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What if you can't afford closing costs? 6 ways you can still buy a home.
It’s no secret that buying a home is expensive, but many people focus on the down payment. Some don’t think too hard about the closing costs, but they can be a significant barrier to buying a home. These costs have risen sharply over the past several years. The median loan fee rose nearly 22% in 2022, according to the Consumer Financial Protection Bureau (CFPB) — a substantial jump compared to the 3.2% increase in 2021.
Paying for closing costs can feel overwhelming, but there are ways to lower or avoid these costs up-front so you can achieve your homeownership dream.
Read more: Closing on a house — What to expect and how to prepare
In this article:
How much are closing costs?
Closing costs are fees you pay to process your home loan, assess the property, and handle the legal documents associated with the home-buying process. These costs are typically 2% to 5% of the home purchase price. You’ll find a more detailed number in your Loan Estimate (which your lender will send you within three days of receiving your official loan application) and Closing Disclosure (which you’ll receive within three days before closing).
Learn more: Are closing costs tax-deductible?
How to lower or avoid up-front closing costs
While any home buyer would love to know how to avoid closing costs, it’s nearly impossible to escape all loan fees. Still, you can take the following steps to lower your expenses or delay payments so you don’t have to put up the money on closing day.
1. Start with the best mortgage lenders
Shopping around and comparing offers from multiple mortgage lenders is one way to ensure you get the best interest rates — but you can also compare loan fees. Look for lenders that offer low fees to process and underwrite your loan application.
Read more: The best mortgage lenders right now
2. Negotiate lower fees
Not all closing costs are negotiable, but many of them are. Lender fees tend to be more flexible, so ask your lender about lowering or waiving expenses like the following.
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Application fee: Lenders may charge this fee for submitting a mortgage application.
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Origination fee: This is a fee mortgage providers charge to process borrowers’ loans.
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Underwriting fee: Companies charge to review your application and assess your loan eligibility. Some may include the underwriting charge in the origination fee or list it as a separate expense.
While mortgage lender fees can be negotiated, you may have a more challenging time negotiating third-party fees like the ones listed below. However, you can shop for some of these services to find more affordable vendors than the lender’s choice.
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Home appraisal and land survey fees: The home appraisal fee is for assessing the home’s value, while the land survey fee is for identifying the property’s boundaries and regulations for building add-ons.
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Title search and insurance fees: You’ll pay a fee to ensure the property is not subject to legal claims or liens.
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Recording fees: These include government charges to register the deed and other official homeownership documents in your name.
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Closing agent or attorney fee: Representatives who oversee the closing process will charge a fee. Some states require a real estate attorney at closing.
Your Loan Estimate will clearly state which fees the mortgage lender will allow you to shop for and which are set in stone.
Read more: 7 strategies for negotiating and reducing closing costs
3. Apply for closing cost assistance
You may be eligible for federal or state programs that can lower loan fees through grants, no-interest loans, or other forms of funding. To be eligible, you’ll likely need to meet an income requirement or be a part of a specific community, like active or retired military members or first-time home buyers. Visit the National Council of State Housing Agencies to find programs in your area.
4. Roll closing costs into the mortgage
If you can’t afford to pay your closing costs up-front, you may be able to roll all or some of the fees into your loan. You won’t pay anything at closing, but the lender adds the fees to your principal, increasing your total loan amount and monthly mortgage payment. You’ll pay interest on a higher balance, which will cost you more in the long term. Make sure the lender shows you exactly how your total costs and monthly payment will change to understand whether this move makes sense for you.
5. Ask for lender credits
Lender credits work similarly to rolling closing costs into your loan. Instead of adding closing costs to your loan balance, your lender pays the fees in exchange for a higher interest rate. Rolling closing costs into your mortgage can help if you can’t pay cash up-front, but it will cost you more over the loan’s term since you’re paying a higher rate.
6. Explore a no-closing-cost mortgage
There’s nothing wrong with asking lenders how to get closing costs waived. Some companies cover fees like loan origination, application, and other lender fees in a no-closing-cost mortgage. But read the fine print to understand whether the lender is truly covering the costs. A mortgage lender may say “no closing cost” but mean “no closing costs up-front” by rolling the fees into your loan or raising the interest rate — both of which would cost you more in the long run.
Choosing a no-closing-cost mortgage loan is similar to rolling costs into your mortgage or using lender credits, except a no-closing-cost loan moves all of your closing costs into the principal instead of just some expenses.
Dig deeper: Mortgage lender fees — How they differ from other closing costs
What if I can’t afford closing costs? FAQs
Is there a way to avoid closing costs?
Certain costs, like government fees, credit report fees, and home appraisal fees, are non-negotiable, making it unlikely to avoid all closing costs. You may have more success negotiating fees that come directly from the lender. Ask your mortgage provider if there is room to lower the origination, underwriting, or other lender fees it may charge.
What happens if I can’t afford closing costs?
If you’re unable to pay closing costs, it’s better to know as early as possible. Explore your eligibility for closing cost assistance programs at your local housing agency. You can also shop around for no-closing-cost loans, which involve lenders paying or waiving your fees in exchange for a higher interest rate. If you still can’t afford closing costs, you may need to wait to buy a house to save more money.
Can I roll closing costs into a mortgage?
Some lenders let you roll the closing costs into the loan principal. Although you won’t pay fees up-front, they are added to your total loan balance, resulting in a higher monthly payment and more interest paid over the loan term.
This article was edited by Laura Grace Tarpley.
