Buying a new home means more than qualifying for the mortgage. Many people forget about the closing costs that accompany this type of loan. Because closing costs can total as much as 5% of the loan amount, they often make home ownership impossible. Luckily, there are closing cost assistance programs available for certain borrowers. These programs, which are often grants, make home ownership possible for low-income families. In some cases, they even make it easier to afford a more expensive/larger home, helping low-income families even further. If you do not qualify for this type of assistance, there are still ways to decrease your liability for closing costs.
Grants for Closing Costs
Grants for closing costs are often available to low-income families. They come from a variety of sources and in varying amounts. Typically, the grants do not need to be repaid as long as you satisfy the terms of the grant. This usually means that you live in the property as your primary residence for a predetermined amount of time. If you move prior to that time, you may owe a prorated amount of the grant back to the agency who provided it.
You can generally find closing cost assistance grants from agencies associated with HUD. The non-for-profit companies often work with the government to provide necessary money for potential homebuyers who cannot afford the closing costs on a loan. The agencies offering the assistance are separate from the lender – they do not fund any loans. Instead, they just provide the funds to help the borrower close on the loan.
Qualifying for a Grant for Closing Cost Assistance
Every program has its own requirements when it comes to closing cost assistance, but there are some similarities across the board:
Income – Your income must not exceed the program’s guidelines. The amount will vary by agency as well as by your family size. The larger your family, the more money you can make and still qualify for the grant. Generally, you cannot make more than 100% of the average median income for the area in order to qualify.
Type of program – Some closing cost assistance programs require you to take a very non-risky loan type, such as a 30-year fixed rate loan. This gives you a better chance at affording the loan in the long run. This way the giving agency can feel good about your ability to keep the home and make good use of the grant they provide.
Primary residence – Most programs that provide closing cost help require the home you purchase is your primary residence. In some cases, they also require that you are a first-time homebuyer; however, there are some programs available to subsequent homebuyers.
Credit – Just as every loan has a different minimum credit score, the same is true for the closing cost programs. Some agencies have a minimum credit score while others simply require that you qualify for a specific loan program, such as FHA or USDA.
Keep in mind that many programs do have a time limit that you must live in the home. For example, if the grant’s requirement states you must live in the home for 5 years, yet you move after 3, you will owe a portion of the grant back to the agency. In this example, you would owe 40% of the grant back because you only lived in the home for 60% of the time you agreed to live there.
Other Ways to Get Closing Cost Assistance
If you do not qualify for a closing cost grant, there are other ways to obtain assistance with this large expense.
- Sellers – Many loan programs allow the use of sellers’ concessions. In other words, the seller can give you a credit at the closing. This comes right out of the seller’s profits and helps with the payment of your closing costs. Sellers are often willing to do this when they are able to secure a higher price for the home because they still get the profit they anticipated while helping the buyer secure the loan.
- Lenders – Do not discount the ability of your lender to help you. If you need help with the closing costs, talk to him about a no-closing cost loan. If the lender is not willing to provide a loan with no costs, they may be willing to concede on a portion of them. In exchange for the lower closing costs, the lender charges you a slightly higher interest rate. If you can afford the 1/8th of a point higher interest rate (or the rate the lender charges), then you can secure your loan and purchase the home without any money at the closing.
- Friends and family – Conventional loans and FHA loans allow the use of gift funds. These funds come from family or friends. This can help you pay your closing costs. Before you accept money from anyone though, make sure you discuss it with your lender. There is a specific way to document the funds as well as track them. This way the lender can verify the funds were a gift and are not a new loan that they need to include in the debt ratio.
If closing costs seem too high for you to afford, do not give up. There are many options available to help you become a homeowner. Grants are available for low-income families, which are those who have income that does not exceed the average median income for the area. If you exceed that amount or do not qualify for another reason, there are other ways to get help. Be creative and let people know you need help. No one can help you if they do not know you are struggling. In the end, you can secure financing without a lot of money out of your pocket, enabling you to become a homeowner.