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First-Time Homebuyer Loans And Programs

July 15th, 2023 7:44 AM by Jackie A. Graves

Once your lender approves you for a home loan, you’re not quite at the finish line yet. You’ll still need to pay for closing costs, which are upfront fees related to the mortgage.

Buyers can expect to pay between 2% and 5% of the home’s purchase price in closing costs. For example, if your property is worth $500,000, you could pay anywhere from $10,000 to $25,000 toward these expenses. But there are ways to reduce your costs.

6 Ways To Reduce Closing Costs

Before you get too far into the mortgage process, learn your options for waiving or lowering closing costs.

1. Review Your Loan Estimate

Once you apply for a mortgage, your lender must provide a loan estimate within three business days. This standardized form details your potential loan’s terms, including the interest rate, monthly payment amount and closing costs. All loan estimates are formatted the same way, so you can make an apples to apples comparison across several loan offers.

When you get your loan estimate, review it to understand your lender’s fees. Some are nonnegotiable, but others have flexibility. Check page 2, section C for a list of third-party services you can shop for. For instance, you may be able to shop for title services and save a few hundred dollars.

Other administrative fees the lender charges at closing may be negotiable, especially if there are vague, itemized charges. Ask your lender for an explanation of exactly what these fees cover, and push back on excessive ones. You may be able to get them reduced or eliminated.

2. Lower Your Down Payment

Consider reducing your down payment and using the funds to cover your closing costs. Check with your lender to see if a smaller down payment is acceptable.

Lowering your down payment may impact your loan in a few different ways. It increases the amount you borrow, so it may increase your monthly payment. If the larger monthly payment pushes your debt-to-income (DTI) ratio too high, you might not qualify for the mortgage. You’ll also pay more interest over time and private mortgage insurance if your new downpayment amount is below 20%.

3. Discuss What the Seller Pays For

In some cases, the seller may agree to cover certain costs. These are known as seller concessions and may include things like closing fees and home repairs. Some mortgage programs have rules on what the seller can cover, so you’ll need to check with your lender first and then negotiate with the seller. Generally, it’s easier to negotiate if you’re in a buyer’s market or the seller is motivated to get the transaction done quickly.

4. Consider a No-Closing-Cost Loan

A mortgage with zero closing costs might sound too good to be true. And in some ways, it is. Lenders that offer no-closing cost-loans cover your upfront fees. They’ll usually increase your interest rate to make up for the cost. While you might save money during the first few years of the loan, those extra interest charges may eventually surpass your initial savings.

Alternatively, the lender might allow you to roll closing costs into the principal loan balance. Again, you won’t have to come up with the cash at closing, but you will end up with a larger loan and paying interest on those closing costs over time.

5. Look for Assistance

Closing costs can be a barrier to homeownership for low-income buyers, so most states offer programs to help with this expense. Aid may come in the form of a grant or loan and is typically awarded to first-time homebuyers or people with incomes below a certain level. Check with your state’s housing finance agency to see what’s available near you.

6. Ask About Discounts and Rebates

Some lenders offer closing cost assistance or discounts. They often work like government-sponsored programs, so they’re usually available to first-time buyers or those with lower incomes. For example, one national bank provides a lender credit of up to $7,500 to qualifying homebuyers, and it doesn’t require repayment. That credit can go toward nonrecurring closing costs, such as title insurance and recording fees, or be used to buy down the interest rate permanently.

You might also earn a loyalty discount if you get your mortgage through your current bank. Banks may not always widely advertise these rebates and credits, so always ask to find out what’s available.

Other Ways To Reduce Home Purchase Costs

Closing costs can be a significant financial burden, especially if you have a sizeable down payment. A no-closing-cost loan can be more convenient and save you money upfront, but it will typically cost you more over the life of the loan. It could be worthwhile to pursue a different option. Negotiating your fees, asking the seller to cover them or applying for assistance can all be good ways to lower your closing costs when buying a home.

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