How to Get Out of Paying Closing Costs

Homeownership involves expenses beyond the purchase price, known as closing costs. These fees, typically 2% to 5% of the total loan amount, cover services required to finalize a real estate transaction and secure a mortgage. Understanding strategies to reduce these upfront costs can be beneficial for prospective homebuyers. This article explores avenues to minimize these expenses.

Negotiating Seller Contributions

Buyers can negotiate with sellers to cover a portion or all of their closing costs, a practice known as seller concessions or interested party contributions. This strategy is particularly effective in a buyer’s market or when a property has been listed for an extended period, as sellers may be more motivated to facilitate the sale. These contributions are formally included in the purchase agreement and are applied directly at closing to offset the buyer’s expenses.

The maximum amount a seller can contribute depends on the type of loan the buyer secures. For conventional loans, sellers can contribute up to 3% of the home’s purchase price if the buyer’s down payment is less than 10%. This limit increases to 6% for down payments between 10% and 25%, and up to 9% for down payments exceeding 25% on primary residences. Federal Housing Administration (FHA) loans permit seller contributions of up to 6% of the sales price towards closing costs, prepaid expenses, and other financing concessions.

Veterans Affairs (VA) loans offer considerable flexibility, allowing sellers to pay all reasonable and customary loan-related closing costs without counting against a specific limit. Beyond these, sellers can contribute up to 4% of the sale price toward additional concessions, which may include the VA funding fee, prepayment of property taxes and insurance, or even payoff of the buyer’s debts. For USDA loans, sellers are allowed to contribute up to 6% of the sales price towards the buyer’s closing costs. Seller contributions cannot exceed the actual amount of the buyer’s closing costs.

Lender-Provided Options for Cost Reduction

Lenders can offer mechanisms to reduce a borrower’s upfront closing costs, such as lender credits. Lender credits involve the mortgage provider covering some or all of a borrower’s closing costs in exchange for a slightly higher interest rate on the loan. This reduces the immediate cash needed at closing, allowing funds for other expenses. However, the borrower will pay more in interest over the loan’s life due to the increased rate.

A “no-closing-cost” loan operates similarly, where the borrower does not pay closing costs directly at settlement. Instead, these costs are either rolled into the principal loan amount or absorbed by the lender for a higher interest rate. While this option eliminates the need for upfront cash, the costs are not truly eliminated; they are paid over time through increased monthly payments and a higher total interest expense. This can be appealing for those needing to conserve cash at purchase, despite a greater overall cost.

Government-Backed Loans and Assistance Programs

VA loans, available to eligible service members, veterans, and their spouses, do not require a down payment and typically do not carry a mortgage insurance premium. While VA loans do have a funding fee, which usually ranges from 0.5% to 3.3% of the loan amount, this fee can often be financed into the loan or paid by the seller as a concession. Sellers are also permitted to pay loan-related closing costs and additional concessions.

USDA loans, which support homeownership in eligible rural areas, also offer no down payment options for qualified borrowers. While these loans have an upfront guarantee fee of 1% and an annual fee of 0.35% of the loan amount, the upfront guarantee fee can be financed into the loan, reducing cash needed at closing. Sellers are also permitted to contribute towards a buyer’s closing costs.

Beyond specific loan types, down payment and closing cost assistance programs exist at state, county, and city levels. These programs often provide grants or low-interest and forgivable loans specifically to help cover down payments and closing costs. Eligibility typically involves criteria such as being a first-time homebuyer, meeting specific income limits, and purchasing a primary residence within certain price ranges. Grants generally do not require repayment, while loans may be deferred or forgiven over time if certain conditions are met.