Is There Such a Thing as Mortgage Closing Cost Assistance?
You hear plenty about the need to save up for a down payment but far less about the other costs associated with purchasing a home. Many first-time buyers are surprised by closing costs altogether, often dipping into their down payment savings to cover them.
Thankfully, programs exist that can offer mortgage closing cost assistance to offset or completely cover the expense of taking out a loan and transferring property.
What Is Closing Cost Assistance?
Closing cost assistance (CCA) helps buyers pay for some or all of the upfront costs of purchasing a home. Most often, this would be someone who has already saved up for a down payment or who is applying for a zero-down mortgage.
While you may find some programs designed specifically for the purpose of covering closing costs, most are more broadly labeled as down payment assistance (DPA) programs. Rest assured that in nearly all cases, DPA funds can be used to cover the down payment, closing costs, or both.
This means that you can use down payment assistance to defray closing expenses such as:
Lender origination fees
Appraisal costs
Discount points
Title research and insurance
Property taxes and homeowners insurance collected at closing
However, every program has its own set of rules. Be sure to ask about potential limitations when you apply. You'll also want to talk with your lender and verify that CCA funds can be used for your intended purpose with your specific loan.
Who Can Qualify for Closing Cost Assistance?
Most mortgage closing cost assistance programs are aimed at first-time and lower-income homebuyers. You will also find programs targeted to specific groups like:
Service members/veterans
Teachers
Childcare workers
But there's no need to worry if you don't fit into one of these categories: Not all programs have these restrictions, and many programs – especially lender-offered assistance – are available to most buyers.
Types of Closing Cost Assistance Programs
Closing cost assistance programs take various forms. The most common include grants, forgivable loans, silent second mortgages, and fully amortized second mortgages.
Grants
Grants are often considered the most desirable type of closing cost assistance. These CCA programs offer “free money” that you do not need to repay. However, grants are far less common than other types of closing cost assistance and are generally very restrictive in their qualifications.
Plus, although you have no obligation to repay the funds, you're often required to use a particular home loan with a higher-than-average interest rate.
Forgivable Loans
If you plan to live in your home for several years, closing cost assistance in the form of a forgivable loan is nearly as good as a grant. These loans are issued with no interest and no monthly payment. Your loan is entirely forgiven once you've lived in your home for the specified time.
If you sell, refinance, or move before then, you simply repay the CCA from your proceeds or savings. Some programs even forgive a set portion of your debt each year.
For example, it's common to find forgivable mortgage closing cost assistance loans with a five-year residency requirement, wiping 20% off the total yearly. If you sold your home after the third year of ownership, you would be responsible for 40% of the original balance with this type of program.
Silent Second Mortgages
Silent second mortgages generally have no or very low interest and do not require you to make monthly payments. As long as you own and live in your home and keep your original mortgage, they do not need to be repaid.
When you eventually sell or refinance, you use the proceeds to repay the closing cost assistance. Many programs may also require repayment if you move yet keep your home.
Second Mortgages with Payments
A fully amortized second mortgage is similar to a regular home loan. You will accrue interest on your balance and must make monthly payments until the loan is paid off.
Common examples of this type of closing cost assistance are Fannie Mae’s Community Seconds and Freddie Mac’s Affordable Seconds.
While not as advantageous as the other CCA options, these programs can be a lifesaver for buyers who would otherwise not have access to assistance funds.
Where to Find Closing Cost Assistance
Closing cost assistance programs commonly operate locally. Some programs could be on the state level, while others may be restricted to a specific county, municipality, or other designated area.
As a result, the best places to look for closing cost assistance include:
Your state’s housing finance agency (HFA)
County and local government agencies
Community-based nonprofits
Local financial institutions
Your employer
Native American tribal agencies
Closing cost assistance programs administered through state HFAs typically require using an approved lender to take out a first mortgage offered through the agency. You'll generally still have the choice of a conventional, FHA, VA, or USDA loan. However, you will likely be quoted a higher interest rate than with a standard mortgage.
Many nationwide banks and mortgage companies have their own closing cost assistance programs with no geographic and fewer qualifying restrictions. However, these options typically have less favorable terms than community-based CCA alternatives.
Other closing cost assistance programs may or may not require you to use a specific type of home loan to be eligible.
When Should I Apply for Closing Cost Assistance?
You will want to apply for closing cost assistance as early as possible. This generally means beginning the process before you even start shopping for a home. Many programs can take weeks or months for approval, while others may put new applicants on a waiting list.
Plus, closing cost assistance doesn’t work with all loan programs. Having your CCA in place when you apply for your mortgage allows your lender to connect you with the right type of loan and avoid issues that could delay your closing.
If you already have a home under contract and are in the underwriting process, talk with your loan officer about mortgage closing cost assistance options that may fit into your timeline.
Closing Cost Assistance Alternatives
Not all buyers will qualify for closing cost assistance, and the wait to get approved can be lengthy with certain programs. Here are some other alternatives you may want to consider, which, by the way, can usually be used alongside CCA as well.
Seller Contributions
When you make an offer on a home, you can ask the seller to pay for a portion of your closing costs. The amount the seller can contribute will vary depending on the type of mortgage you're applying for.
You're most likely to receive seller contributions with properties that have been on the market for a while or when overall market conditions favor buyers.
Rolling Closing Costs Into Your Loan
You may be able to roll your closing costs into your mortgage, but only if you’re getting a USDA home loan and the appraised value turns out higher than the sales price. It’s best not to count on this option, though, since you don’t know how much the home will appraise for until late in the process.
Lender Credits
Lender credits are the opposite of lender discount points. With lender credits, the mortgage company pays your closing costs in exchange for your accepting a slightly higher interest rate. Taking lender credits is similar to rolling the expenses into your loan, except that you're increasing your mortgage rate instead of your balance.
Cash Gifts from Relatives
Most loans let you receive cash gifts from relatives to cover or help offset your down payment, closing costs, and required reserves. Programs generally allow you to use funds from close family members such as parents, siblings, and spouses. Restrictions, however, will vary by loan type.
If you’re receiving a closing cost assistance gift from a family member, plan to need a gift letter and supporting documentation of where the funds came from.
HomeReady/Home Possible Sweat Equity
The HomeReady and Home Possible conventional loan programs allow homebuyers taking part in an affordable housing purchase program to earn sweat equity through their work with a nonprofit housing provider.
By aiding in the construction or rehabilitation of program-affiliated properties, buyers can build sweat equity that they can use to cover some or all of the down payment or closing costs on their own homes.
Under these programs, borrowers who earn 50% or less than their area’s median income may also qualify for a $2,500 closing cost credit.
Find Closing Cost Assistance Programs
Closing costs do not have to get in the way of your home purchase. Although it may sound complicated, qualifying for mortgage closing cost assistance is likely more straightforward than you think.
If you're ready to start, talk with an experienced lender serving your area who can guide you toward the best CCA programs available within your community.
