy a home includes having to come up with money to pay your down payment and closing costs.
The minimum down payment is dictated by the type of financing you are using to buy your home.
Minimum Down Payment Requirements
- Conventional Community Mortgages – 3% Minimum Down Payment
- Conventional Standard Mortgages – 5% Minimum Down Payment
- FHA Government Insured Mortgage – 3.5% Minimum Down Payment
Beyond the minimum down payment, there are other costs associated with buying a home. These are your closing costs. Closing costs are made up of lender related costs and settlement services costs.
Common Lender Related Closing Costs
Origination Points – Charged by the lender to cover the lender’s costs. Origination fees are not common, and you should probably avoid any lender that charges origination fees. In some cases, you can get a lower interest rate if you pay origination fees.
Discount Points – Pre paying interest charges can give you a lower interest rate over the term of the loan. This is also commonly referred to as “buying down” the interest rate.
Appraisal Fee – Paying for an inspection to appraise the value of the home you are buying usually falls on you. In most cases, you will pay for the appraisal with a credit card, and it is not included in the final closing costs. In some cases, the lender will pay for the appraisal up front, and the fee will show up on the final statement as a closing cost.
Settlement Services – Depending on where in the Country you’re buying, you may have a title and escrow company involved, or you may have a real estate attorney. Notary and recording fees are also common as part of settlement services.
Pre-Paid Finance Charges – Unlike closing costs, prepaid fees are recurring expenses during the life of your mortgage. Examples of pre-paid fees include interim interest, and the funding of your impound account (pre-paid property taxes and homeowner’s insurance).
Transfer Taxes – City, County, or State transfer taxes will vary depending the laws where the home is located.
Some closing costs can also be referred to as recurring, and non-recurring closing costs. The difference is simply whether a fee is a one-time fee that is the result of this purchase transaction, or recurring, such as interim interest and funding your escrow account.
Who Can Pay What?
Down payment sources tend to be much more strict that what is allowed when paying closing costs.
Who Can Pay Down Payment?
- You can pay from your own funds
- Use gift funds from a family member
- An approved source of down payment as determined by loan program
Closing costs on the other hand, can be paid for by other parties involved in the transaction. Let’s take a look at the most common ways to pay closing costs other than paying them out of your own pocket.
Closing Costs Paid by Lender Credit
A lender credit occurs most commonly when you choose to take a higher interest rate. Taking a higher interest rate has the opposite effect of paying discount points essentially.
The benefit of using a lender credit through a higher interest rate is that this is not a fixed cost. You may need a small credit, which means a very small increase of your interest rate. You may need to cover all of your closing costs, which might require a higher increase of your rate.
In most cases, you are only bridging a gap in coming up with the final closing costs to make it to closing. This is common when you have other sources of closing costs, but not enough to cover everything.
Seller Credit to Cover Closing Costs
It is not uncommon for the seller of the home that you are buying to offer to pay some, or all of your closing costs. When this occurs, the seller is offering a portion of the equity in their home as a credit toward your closing costs.
The seller is not giving you cash, or writing you a check, the credit is deducted out of their proceeds from the sale.
Always discuss the option of asking for a seller credit with your real estate agent. A seller’s market usually makes more difficult because there are many buyers, and a lot more competition for the homes available for sale.
Asking for a seller credit when the competition does not, puts you at a disadvantage and reduces your chances of getting your offer accepted.
Real Estate Agent Closing Cost Credit
There are many discount real estate organizations in the market today that offer a closing cost credit if you use their services.
As a general rule, I do not personally like discount real estate services because the real estate agents willing to work in this environment tend to be less experienced.
However, an experienced real estate agent will usually do anything it takes to get a deal done. It’s usually a last case scenario, but it is absolutely possible for your agent to apply a portion of their commission to help you cover closing costs.
Do not be afraid to ask your agent if this is a possibility should you need it.
Pay Closing Costs with Buyer Assistance
First time home buyer assistance programs are offered by many States, Counties, and sometimes even Cities.
While the prospect of getting buyer assistance to pay your closing costs, the reality is not nearly as attractive. Buyer assistance programs are very expensive, and often have hidden costs and strings attached that can come back to bite you in the future.
Related Reading: Beware Hidden Costs with Buyer Assistance
Working with a Mortgage Expert
Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.
All mortgage companies are NOT created equal. Big box lenders that advertise on TV, radio and the internet, often only target a very narrow qualifying criteria.
These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.
Big box lenders try to convince unsuspecting consumers that it’s the lender that matters, and never mention the fact that your loan officer is the gateway to you getting the best mortgage.
You should avoid these types of lenders at all costs if possible. They do not offer lower rates or better service, but they do have more money to convince you that they do.
Set Yourself Up for Success
The absolute first step to buying a home is to get your financing ducks in a row before you start looking for home. This means working with a mortgage professional.
Once you find an expert loan officer that you trust, ask them for an introduction to a local real estate agent that they trust. Even if the loan officer is not from the community that you’re buying in, they will still be able find an agent that rises to the level of professionalism you deserve.
Not sure where to find a professional loan officer that you can trust? You’re in the right place!
If you have any questions or comments about this topic, feel free to leave a comment below, or you can shoot me an email at firstname.lastname@example.org.
Now sure how to identify a professional loan officer? Watch these expert interviews I’ve done with professional loan officer friends of mine.
I firmly believe that once you hear how a professional loan officer communicates, it will help you to avoid silly mistakes and errors that are common with inexperienced or uneducated loan officers.