Closing costs can cost anywhere from 2 to 5 percent of the loan amount. That’s a significant amount of money, especially when you are buying a home and need a down payment as well. While depleting your savings account might be the easiest way to pay these costs, it’s not the most recommended. What happens if you experience an emergency? What funds will you turn to then?
Rather than using your savings, we’ve come up with some creative ways you can pay those closing costs and not break the bank.
Get a No Closing Cost Loan
It might not seem possible, but you can get a loan that does not cost any closing costs. Don’t think you are cheating the system or anything, though. Essentially, you pay them, just in a different way. Lenders need to make money on your loan. They usually do so upfront when you close and pay the fees they charge. However, if you don’t have the cash to pay the fees upfront, you can take a higher interest rate and have no fees.
It’s like a wash for the lender. Even though they don’t collect cash up front, they still see the money in the extra interest they charge. Generally, lenders charge 0.5% more for this type of loan, but the exact amount differs by lender.
Before you agree to this, though, make sure you can afford the higher monthly payment. Also, keep in mind that a higher interest rate means you’ll pay more over the life of the loan as well as each month. If you keep the loan for the entire term, the closing costs will probably cost you more overall.
Get the Seller to Pay the Closing Costs
Did you know that sellers sometimes pay closing costs for their buyer? Again, you aren’t getting away cheap; you still pay them, just in a different way. In this case, you will offer the seller the full asking price with the condition that he/she pays your closing fees for you.
Sellers are sometimes willing to do this because they know they probably won’t get the full asking price for the home. They know they will have to lower the price a bit. If you pay the full asking price, they have wiggle room to credit you some of the money to help you get your closing costs paid.
This method only works if you qualify for the higher loan amount, though. Plus, you must be okay with the fact that you’ll pay more in interest over the life of the loan since you essentially wrap the closing costs into it.
Get a Gift from a Relative
Many loan programs, including FHA and conventional loans allow the use of gift funds for closing costs. The main requirement is that the funds cannot be borrowed. You must be able to prove they are a gift with a signed gift letter from the donor. You’ll also have to provide the proof of where the funds originated and that they went into your account designated for your house purchase.
For example, your mom gives you $5,000 for your closing costs. She sells stocks in order to give you the money. She must provide the stock sale certificate and the canceled check for the check she wrote you for the funds. You must also provide the deposit ticket proving that you deposited the money into the correct account. This all accompanies the letter your mom writes stating that she does not expect the money to be repaid – that it is a gift.
Borrow From Your 401K
Some 401K programs allow you to borrow funds from them for the purpose of buying an owner-occupied home. Whether your program allows it is up to the plan director. You’ll need to get in touch with your HR department to determine what options you have. Some 401K plans allow investors to borrow the funds for closing costs without any penalty. However, there are likely strict repayments terms you must abide by in order to get the loan.
Bank Your Windfalls
If you regularly receive tax refunds or you know you are privy to an inheritance, bank the money. If you need the funds for your closing costs in the next two months, you’ll need to source the funds, so make sure you have proof of where they originated. If you won’t buy a home for a few months or longer, though, you can put the money not the bank and leave it there. This way you have the funds you need to close on your loan without disrupting your savings.
Get Help From Your Employer
Some employers offer assistance programs to help employees buy a home. As long as the program is offered to everyone in the company, you may be able to use those funds to pay your closing costs. You’ll have to provide the documentation from your employer showing the eligibility for the funds and how you can use them. As long as it’s not a loan, though, most lenders will allow the use of the assistance.
Paying your closing costs may require a little creativity. You have to figure out what will work best for you, whether it’s taking the higher interest rate or offering the full asking price of the home. If you don’t want to risk higher monthly payments or more interest over the life of the loan, consider other options that allow you to tap into other funds to get the money you need to buy your home.