Closing cost assistance: Where to get it and how it works

Need help with your closing costs?

Closing costs can be an unwelcome surprise for home buyers.

Imagine you have saved $20,000 for a down payment. Then you find out you’ll owe another $7,500 in closing costs. Suddenly, your down payment is cut nearly in half.

Closing cost assistance can help relieve that burden, so you don’t have to spend as much of your savings on fees.

If you qualify for assistance, you could potentially receive thousands of dollars to help pay your upfront mortgage costs.

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Closing cost assistance programs

There are grants and loans available at the local, state, and federal levels to help with closing costs. It may be easier than you think to qualify.

Every state has special programs for first-time home buyers. Repeat home buyers can often find help, too.

Many of these programs award funds that can be used toward the down payment and/or closing costs. (Different rules apply, depending on the program.)

There are grants and loans available at the local, state, and federal levels to help with down payments and closing costs.

Often, closing cost assistance is offered by local or state housing commissions authorized by the U.S. Department of Housing and Urban Development (HUD). But assistance can also come from nonprofits and private mortgage lenders.

Home buyer aid is often geared toward low- and moderate-income home buyers. But that’s not always the case.

In expensive cities like San Francisco and New York, for example, the income limits to qualify for down payment and closing cost assistance can be quite high.

So before you dismiss the idea of qualifying for help, check with your real estate agent, loan officer, or local Housing Finance Agency to learn what’s available.

How closing cost assistance works

Generally, closing cost assistance is not a standalone program. It’s included as part of a down payment assistance (DPA) program.

DPAs offer money that can typically be put toward your down payment or closing costs — whatever will help most with your home purchase. And the funds can come to you in one of four ways:

• Grant – The money is never repaid
• Forgivable loan – The loan doesn’t have to be repaid if you stay in the home a set number of years
• No- or low-interest loan – This loan would be repaid in tandem with your primary mortgage
• Lender credits – Some mortgage lenders offer credits to cover closing costs. But be aware, these mortgages often come with higher interest rates

These grants and loans can be generous, often bestowing thousands to tens of thousands of dollars to eligible recipients.

Closing cost assistance repayment

Often, closing cost and down payment assistance funds do not have to be repaid as long as you remain in the home as your primary residence for a set number of years. You’ll likely have to repay the funds if you move, refinance, or sell the home within that period.

Say you do vacate, refi, or unload the property within that predetermined period. In this case, you’d repay the money on a prorated schedule.

For instance, assume you move out two-and-a-half years after receiving a $10,000 closing cost assistance grant that requires you to stay put for five years. If so, you’ll owe half the money back: $5,000. Remain in place over five years and the grant funds are completely forgiven.

Another type of closing cost assistance is a fully amortizing second mortgage. These loans work a lot like your primary, or first mortgage. They charge interest and must be repaid over a given term.

Choosing a lender

If you qualify for a closing cost grant or loan, you will also need to find a mortgage lender willing to work with the program.

Many experts suggest getting pre-approved for your home loan at the same time you apply for closing cost assistance. This can help streamline the process for each application.

Many states’ Housing Finance Agencies offer first mortgages designed to sync with down payment and closing cost assistance programs. Housing agencies usually offer these programs through private lenders.

Who qualifies for closing cost assistance?

Once you’ve located closing cost assistance programs in your area, you’ll apply for the aid.

Because many grant programs are offered by state and local housing commissions, eligibility requirements can vary. But they tend to include:

• Income limits: You typically can’t make more than your area’s median income (AMI). Your household income limit is based on your household size
• Minimum credit score requirements: A minimum FICO score of 620 to 640 is common
• Property requirements: Usually, the property must be a single-family home used as your primary residence. There may also be purchase price limits
• Loan type: Some organizations offer specialized mortgage loan programs that can be used with down payment and closing cost assistance. Other assistance programs can be used with just about any loan type (conventional loans, FHA loans, VA loans, etc.)
• Homebuyer status: Some programs are offered to both repeat and first-time purchasers; others are for first time home buyers only. Most programs define first-time buyers as anyone who hasn’t owned a home in the past three years
• Homebuyer education: Borrowers typically must complete a homeownership program. These are often only a few hours long and available online

Many areas have more than one DPA program operating. So if you don’t qualify for the first assistance program you try, keep digging to see if there are others you can apply for.

Where to find help with closing costs

A good place to start is with your state’s Housing Finance Authority (HFA).

These government agencies typically offer mortgage programs and assistance for first-time home buyers. At the very least, they’ll list resources to turn to for help with your closing costs and down payment.

You can also check out these articles to locate and learn about programs you may qualify for:

Note, requirements to qualify for closing cost assistance vary by program. Income caps and maximum loan amounts are common.

But you don’t always have to be a first-time home buyer to get financial aid. Many programs are available to repeat buyers, or former homeowners who haven’t owned property in the last three years.

Other ways to reduce closing costs

Closing cost assistance doesn’t have to come exclusively from a housing finance agency or local program. There are other ways to come up with the cash, too.

1. Ask the seller to pay closing costs

“It’s common for the home seller to pay for some or all of the buyer’s closing costs. This is most commonly seen by working the request into the buying offer,” says Reggie Graham, branch manager for Silverton Mortgage.

“At least request that the seller covers some of the closing costs, as it will allow the buyer to have more cash on hand for additional expenses that come with moving into a new home,” he recommends. “Work closely with your real estate agent, who can negotiate this into your purchase offer.”

Danielle O’Brien, broker/owner of Parkway Real Estate, explains how this approach works.

“Essentially you’re borrowing more from the bank than you are actually paying the seller for the home. The seller is technically receiving this money. But they’re transferring it to the buyer to help with closing costs,” says O’Brien.

“However, I usually don’t advise my clients to write this into an offer unless it’s necessary. That’s because it can be seen as a less clean offer that could turn off the seller,” he continues.

2. Use a cash gift from a loved one

Alternatively, you can ask for closing cost help from a relative, friend, or loved one.

Most major home buying programs — including FHA and conventional loans — allow you to use gifted funds for the down payment and closing costs.

VA loans and USDA loans do not require a down payment, but you could still use gift money for your closing costs.

The one thing you MUST do is make sure the gift funds are properly documented in order for them to be accepted by your mortgage lender.

3. Have the lender pay your closing costs

“Some lenders will also let you roll your closing costs into the loan by paying a higher interest rate,” notes Graham. This is known as a lender credit.

“But while you’ll pay less money upfront with this strategy, you’ll end up paying more in the long run through compounded interest,” he cautions.

Whatever approach you explore, weigh the pros and cons carefully.

4. Choose a less expensive home

Finding homes with lower sales prices can also make closing costs more manageable.

Many closing costs, such as the loan origination fee, are charged as a percentage of your loan amount. A smaller amount requires a smaller origination fee.

Other costs come as flat fees, though, so not all costs will be proportionate to your loan size. Smaller home sales prices have another advantage: more affordable monthly payments.

Help with your down payment

If you’re looking for closing cost assistance, you might like to know that there’s financial aid available for your down payment, too.

In fact, down payment assistance is the primary focus for many of the programs described above. Closing cost assistance tends to be an extra benefit tacked on to down payment assistance (DPA) programs.

“Depending on the program and down payment needed, you may be able to apply any remaining funds toward closing costs,” explains Chris McDermott, a real estate investor and former mortgage broker.

“Some down payment assistance programs allow you to use the funds they provide for closing costs, while others may not,” Graham says.

Low-down-payment mortgage options

Getting a loan that requires a low down payment could free up more money to spend on closing costs — whether you’re spending money you’ve saved or money you’ve accessed through a grant or loan.

USDA and VA loans require no down payment, but not everyone can qualify. VA loans go to veterans and current service members; USDA loans go to low- and moderate-income buyers in rural areas.

More buyers can get low down payment FHA loans. If your credit score is 580 or higher, you could buy with 3.5% down.

Fannie Mae and Freddie Mac, which regulate conventional loans, offer loans with down payments as low as 3%. Buyers need credit scores of at least 620.

Check your home buying eligibility

Research local down payment and closing cost assistance programs in your area. Help is available in every state in the U.S.

It’s also worth looking into your mortgage options. Combining closing cost assistance with today’s low-down-payment loans could make buying your first home easier than you think.