Can I build my closing costs into my loan amount?
Transcript of video:
Hi, I’m Evan Swanson with Swanson Home Loans & Mortgage Trust, NMLS number 120856. In this video, I’m going to answer a question that I am frequently asked by home buyers, which is can I build my closing costs into my loan amount in order to reduce my cash out of pocket? I’m going to answer this question today from a purchase transaction perspective. I am not going to address the question from a refinance perspective.
The short answer to the question is no. A home buyer typically is not able to add the closing cost into the loan amount. The reason for that has to do with the loan-to-value restrictions of a loan program.
Let’s look at this with an example. Let’s assume there’s a home buyer who’s purchasing a property for $300,000, and the loan program they’re using requires a 5% down payment. That means they would put $15,000 down and take out a loan for $285,000. Let’s assume, for example, the total closing costs, prepaid, and pro-rated payments for that purchase is $7,000. So, without anything happening, purchase price $300,000, 5% down ($15,000) plus $7,000 settlement charges.
The buyer would have to bring in $22,000 to close. If we were to arbitrarily add that $7,000 into the loan amount, that would push the loan up to $292,000, and now the loan-to-value would be 97%. If the loan program doesn’t allow for a loan-to-value of 97%, then unfortunately the buyer is not able to qualify after adding that in.
There is a backdoor way that we can address this. The buyer could make an offer to the seller for $307,000, but at closing I want you to subsequently give me a $7,000 credit back to be applied to my closing costs.” In that instance, the buyer would have to bring in 5% down based on a $307,000 purchase price, which is $15,350, and now the seller is giving a credit to be applied to the closing cost.
So, the buyer is now effectively able to finance their closing cost by buying the property for a higher price and subsequently asking the seller to give a credit. There are some potential issues around that. In some markets, that may not be viable. In addition, the house would have to appraise for $307,000 to collateralize or to cover that additional $7,000 credit being asked for.
Again, can loan closing cost be built into the loan amount? By default, no, in a purchase transaction. In some instances, you may be able to by effectively building them into your purchase price and subsequently asking the seller to pay them.