If you haven’t thought about closing costs on your mortgage loan, you might be in for an unpleasant surprise. Closing costs can cost as much as 3% to 5% of your loan amount. On a $200,000 loan, that means $6,000 to $10,000. This is in addition to the money you put down on the home.
What if you can’t afford the closing costs? Can you wrap them into your home loan?
The answer is that it depends. The lender must approve it and the parameters of the loan must fit within the loan’s guidelines.
How to Roll Closing Costs Into Your Mortgage
The only way you can roll closing costs into your mortgage is if the home’s value exceeds the purchase price. If the appraised value exactly equals the purchase price, there isn’t any room to add the closing costs. If you were to finance them, you would enter home ownership owning more on the mortgage than the home is worth. This isn’t a position that most lenders are willing to take.
If, however, you have the room in the home’s value, you may wrap the closing costs into the loan, but you can’t exceed the loan program’s LTV requirements. For example, an FHA loan requires borrowers to put 3.5% down on a home. Let’s say you bid $200,000 on a home that you are using FHA financing on. You must put down $7,000. Now let’s say the appraiser determines the home is worth $215,000. That leaves room for you to wrap your closing costs into the loan, should you want to do that.
If the appraiser decided the home was worth $200,000, though, you wouldn’t be able to wrap the closing costs into the loan, as there wouldn’t be any room to do so.
Should You Wrap Closing Costs Into a Home Loan?
The bigger question is ‘should you wrap those costs into your home loan?’ Even if the lender/loan program allows it, you should give it careful consideration. If you wrap the costs into your loan, you increase your loan amount. This means you increase your monthly payment. It also means that you pay interest on those closing costs. Let’s say your closing costs were $5,000. If you finance them, you will end up paying interest on that $5,000, turning your closing costs into a much higher figure than you anticipated.
This could also affect your debt ratio. Because the loan payment increases, it could affect your ability to secure the loan. If you were already borderline with the approval and now you’ve increased your payment, you could find yourself without a loan approval.
Other Ways to Get Your Closing Costs Paid
If you don’t want to or can’t roll your closing costs into your loan, you have a few other options:
- Ask the seller to pay the closing costs – Some sellers are willing to pay the closing costs for you. They do this with a seller’s concession. The seller gives you a credit at the closing for a specific amount. They may not concede all of your closing costs, but they may help you a little, bit, making it easier to come to the closing table with less cash in hand.
- Ask the lender to pay the closing costs – Some lenders will even pay your closing costs for you. In exchange for the no closing costs, though, the lender will charge you a higher interest rate. The average increase is 0.5%, which doesn’t do a lot to your payment. If you can still afford the higher payment, this could be a viable option.
When you start saving for a home, keep those closing costs in mind. It’s best if you just pay them upfront. This way you don’t pay excessive interest or make your mortgage payment higher than necessary. If you can’t pay them though, wrapping the costs into your loan amount can be a great way to get the loan that you need to buy your home.