Covering Closing Costs with Creative Concepts
Closing costs are capable of setting you back anywhere between 2 and 5% of a loan amount. That is a substantial sum of money, particularly when you require a down payment to purchase a home. Although a savings account depletion might sound like the simplest approach to covering these expenses, we don’t recommend it. You need that money if an unexpected emergency happens.
Instead of relying on the money in your savings account, consider the following ways to cover closing costs without breaking the bank:
ENSURE THAT YOUR LOAN DOESN’T CONTAIN CLOSING COSTS
It is possible to legally obtain a loan without closing costs. You’ll still be paying closing costs, just not in the same way. Lenders generate their revenue from your loan. This is usually done upfront during closing, as you pay them whatever they charge. With that said, if you do not have funds to have these fees paid upfront, you have the option to bypass the fees altogether by accepting a high interest rate instead.
For lenders, this is essentially a wash. While no cash is collected upfront by them, they will still be paid through the higher interest that they charge. For the most part, lenders charge an average of 0.5% at a minimum for this kind of loan. However, the specific amount varies depending on who the lender is.
Before you commit to this, ensure that higher payments are affordable for you each month. Be mindful that high interest rates means that more money will be paid by you over the loan’s lifetime. If the loan is for the whole term, then closing costs are likely to cost more money for you overall.
HAVE CLOSING COSTS PAID BY THE SELLER
Were you aware that sellers occasionally cover closing costs on behalf of the buyer? This can be a bit misleading, since these costs will still need to be paid by you, just not in the same way that you expect. In this instance, you agree to give the seller whatever their asking price is if they cover your closing costs.
Sometimes, sellers are open to this agreement since they don’t expect to receive their asking price in full. They are prepared to reduce the price for the sake of selling the home. However, if the asking price is paid in full, then they have the ability to credit a portion of funds to you, allowing you to overcome the hurdle of closing costs.
This approach is only effective if you are eligible for a high loan amount. Also, you need to be fine with paying more interest throughout the loan’s lifetime, because you are basically wrapping closing costs directly into it.
RECEIVE A GIFT SENT BY A RELATIVE
Most loan programs – conventional loans and FHA loans included – allow you to use monetary gifts to cover closing costs, as long as the funds aren’t borrowed. You need to establish that they money is a gift, accompanied by a letter signed by whomever the donor is. You’ll need to offer evidence of where this money came from, and that it were deposited into your bank account specifically for the purpose of purchasing a house.
For instance, let’s say your mother gives you a gift of $5000 to cover closing costs for you. She sells some stocks to liquidate cash before giving it to you. Your mother will need to offer a stock sale certificate, as well as a copy of the check given to you. You also need to offer a deposit ticket establishing that money was deposited into the right account. This will accompany the letter written from your mother, which states that she doesn’t expect any repayment of funds by you – and that the money is truly a gift.
TAKE SOME MONEY OUT OF YOUR 401(K)
A number of 401(k) programs let you borrow funds for the sake of purchasing a home occupied by an owner. A plan director will determine if this is allowed by your program. You must contact your human resources department to establish your choices. Many 401(k) plans let investors borrow funds to cover closing costs, and no penalties are involved. With that said, there are probably terms for strict repayments that you’ll need to adhere to for the sake of acquiring a loan.
If tax refunds are something you get regularly, or if you expect to receive an inheritance, put your money in the bank. If you require those funds to cover closing costs over the next month or two, you will need to have the funds sourced. As such, proof of the place it originated from is necessary. If you aren’t purchasing a house for several months, though, then the money can be left in the bank. In doing so, the funds will be there when you close a loan without it impacting your savings account.
ASK YOUR EMPLOYER FOR HELP
Several employers provide assistance programs so that their staff can purchase a home. Assuming this program is available to all staff members, then it may be possible to use a program’s funds to cover closing costs. Documentation will need to be provided from an employer revealing fund eligibility, as well as how the money will be used. Assuming it isn’t a loan, many lenders will permit use of this program.
Paying closing costs might warrant some creativity. You will need to determine what is most effective for your needs, whether it be accepting a high rate of interest, or providing the asking price in full of a property. If high monthly repayments or greater interest over a loan’s lifetime are risks you don’t wish to take, think about other choices for alternative funds to purchase a property.