What Are Borrower-Financed Closing Costs (BFC)?

Understanding mortgage terminology is important for anyone navigating the homebuying process, as it directly impacts financial obligations. This article clarifies “Borrower-Financed Closing Costs,” or BFC, explaining what these costs entail and their role in securing a home loan. A clear grasp of such financial concepts helps borrowers make informed decisions.

Understanding BFC in Mortgages

Borrower-Financed Closing Costs (BFC) refer to the various fees and expenses that a borrower is responsible for paying out-of-pocket at the time of loan closing. These are distinct from the loan principal and down payment, representing additional funds required to finalize the mortgage transaction. BFC ensures that certain services and administrative functions necessary for the loan’s completion are covered.

These costs typically range from 2% to 6% of the loan amount, though this can vary based on location and the specifics of the transaction. Common examples of BFC include appraisal fees, which cover the cost of assessing the home’s value, and credit report fees, for evaluating the borrower’s creditworthiness. Other frequent costs are loan origination fees, charged by the lender for processing the loan, and discount points, which are optional fees paid to reduce the interest rate.

Title insurance, both for the lender and potentially the owner, is another significant BFC component, protecting against title defects. Recording fees, collected by local government to officially register the property transfer, and attorney fees, if required by state law, also fall under BFC. Prepaid expenses, such as initial property taxes and homeowners insurance premiums, are also included as part of the cash needed at closing.

How BFC Affects Your Mortgage

Borrower-Financed Closing Costs directly influence the total cash required from a borrower at closing. This amount, often termed “cash to close,” encompasses the down payment, BFC, and any prepaid items for escrow. Borrowers must have sufficient liquid funds available to cover these expenses.

These costs are clearly itemized and presented to the borrower on standardized federal documents. The Loan Estimate, provided within three business days of a mortgage application, offers an initial projection of these costs, allowing borrowers to compare offers from different lenders. Later, the Closing Disclosure, issued at least three business days before closing, provides the final, definitive breakdown of all fees and charges. This three-day review period is important for borrowers to verify that the final costs align with earlier estimates and to ask any questions before signing.

While BFC are typically paid out-of-pocket, there are alternatives that can impact the total cash needed. Lender credits, offered in exchange for a higher interest rate, can reduce upfront closing costs. Similarly, seller concessions, where the seller agrees to pay a portion of the buyer’s closing costs, can also lower the borrower’s financial burden at closing. Even when these options are utilized, the underlying services and fees still exist; they are simply covered by another party or financed into the loan, potentially increasing the overall cost over time.

When BFC is Relevant

Borrower-Financed Closing Costs are a standard feature of most mortgage transactions, making their understanding broadly relevant across various loan types. Whether securing a conventional loan, an FHA loan, or a VA loan, borrowers will typically encounter BFC. The specific types and amounts of these costs may vary, but their presence is consistent.

For instance, FHA loans include a unique Upfront Mortgage Insurance Premium (UFMIP) that is often a significant portion of BFC, usually 1.75% of the loan amount. While this can sometimes be financed into the loan, it remains a borrower-associated cost. VA loans also have a VA funding fee, which is a one-time charge typically ranging from 1.25% to 3.3% of the loan amount, depending on factors like service history and down payment. While the VA funding fee can often be rolled into the loan, other VA closing costs must still be paid upfront.

Conventional loans also involve BFC similar to those found in FHA and VA loans, such as appraisal, title, and origination fees. While some fees, like attorney fees or specific transfer taxes, can be location-dependent, the core concept of BFC applies nationwide. The amount of BFC varies by loan amount, property location, and the specific service providers involved.