Can I Borrow Money for Closing Costs?

Closing costs are fees and expenses homebuyers pay to finalize a real estate transaction. These costs are distinct from the down payment and include charges for loan origination, property appraisal, title insurance, attorney fees, and recording fees. The total amount can range from 2% to 6% of the home’s purchase price. Many homebuyers need to cover these substantial upfront expenses, which can be challenging if their available cash is limited or if they wish to preserve savings. Financing these costs can make homeownership possible.

Financing Through Your Mortgage Lender

One way to reduce immediate out-of-pocket expenses for closing costs is through your mortgage lender, via “lender credits.” A lender credit involves the mortgage provider covering some or all of a borrower’s closing costs. In exchange for this financial assistance, the borrower agrees to a higher interest rate on the mortgage loan. This means less cash is required at closing, but the borrower will incur higher monthly mortgage payments and pay more interest over the loan’s duration.

Lender credits benefit homebuyers with limited liquid assets, freeing up cash for other immediate expenses like moving or home improvements. However, this strategy increases long-term costs due to the elevated interest rate, adding thousands of dollars to the total repayment. Borrowers should consider how long they plan to stay in the home when evaluating if a higher interest rate is worthwhile. A higher interest rate can also increase a borrower’s debt-to-income ratio, affecting eligibility or future financial flexibility.

Securing Funds From the Seller

Another way to reduce a homebuyer’s cash outlay for closing costs involves negotiating seller concessions. Seller concessions are an agreement where the seller pays for a portion of the buyer’s closing costs or other associated fees as part of the purchase contract. This negotiation occurs during the offer phase of the homebuying process. While not a direct loan to the buyer, these concessions effectively lower the cash the buyer needs at closing.

Funds for seller concessions are deducted from the seller’s proceeds at closing. Costs covered by seller concessions include appraisal fees, title insurance, loan origination fees, and property taxes. There are specific limits on how much a seller can contribute, which vary based on the type of mortgage loan. For conventional loans, seller contributions range from 3% to 9% of the purchase price, depending on the buyer’s down payment percentage.

Federal Housing Administration (FHA) loans allow seller concessions up to 6% of the home’s purchase price. Department of Veterans Affairs (VA) loans offer flexibility, allowing sellers to cover most reasonable and customary closing costs, with a limit of 4% of the home’s value for certain concessions like the VA funding fee or debt payoffs. United States Department of Agriculture (USDA) loans also permit seller contributions up to 6% of the loan amount. These limits help prevent inflated home prices.

Utilizing External Programs and Gift Funds

Homebuyers can access funds for closing costs through external programs and gift contributions. Down Payment Assistance (DPA) programs are offered by state, county, or local housing authorities to help individuals with both down payments and closing costs. These programs come in various forms, including outright grants that do not require repayment, deferred loans where repayment is postponed, or forgivable loans that are forgiven after a certain period if conditions are met. Eligibility for DPA programs depends on income limits, credit score requirements, and completion of homebuyer education courses.

A source of funds can be gift money provided by eligible donors, such as family members. These funds can cover closing costs, reducing the need for the buyer to use personal savings. Lenders require a gift letter to document that the funds are a gift and not a loan that needs to be repaid. The letter specifies the donor’s name, relationship to the borrower, the amount, and a clear statement that no repayment is expected.

While recipients do not pay taxes on gift funds for a mortgage, donors might have reporting requirements. For 2025, an individual can gift up to $19,000 per recipient annually without triggering tax reporting requirements. Amounts exceeding this annual exclusion require the donor to file a gift tax return, though actual taxes are rarely owed.

Considering Other Loan Options

For homebuyers seeking to finance closing costs, other loan options exist, but they have drawbacks compared to mortgage-related solutions. Personal loans can provide a lump sum of cash for closing expenses. These loans carry higher interest rates than mortgages, with rates for good credit ranging from 12.64% to 14.48%, and can extend to 36% or more depending on creditworthiness. Personal loans have shorter repayment terms, resulting in higher monthly payments and adding another debt obligation to the borrower’s financial profile.

Using credit cards to pay for closing costs is not advisable due to high interest rates, exceeding those of personal loans. While some smaller fees like application or appraisal costs might be payable by credit card, major closing expenses are not accepted via credit card by mortgage lenders or title companies. Taking a cash advance from a credit card for closing costs can incur additional fees, 3% to 5% of the advance amount, and can negatively impact a credit score by increasing credit utilization. This approach can also complicate the mortgage approval process as lenders monitor credit activity to ensure the borrower’s debt-to-income ratio remains acceptable.