What If I Can't Afford Closing Costs? Solutions & Tips

Buying your dream home costs more than the number you see on the listing price. You need to factor in the downpayment, moving fees, and selling your current home, as well as coming up with cash in hand for closing costs.

Nationwide, buyer closing costs averaged $3,860 in 2021 without transfer tax and $6,905 with it, ranging from $2,061 in Missouri (no transfer taxes) to $18,195 in Washington, D.C. (transfer taxes split between buyer and seller).¹

What happens if you can't afford closing costs? 

Don’t panic—there are multiple ways to reduce or avoid the need for upfront cash. 

Understanding Closing Costs

Closing, or when the transfer of a property title is completed, is more complex than exchanging a briefcase full of cash for a property deed. There are many professionals, tasks, and requirements involved in the span of time leading up to and on closing day. Some are required by state or local laws, some are mandated by real estate and title companies and professional organizations, and some are at the buyer’s request. 

What do closing costs include? We’ve provided a list of what to expect below²:

• Lender – Lenders may charge underwriting, origination, and application fees (typically about 1% of the loan amount) plus credit check and mortgage lock fees. They may also charge a tax monitoring and research fee if you pay property tax directly rather than through escrow.

• Appraisal – Lenders typically require appraisals prior to final approval of a mortgage. Although they’ll often arrange the appraisal, you’ll be charged for it. 

• Title – Title search and closing fees, plus lender and/or owner title insurance, are often arranged through a title company (or attorney, in some states) selected by either the lender or buyer. 

• Administrative – The lender or title company may also charge courier, wire transfer, copying, or other administrative fees.

• Prepayments – You’ll likely need to fund an escrow account with an amount covering about two months’ worth of property tax and homeowners insurance costs, and mortgage insurance if required. Plus, lenders often require a prepayment of the loan interest that will accrue between closing day and the first monthly payment due date. 

• Government recording fees – Updating property records with your municipality typically costs about $125.

• Mandated inspections and tests – Your state real estate laws may require pre-purchase inspections such as termite testing (usually about $150). For the most part, however, tests and inspections such as home, radon, pest, seismic, or flood zone are either optional for the buyer to arrange or funded through a seller concession during the initial or post-inspection negotiation phase. 

• Government loan fees – If you opt for an FHA, VA, or USDA loan, then closing costs will typically include an upfront fee (mortgage insurance premium, guarantee, or funding fee) equivalent to 1% – 3.3% of the loan amount depending on loan type.

• Discount points – These optional upfront fees are a way to lower your loan interest rate, usually by a quarter of a percentage point per discount point, priced at 1% of the loan total.

Negotiating Closing Costs

Before you commit to a lender, shop around with closing cost negotiation in mind. Mortgage terms vary, and some lenders will even offer special rebates, discounts, and promotions to attract borrowers. At current interest rates, lenders earn more than the loan amount in interest charges for mortgages, so don’t be afraid to push for a deal that works in your favor. 

Ask lenders to waive fees such as: 

• Loan application and credit check 
• Loan origination or underwriting 
• Courier, wire transfer, or other administrative fees

Next, ask if you can shop around for the best deal and choose the: 

• Appraiser and type of appraisal (desktop, walkthrough, drive-by, etc.) to limit costs
• Title company 
• Closing date at the end of the month to reduce required prepayments

Closing Cost Assistance Programs

If you’re navigating how to pay closing costs, closing cost assistance (CCA) programs are available from many government agencies (state, county, and local) as well as from nonprofit organizations. Many focus on first-time and low-income homebuyers, offering arrangements such as³: 

• Grants 
• Matched savings programs
• Forgivable or deferred-payment loans
• No- or low-interest loans

Check with your state housing finance authority to see what’s available in your area. 

Rolling Closing Costs into Your Mortgage

What if I can't afford closing costs and don’t qualify for CCA programs? 

Another option is to roll your closing costs into your mortgage principal. You’ll need to shop for lenders who allow this practice, but it can be done for most types of mortgage loans: 

• Conventional loan
• FHA loan
• VA loan
• USDA loan

Do the math before you select this option. While it provides short-term relief, it can also: 

• Increase how much you’ll pay in total interest 
• Introduce prepayment penalties to your contract
• Raise your debt-to-income (DTI) and loan-to-value (LTV) ratios
• Lead to a private mortgage insurance (PMI) requirement

Exploring Seller Concessions

An important option on the “what to do if you can't afford closing costs” list is seller concessions. Negotiation is part of the buying process, and it’s fairly common to ask sellers to pay some of your closing costs either in addition to or instead of haggling over the home price. 

Talk to your real estate agent about best approaches to negotiating, and consider asking for the seller to pay all or some of these costs: 

• Property tax covering the remainder of the current year or mortgage payment period
• Inspections for pests, radon, flood zone, etc.
• Government recording, title transfer, stamp, and tax service fees
• Discount points to lower your mortgage interest rate

It’s important to note, however, that lenders impose limits on how much a seller is allowed to cover on closing day. Lenders want assurance that borrowers have an immediate stake in the purchase and some upfront funds to back up their commitment. 

For a conventional mortgage, buyers who plan to live in the home can seek the lesser of a percentage of the sale price or of the home’s appraised value, up to:²

• 3% with a downpayment under 10%
• 6% with a 10 – 20% downpayment 
• 9% with a downpayment of at least 25% 

For government-backed loans, buyers can seek up to: 

• 6% of the sales price for an FHA loan
• 6% of the sales price for a USDA loan
• 4% of the loan total for a VA loan

No-Closing-Cost Mortgages

We explored rolling closing costs into your mortgage above, but there’s another option from some lenders: a no-closing-cost mortgage. With this loan arrangement, the lender increases your interest rate in exchange for excusing your closing costs. 

Again, be sure the long-term costs are worth the short-term benefit. 

Consider a $300,000 loan with closing costs of $6,500 and a 6.5% fixed interest rate. A no-closing-cost mortgage lender may offer to keep the same $300,000 loan total, cover your closing costs, and adjust your rate to 7.0%. Over the course of a 30-year loan, this would mean paying an additional $35,887 in total interest—more than five times the amount of the original closing costs. 

Saving Money on Closing Costs

The purchase price of a home is big enough to make it worthwhile to do some homework before you move forward. To waive, negotiate, and save the most on closing costs, follow these steps: 

• Research state regulations – Look up a summary of your state’s real estate laws to understand what closing costs are required (such as whether an attorney must be involved at closing). 

• Interview agents – While the seller pays both agent commissions in most states, it’s still important to find a skilled and experienced agent who can help you identify solutions and negotiate for seller concessions. Interview three to five before locking one down. 

• Shop around for a lender – Lender fees and rates vary widely, so compare credit unions, banks, and online lenders carefully for the best deal and lowest closing costs. Ask about fee waivers and mortgage promotions before you apply for a mortgage loan. 

• Choose your title company – Compare prices, ask for waivers, and find the best deal for you rather than going with your lender’s default choice. 

• Price-shop title insurance – If you opt for an owner title insurance policy, it doesn’t need to be purchased from the same company that handles your closing.

Convert Your Home Equity to Cover Closing Costs 

If you’re a current homeowner planning your next purchase, a sell and stay transaction can help you cover closing and moving costs more easily. Rather than paying for all the home repair, clean-up, and staging that comes with a traditional sale listing—and trying to time your selling and buying transactions to avoid gaps in funds or housing—a sell and stay transaction provides an all-in-one solution. 

With Truehold's sell and stay transaction, you sell your property and remain in the home as a renter. In addition to unlocking your home equity, you’ll no longer need to pay for property tax, property insurance, or essential repairs.

With your home sale completed, you’ll have more cash-in-hand for a larger downpayment in the future and the remaining closing costs after you save with the tips above!

Ready to learn more? Call us today, and one of our representatives will review the process and answer your questions about our sell and stay transaction.

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Sources: 

1. Business Insider. The average mortgage closing costs, by state. https://www.businessinsider.com/personal-finance/average-closing-costs‍
2. Nerdwallet. Mortgage Closing Costs: How Much You’ll Pay. https://www.nerdwallet.com/article/mortgages/closing-costs-mortgage-fees-explained‍
3. The Mortgage Reports. Closing Cost Assistance Programs & Grants 2024. https://themortgagereports.com/65878/closing-cost-assistance-where-to-get-it-and-how-it-works