Closing Costs Paid by Others

How to Get Your Closing Costs Paid by Others

Now that you have enough money for your down payment, here’s how to get your closing costs paid by someone other than you.

One of the biggest hurdles for for first time home buyers is coming up with the money for down payment and closing costs.  This article will help you buy your first home with as little of your own money as possible.

  • What Are Closing Costs?
  • Who Can Pay What?
  • Closing Costs Paid by Lender Credit
  • Seller Credit to Cover Closing Costs
  • Real Estate Agent Closing Cost Credit
  • Using Buyer Assistance to Pay Closing Costs

What Are Closing Costs?

Qualifying for a mortgage loan to buy a home includes having to come up with money to pay your down payment and closing costs.

The minimum down payment is dictated by the type of financing you are using to buy your home.

Minimum Down Payment Requirements

  • Conventional Community Mortgages – 3% Minimum Down Payment
  • Conventional Standard Mortgages – 5% Minimum Down Payment
  • FHA Government Insured Mortgage – 3.5% Minimum Down Payment

Beyond the minimum down payment, there are other costs associated with buying a home.  These are your closing costs.  Closing costs are made up of lender related costs and settlement services costs.

Common Lender Related Closing Costs

Origination Points – Charged by the lender to cover the lender’s costs.  Origination fees are not common, and you should probably avoid any lender that charges origination fees.  In some cases, you can get a lower interest rate if you pay origination fees.

Discount Points – Pre paying interest charges can give you a lower interest rate over the term of the loan.  This is also commonly referred to as “buying down” the interest rate.

Appraisal Fee – Paying for an inspection to appraise the value of the home you are buying usually falls on you.  In most cases, you will pay for the appraisal with a credit card, and it is not included in the final closing costs.  In some cases, the lender will pay for the appraisal up front, and the fee will show up on the final statement as a closing cost.

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Settlement Services – Depending on where in the Country you’re buying, you may have a title and escrow company involved, or you may have a real estate attorney.  Notary and recording fees are also common as part of settlement services.

Pre-Paid Finance Charges – Unlike closing costs, prepaid fees are recurring expenses during the life of your mortgage.  Examples of pre-paid fees include interim interest, and the funding of your impound account (pre-paid property taxes and homeowner’s insurance).

Transfer Taxes – City, County, or State transfer taxes will vary depending the laws where the home is located.

Some closing costs can also be referred to as recurring, and non-recurring closing costs.  The difference is simply whether a fee is a one-time fee that is the result of this purchase transaction, or recurring, such as interim interest and funding your escrow account.

How Do You Pay Closing Costs?

Usually, you will receive a document from your lender several days before closing showing exactly what you will need to pay at closing. Closing costs are included in that amount. That total amount will be paid via a cashier’s check as part of the closing.

That statement will show the portions of your closing costs are being paid by the seller or rolled into your loan, (if any) and will be part of the calculation of the amount you will need to bring to the closing.

Who Can Pay What?

Using traditional financing such as a Conventional FHA, VA, or USDA loan, there are rules about who can pay the down payment and closing costs.

Down payment sources tend to be much more strict than what is allowed when paying closing costs.

Who Can Pay Down Payment?

  • You can pay from your own funds
  • Use gift funds from a family member
  • An approved source of down payment as determined by loan program

Closing costs on the other hand, can be paid for by other parties involved in the transaction.  Let’s take a look at the most common ways to pay closing costs other than paying them out of your own pocket.

Closing Costs Paid by Lender Credit

A lender credit occurs most commonly when you choose to take a higher interest rate.  Taking a higher interest rate has the opposite effect of paying discount points essentially.

The benefit of using a lender credit through a higher interest rate is that this is not a fixed cost.  You may need a small credit, which means a very small increase of your interest rate.  You may need to cover all of your closing costs, which might require a higher increase of your rate.

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In most cases, you are only bridging a gap in coming up with the final closing costs to make it to closing.  This is common when you have other sources of closing costs, but not enough to cover everything.

Seller Credit to Cover Closing Costs

It is not uncommon for the seller of the home that you are buying to offer to pay some, or all of your closing costs.  When this occurs, the seller is offering a portion of the equity in their home as a credit toward your closing costs.

The seller is not giving you cash, or writing you a check, the credit is deducted out of their proceeds from the sale.

Always discuss the option of asking for a seller credit with your real estate agent.  A seller’s market usually makes more difficult because there are many buyers, and a lot more competition for the homes available for sale.

Asking for a seller credit when the competition does not, puts you at a disadvantage and reduces your chances of getting your offer accepted.

Real Estate Agent Closing Cost Credit

There are many discount real estate organizations in the market today that offer a closing cost credit if you use their services.

As a general rule, I do not personally like discount real estate services because the real estate agents willing to work in this environment tend to be less experienced.

However, an experienced real estate agent will usually do anything it takes to get a deal done.  It’s usually a last case scenario, but it is absolutely possible for your agent to apply a portion of their commission to help you cover closing costs.

Do not be afraid to ask your agent if this is a possibility should you need it.

Pay Closing Costs with Buyer Assistance

First time home buyer assistance programs are offered by many States, Counties, and sometimes even Cities.

While the prospect of getting buyer assistance to pay your closing costs, the reality is not nearly as attractive.  Buyer assistance programs are very expensive, and often have hidden costs and strings attached that can come back to bite you in the future.

Related Reading:  Beware Hidden Costs with Buyer Assistance

Can You Pay Closing Fees With A Credit Card?

Yes, Fannie Mae’s mortgage approval guidelines allow you to pay some closing fees with a credit card, (but there’s a catch.) Closing costs you could pay for with a credit card include:

  • Mortgage origination fees
  • Interest rate lock-in fees
  • Credit report fees
  • Appraisal fees
  • Commitment fees

But here’s the catch. Doing so increases your total debt, so this strategy may cause your debt-to-income ratio to move high enough to cause denial of your loan.

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Fannie Mae’s policy allows up to 2% of those types of customary and common fees to be paid with a credit card if the lender confirms that you have enough liquid funds to pay off those bills, in addition to the amount you be paying at closing.

You could do this if you have a credit card with a low balance, you have the liquid funds to be able to pay them off, and your debt-to-income ratio is low enough to absorb these charges without risking denial of your loan.

Frequently Asked Questions About Mortgage Closing Costs

Do closing costs go towards paying your mortgage?

No, they do not. It is important to understand that closing costs do not go towards paying off your mortgage. They are fees paid to the lender and other parties (appraisers, inspectors, title companies, etc.) who performed services involved in the loan approval process.

How does seller credit at closing work?

If you were able to negotiate seller credit, having the seller pay part of your selling cost, that amount will automatically be deducted from the amount you owe at closing. You will see it on the Closing Disclosure statement which, if you are purchasing in the United States, will be supplied to you at least 3 business days before closing. 

‘The Closing Disclosure statement is an important document that you will want to review carefully and ask questions to ensure you understand it. It gives you a chance to see everything laid out, line-by-line, to see if there are any errors or misunderstandings.

 You can see a copy and explanation of the Closing Disclosure statement here.

How do you get the seller to pay closing costs?

Closing costs like everything else in the home buying process, are negotiated as part of the offer letter you give to the seller, giving them the conditions for which you are willing to buy their property (the amount you will pay, date of closing, contingencies, etc.) Some people make the mistake of not realizing that the offer letter is the point where you negotiate with the seller, not after they have accepted an offer (with the exception of the situations where the property doesn’t meet a contingency, which can re-open negotiations.)

So, if you want the seller to pay part of your closing costs, you should ask for that in your offer letter. Just be aware that those costs are money out of their pocket, so they may not be willing to accept your request, and they may reject your offer or reply with a counter-offer. 

Requests for the seller to pay closing costs are usually more likely to be accepted when the market is cold or when their property has remained unsold on the market for some time.

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Working with a Mortgage Expert

Choosing the best mortgage based on your qualifications requires that you work with a professional loan officer that has experience with all of the options that are available to you.

All mortgage companies are NOT created equal.  Big box lenders that advertise on TV, radio, and the internet, often only target very narrow qualifying criteria.

These popular lenders spend millions of dollars on marketing and advertising, only to dump you into a call center and put you in the hands of an inexperienced customer service telemarketer.

Big box lenders try to convince unsuspecting consumers that it’s the lender that matters and never mention the fact that your loan officer is the gateway to you getting the best mortgage.

You should avoid these types of lenders at all costs if possible.  They do not offer lower rates or better service, but they do have more money to convince you that they do.

Have Questions About Qualifying for a Mortgage?

We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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