Can You Roll Closing Costs Into a Home Loan?

Including closing costs in a home loan is a tempting thought, especially for first-time home buyers. The fees can be expensive! Typically, closing costs are 2% to 5% of the home’s purchase price. This means that for a $200,000 home, you are looking at $4,000 to $10,000. 

Not many people can afford such amounts out of pocket and that’s why choosing to roll closing costs into a mortgage seems more reasonable. But whether or not this is the right option for you depends on the following:

• The type of loan
• Debt-to-income ratio
• Loan-to-value ratio

Is it an FHA or VA loan? 

For Federal Housing Administration (FHA) home loans, you can include most of your closing costs and fees in the home loan.  But you are required to pay a minimum of 3.5% of the purchase price as a down payment-not including closing costs. You also have the option of negotiating with the seller to pay part of the closing costs if you went for an FHA loan.

That means that you can roll closing costs in the mortgage, then negotiate with the seller to pay a portion of the remaining amount, and then pay the rest out of pocket. Veterans that opt for a Veterans Affairs (VA) mortgage loan cannot roll closing costs into their loan. They can negotiate with lenders to purchase lender credits that can reduce some of the closing costs. But this option will increase your interest rates.

The only thing veterans can roll into the VA loan is funding fees. All people borrowing VA loans are required to pay a VA funding fee because this fee is used to keep the loan guarantee program running for the benefit of future military home buyers. 

Should you include closing costs in a loan?

Your monthly mortgage payments will increase if you include closing costs in a loan. Since you will be repaying the loan with interest every month, you will end up paying significantly more for your closing costs than you would have had you paid out of pocket. To avoid paying more, talk to your lender to increase your interest rate in exchange for a credit that reduces your out-of-pocket expenses at closing. This is what is referred to as premium pricing.

What should you do before you close on a home?

First, you will need to apply for a loan if you have been pre-approved. People who have not obtained a pre-approval can compare rates from various lenders to find the best loan.  

The next stage is to find out how you will pay the closing fees. The options explained above can help lower the closing fees you have to pay. After examining the title to ensure only you can claim ownership of the home, get a home appraisal. An appraisal will not only help prevent you from overpaying, it will also make it easier for you to get a loan in the future from the same lender. If you are having trouble finding a home, you can search for an experienced real estate agent on the Homes & Land website to help you navigate the process of obtaining a home loan.