Can You Roll Closing Costs Into Your Mortgage?

Closing costs are fees and expenses incurred during a home purchase or mortgage refinance, typically due at the time the transaction is completed. Many prospective homeowners or those refinancing wonder if these significant upfront costs can be included in the mortgage loan. While possible in certain situations, incorporating these costs into the loan comes with specific financial considerations for the borrower.

Ways to Include Closing Costs

Government-backed loan programs often provide specific mechanisms to assist with these expenses. Federal Housing Administration (FHA) loans may allow some closing costs to be financed, and the Upfront Mortgage Insurance Premium (UFMIP) is commonly added to the loan principal. For loans backed by the U.S. Department of Agriculture (USDA), closing costs can be rolled into the mortgage if the home’s appraised value exceeds the purchase price, and the upfront guarantee fee can also be financed. For Veterans Affairs (VA) loans, only the VA funding fee can be included in the loan principal.

Lender credits are another method, where the mortgage lender agrees to cover a portion or all of the borrower’s closing costs. In exchange for this upfront financial relief, the borrower accepts a slightly higher interest rate. This arrangement is sometimes referred to as a “no-closing-cost mortgage,” as it reduces the immediate cash required from the borrower at closing. While these credits are applied at closing to offset fees, the higher interest rate means the cost is effectively spread out over the life of the loan.

A cash-out refinance also offers a way to generate funds that could cover closing costs. With a cash-out refinance, a borrower takes out a new mortgage for a larger amount than their existing loan, converting a portion of their home equity into cash. This cash can then be used to pay for various expenses, including closing costs.

Key Factors for Eligibility

Loan-to-value (LTV) ratios are a primary consideration, as lenders impose limits on the total loan amount relative to the home’s value. For example, a conventional cash-out refinance typically has a maximum LTV of 80%, meaning the new loan cannot exceed 80% of the home’s appraised value. Including closing costs would increase the loan amount, potentially pushing it beyond these established LTV thresholds.

A borrower’s credit score and overall financial health also play a significant role. Lenders assess creditworthiness, and a stronger credit profile generally increases the likelihood of qualifying for financing options that include closing costs. While minimum credit scores vary by loan type, a higher score can lead to more favorable loan terms. Additionally, a low debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income, is preferred by lenders.

Beyond general program guidelines, individual lenders may implement their own stricter policies, known as overlays. This means that even if a specific loan program permits certain closing costs to be financed, a particular lender might have internal rules that limit this option or require a stronger financial standing from the borrower. The type of property and its intended occupancy, such as a primary residence versus an investment property, can also influence a lender’s willingness and the specific terms offered for including closing costs.

Financial Outcomes of Including Costs

Incorporating closing costs into a mortgage loan has direct and quantifiable financial consequences. The most immediate outcome is a higher overall loan amount than if the costs were paid out-of-pocket. For example, if closing costs are $10,000 on a $200,000 mortgage, rolling them in results in a $210,000 loan principal. This larger principal balance directly impacts the total cost of the loan over its term.

An increased principal leads to a greater amount of interest paid over the life of the loan. Since interest accrues on the outstanding balance, financing an additional several thousand dollars in closing costs means paying interest on that amount for many years, often 15 to 30 years, depending on the loan term. This can add thousands of dollars to the total repayment amount beyond the initial cost of the fees themselves.

Consequently, higher overall loan amounts also result in increased monthly mortgage payments. While the increment might seem small on a month-to-month basis, it adds up significantly over time. Borrowers should carefully consider whether the convenience of financing closing costs outweighs the long-term financial impact of a larger total repayment and higher regular expenditures.

Other Ways to Pay Closing Costs

For those who prefer not to or cannot roll closing costs into their mortgage, several alternative payment strategies exist. The most straightforward approach is paying the costs out-of-pocket, using saved funds to cover the expenses directly at closing. This avoids increasing the loan principal and the associated interest payments over time.

Another common method is negotiating seller concessions, where the buyer requests that the seller contribute a portion of the closing costs. The amount a seller can contribute is typically limited by the loan type and down payment percentage. These contributions reduce the cash a buyer needs to bring to the closing table.

Gift funds from eligible donors can also be utilized to cover closing costs. Lenders have specific rules regarding who can provide gifts and require documentation, such as a gift letter stating the funds are not a loan and verifying the donor’s relationship to the borrower. Permissible donors often include family members, though some loan types like FHA, VA, and USDA may allow gifts from a broader range of individuals or organizations. Additionally, borrowers may be able to negotiate certain lender fees or shop for service providers, such as title companies, to potentially reduce the overall amount of closing costs.