Can closing costs be included in a mortgage?
Yes, closing costs can be included in a mortgage loan. This is also known as “rolling” closing costs into a loan.
The downside of rolling closing costs into a loan is that you will be paying interest on the closing fees, so you’ll pay more for your mortgage in the long run.
Your lender will let you know which closing fees can be included in the mortgage and which cannot. For example, most FHA loans for single-family mortgages require that borrowers pay an upfront mortgage insurance premium (MIP). This premium, currently at 1.75% of the mortgage amount, can be rolled into the mortgage amount.
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Can you roll closing costs into a mortgage? Read on to learn more.
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What are closing costs on a house?
Closing costs are the fees associated with the closing, which is the last step of the home buying process. The closing typically takes place at the office of the title company, which is selected by the buyer. The closing costs are fees that both buyers and sellers pay when finalizing a real estate transaction.
How much are closing costs?
On average, closing costs are approximately 2% to 5% of the purchase price of the property.
The buyer’s closing costs may be under 5%, while the seller’s closing costs are often higher than 5%. This is because the seller pays the real estate agent’s commission at closing (if an agent was hired by the seller to list the property).
Prior to the closing, the buyer receives a “closing disclosure,” referred to as the CD, from their mortgage lender (if the buyer is getting a loan for the property purchase). The closing disclosure lists all the closing costs the buyer will pay. By law, the mortgage lender must provide the borrower/buyer with a closing disclosure no later than three days before the closing.
How to roll closing costs into a mortgage
As mentioned earlier, it is possible to roll closing costs into a mortgage. All lenders, including credit unions and banks, have policies regarding which fees can be included in the mortgage. Be sure to talk to your lender about whether closing costs can be included in the mortgage.
Other options for reducing closing costs
If you don’t have the money for closing costs, there are other options to explore.
Reduce your down payment. Putting less money down will free up money to use for closing. Some mortgage loan programs require only 3% down, while VA and USDA government loans require 0% down.
Ask the seller to pay for some or all closing costs. This is called a “seller concession
.” Some sellers may offer to pay some of a buyer’s costs as an incentive to sell the home. This may include a home warranty, prorated property tax, an appraisal, or inspection fee.
Pay a higher Interest rate. This is also referred to as
lender credits. According to the Consumer Financial Protection Bureau, when you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate.
Ask friends and family for help. First-time homebuyers, young adults moving out of their parents’ home, and newlyweds often use gift money to pay for closing costs. While family and friends may offer money, be sure to have a clear understanding of whether the money needs to be paid back, or if it is truly a gift.
Apply for grants. Some nonprofit organizations and even county or state governments may have grants available to low income and/or first-time homebuyers.
Requirements for financing your closing costs
All mortgage lenders are required by law to engage in responsible lending. Part of this process includes determining if a potential borrower can repay the loan they are applying for.
To determine a borrower’s ability to repay a mortgage loan, the lender reviews an assortment of information, including the borrower’s credit score, credit history, income, monthly expenses, and debts.
A lender is more likely to allow some closing costs to be included in the mortgage, if it can be determined that the borrower has a strong likelihood of repaying the loan based on their debt-to-income ratio and the loan-to-value ratio.
Let’s look at these further:
Loan-to-value ratio (LTV). This is a comparison of the loan amount compared to the market value of the property. To get an accurate ratio, the mortgage company requires an appraisal of the property to determine its fair market value. If the loan amount is higher than the value of the property, the buyer may not be approved for the loan. If the LTV is acceptable and you are approved for the loan, your lender will run the numbers to ensure that the inclusion of closing costs doesn’t raise the loan amount above 80%.
Debt-to-income ratio (DTI). DTI is your total monthly expenses divided by your total monthly income before taxes. Lenders will calculate this to determine if you’ll have the funds to repay the loan. Lenders typically require a DTI from 36% to 43%. Financing your closing costs could raise your debt such that your ratio is no longer acceptable. Your lender can run the numbers and provide you with options.
Which closing costs can be included in a mortgage?
Loan origination fee. This is a fee charged by a mortgage lender for the work done to originate the mortgage loan. Ask your lender if the fee can be rolled into your loan.
Discount points. Buyers may choose to “pay points” on a mortgage to reduce the interest rate. Generally, each point costs 1% of your total loan amount and typically lowers the mortgage interest rate by 0.25%. The cost for points can be rolled into the mortgage.
Credit report fee. According to the Consumer Financial Protection Bureau, a credit report fee is usually less than $30.
Title fees and title insurance. Your lender and the title company will determine if these fees may or may not be rolled into your loan.
Is it a good idea to finance your closing costs?
While you can include closing costs in a mortgage, rolling closing costs into a loan will cost you more in the long run. Ultimately, it's always better to not pay interest on a debt, and in general, paying your closing costs in cash is almost always the better option.
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