You’ve been wanting to buy a home for some time and are finally ready to apply for a mortgage. So, you get preapproved for a home, put down the earnest money for the house you submitted a winning bid on and start packing your belongings. But after speaking with the lender again and reviewing the loan offer, you quickly notice there’s a significant expense you forgot to account for – closing costs.
Now, you’re left wondering if the deal will fall through if you can’t come up with the funds to cover closing costs. The good news is you may not be completely out of luck. It depends on the lender and loan program you select.
Keep reading to discover how much you can expect to pay for closing costs and how they’re calculated. You’ll also learn more about how to roll closing costs into your mortgage loan.
How Much Are Usually Closing Costs?
On average, closing costs are between 2 percent and 6 percent of the loan amount. So, if your mortgage is $375,000, the closing costs will generally be between $7,500 and $22,500.
Who Has to Pay for Mortgage Closing Costs?
The responsibility for mortgage closing costs falls on the buyer. This amount includes the loan origination fee, appraisal, title insurance and recording fees. If you purchased points to lower the interest rate, you’d also pay these fees at closing. Both property taxes and homeowners insurance, which are known as prepaid, are included in the mortgage closing costs.
What Rolling Closing Costs Into the Mortgage Means
In short, rolling closing costs into a mortgage means you’ll add them to the total loan amount instead of paying out of pocket at closing. Doing so helps keep more of your hard-earned money in your pocket in the short term, and you won’t have to scramble to come up with the funds needed to seal the deal.
Can You Roll Closing Costs Into the Mortgage?
Yes, you can roll closing costs into the mortgage. This practice is not permitted by all lenders, though, and certain requirements must be met before you can do so.
Type of Mortgage
Some lenders offer what’s referred to as no-closing cost mortgages. These home loans come with a lender credit that covers closing costs. However, you can expect higher borrowing costs if you wish to take out this type of mortgage.
Here are the guidelines for other types of mortgages:
- FHA loans: allows closing costs to be rolled into the loan, along with seller concessions of up to 6 percent of the loan amount to lower the amount you need to finance
- VA loans: borrowers can roll the one-time funding fee into the home loan
- USDA loans: the home value (per the appraisal) must exceed the sales price to be eligible for closing cost refinancing, and up to 6 percent of the loan amount can be contributed by the seller through concessions to minimize your closing costs
Loan-to-value (LTV) Ratio
Also, consider your LTV ratio, or the loan amount divided by the appraised value of the home you’re planning to purchase. Lenders like to see this amount at or below a certain percentage, and including closing costs could make it rather high. And in some instances, you may have to pay private mortgage insurance that could add a few hundred dollars to your monthly mortgage payment. So, this situation wouldn’t be ideal for rolling closing costs into the mortgage – you could be better off paying them upfront instead.
Debt-to-income (DTI) Ratio
Your DTI, which is calculated by dividing the total of your monthly debt payments by your pretax income, should not exceed the lender’s thresholds. But if you’re cutting it close, rolling closing costs into the mortgage may not be permitted if adding these expenses will take you over the maximum allowable DTI.
Pros and Cons of Rolling Closing Costs Into the Mortgage
There are some advantages and disadvantages of rolling closing costs into your mortgage.
Key benefits:
- You won’t have to deplete your cash reserves to buy a home, and you can use the funds to meet other financial needs and goals instead.
- You can use the funds you had for the closing to pay down debt, improve your DTI and potentially increase your credit score to get a better rate on your home loan.
- You can buy a home sooner without having to wait until you’ve saved for closing costs on top of the down payment.
Key drawbacks:
- You could increase your LTV and possibly have to pay mortgage insurance, which can add several hundred dollars to your monthly mortgage payment.
- You’ll start out with less equity in your home, potentially leading to you being upside down on the loan sooner or encountering issues if you have to sell in the near future.
- You’ll pay more in interest over the loan term since you have to take out a larger mortgage.
How to Roll Closing Costs Into the Mortgage
Rolling closing costs into a mortgage doesn’t require much effort on your end. It simply involves notifying the lender of your intentions if this option is allowed. They will handle the financing part from there by increasing the loan amount to reflect the closing costs, and you’ll make monthly mortgage payments as you normally would.
Should You Roll Closing Costs Into the Mortgage?
It depends on your financial situation. If you have the funds to pay the closing costs upfront, you can borrow less, get a slightly lower monthly payment and save on interest over the life of the loan. Otherwise, rolling closing costs into your mortgage could be worthwhile if you’d be forced to put your homeownership dreams on hold to save up enough money to cover closing costs.
Where to Get a Mortgage Loan
Even if you haven’t yet decided how you’re going to take care of closing costs – either by rolling them into the home loan or paying out of pocket – you’ll first need to find the right lender to make the home purchase possible. They should be reputable, experienced, and boast several reviews from satisfied customers.
