Closing costs refer to the various fees and expenses required to complete a home purchase. They typically range from 3% to 6% of the home’s purchase price; on a $300,000 home, that’s an extra $9,000 to $18,000—a significant amount that could make owning a home seem out of reach.
The good news is there are plenty of options to make closing costs more affordable. From negotiating with sellers to using innovative solutions like home sale-leasebacks, this guide will walk you through practical strategies to reduce or finance these costs, helping you take the next step toward homeownership.
Table of Contents
6 strategies to handle closing costs when you can’t afford them
1. Negotiate seller concessions
Negotiating seller concessions is one of the most common ways to reduce closing costs. It allows you to shift some of the financial burden to the seller, making it easier to afford the upfront expenses of buying a home. This option is best for homebuyers who need to reduce out-of-pocket costs.
How it works
Seller concessions are when a seller agrees to cover some of the costs associated with purchasing a new home to sweeten the deal; this can include:
- Appraisal fees
- Home warranty
- Repairs
- Loan origination fees
- Property taxes
- Attorney’s fees
- Title insurance
- Moving expenses
- HOA fees
Seller concessions can be negotiated as either a fixed amount or a percentage of the home’s purchase price—typically between 3% to 6%.
For example, on a $400,000 home, a 5% seller concession would reduce your closing costs by $20,000. Concessions come out of the seller’s proceeds at closing, with the closing agent handling the payments—there’s no direct cash exchange between buyer and seller.
The biggest advantage to negotiating seller concessions is that they make home-buying more affordable, especially if you don’t have a lot of cash on hand to cover closing costs. They can also help the seller attract more buyers and make a sale faster.
However, there are some downsides. The seller may raise the price of the home to offset the additional cost. Plus, there are limits on seller concessions; for example, the maximum allowed for FHA and USDA loans is 6%, while VA loans are capped at 4% of the purchase price.
When it’s possible
Negotiating seller concessions is a great way to cover your closing costs, but unfortunately, the timing may not be right—it all depends on market conditions.
During a buyer’s market when homes take a longer time to sell, sellers will be much more likely to make concessions to try to close the deal more quickly. If it’s a seller’s market with low housing inventory and high competition, then it will be much harder to convince a seller to pay for closing costs.
Unfortunately, the last time we had a buyer’s market was in 2012. However, finding a seller willing to make concessions may still be possible. Look for homes that have been on the market for a while or need significant work. Owners of these types of properties will likely be more open to covering closing costs.
Tips
If you’re thinking about negotiating seller concessions, a little strategy can go a long way. Here are some tips to help you get the best outcome:
- Work with an agent: A good real estate agent knows the market and can help you make a strong, realistic concessions request.
- Be flexible: Sellers may be more open to concessions if they can offset the cost by adjusting the purchase price.
- Include them in the contract: Make sure the concessions are clearly written into the purchase agreement to avoid any confusion later.
- Be willing to walk away: Sometimes the best leverage is your ability to step back. If the seller won’t budge and the deal isn’t right for you, don’t be afraid to explore other options.
2. Explore closing cost assistance programs
If negotiating seller concessions isn’t an option, don’t worry. Closing cost assistance programs offer another way to help cover upfront expenses—especially if you’re a first-time home buyer or earn a low to moderate income.
How it works
Closing cost assistance programs are designed to help cover the various fees associated with finalizing a home purchase. These programs are usually offered by federal, state, or local government agencies and non-profit organizations.
Here are the main types of closing cost assistance available:
- Grants: Free money that doesn’t need to be repaid, often provided by government or community programs to help cover closing costs.
- Loans: These can include forgivable loans, low-interest loans, or deferred payment loans, which provide upfront help with flexible repayment options.
- Matched Savings Programs: Programs where your savings are matched by an organization, helping you boost your total funds.
Sometimes, down payment assistance (DPA) programs also allow their funds to be used for closing costs. Even if the DPA program doesn’t cover closing costs directly, it can free up money you had saved for your down payment to go toward closing expenses instead.
While closing costs and DPA programs can make homeownership more accessible, they do come with trade-offs. On the plus side, they reduce upfront expenses and allow you to buy a home sooner.
However, some programs have strict eligibility requirements and loans may add to your long-term financial obligations. It’s important to weigh the benefits against any potential drawbacks before applying.
Who qualifies?
Eligibility requirements vary from program to program but often include:
- First-time buyers: Many programs are geared toward first-time buyers who haven’t owned a home in the past three years.
- Income limits: Assistance is typically reserved for low-to-moderate-income households.
- Property: Most programs require that you purchase a single-family home that will be used as your primary residence.
- Credit standards: A minimum credit score may be required.
- Education courses: Completing a homebuyer education course may also be a requirement.
- Residency requirements: Most programs require applicants to be U.S. citizens or legal permanent residents to qualify for assistance.
Resources
Looking for help with closing costs? These resources can connect you with programs to make homeownership more affordable:
3. Consider a no-closing-cost mortgage
Another way to reduce the upfront cost of buying a home is through a no-closing cost mortgage. Let’s look at how it works plus the pros and cons to see if it’s the right choice for you.
How it works
With a no-closing-cost mortgage, your lender covers all of your closing costs upfront, which makes home buying so much easier to afford. It’s a great option, especially if you’re struggling to find enough cash to cover a down payment and closing costs.
You can find a no-closing-cost mortgage through many of the most popular mortgage lenders. As you shop around, ask the lender if they offer this option.
But remember, those closing costs don’t just disappear—you end up paying for them through a higher interest rate, which will likely increase your monthly payments. And over the life of the loan, you could spend far more in interest than you would if you had just paid the closing costs upfront.
Despite the higher long-term costs, a no-closing-cost mortgage can still be a good option if you must keep your upfront expenses low. Be sure to compare offers from different lenders to find the one that best fits your budget.
4. Roll closing costs into your loan
Rolling closing costs into your mortgage can help you afford a new home. This option is similar to a no-closing-cost mortgage because the lender pays for closing costs upfront. However, your principal balance is increased instead of raising the interest rate to recoup funds.
How it works
Rolling closing costs into your loan allows you to finance these upfront expenses rather than paying them out of pocket. Instead of handing over thousands of dollars at closing, your lender adds the costs to your loan balance. However, some lenders may not offer this option so you’ll have to shop around.
This option is best for buyers comfortable financing a higher loan amount. It’s also a good choice if you’d rather save your cash and use it in other ways, like moving expenses or home improvements.
The biggest advantage of rolling closing costs into your loan is reducing the cash you need upfront, which can be a lifesaver if you’re short on savings. It also makes it easier to manage the financial stress of buying a home by spreading those costs out over the life of the loan.
On the downside, rolling closing costs into your loan increases the total amount you borrow, which means higher monthly payments and more interest paid over time. Plus it increases your LTV ratio, which could push it above lender limits and lead to additional costs like mortgage insurance or even loan denial.
Example
Let’s look at an example of rolling closing costs into your mortgage to see exactly how it works.
In this example, let’s say you’re purchasing a home for $300,000, and the closing costs are $9,000. Instead of paying the $9,000 upfront, you roll it into your loan.
If you make a 10% down payment ($30,000), your loan amount would normally be $270,000. However, if you add the $9,000 in closing costs, your new loan amount becomes $279,000.This increases your monthly mortgage payment slightly and raises your loan-to-value (LTV) ratio.
Over time, you’ll pay interest on that additional $9,000, which increases the total cost of your mortgage. However, this approach allows you to conserve your cash upfront, which could be used to cover other expenses.
5. Use a home sale-leaseback to unlock equity
If you have equity in your current home but need to free up cash to cover closing costs on a new home, a home sale-leaseback just might be the perfect solution.
How it works
A home sale-leaseback is a financial arrangement that allows you to sell your current home while continuing to live in it as a renter.
Here’s how it works: You sell your home to a company or investor, and they pay you the equity you’ve built up as a lump sum. After the sale, you sign a lease agreement to stay in the home, usually for a predetermined period. Truehold is one example of a company that offers an agreement like this.
This arrangement can be especially helpful when buying a new home. The cash you receive from the sale can cover the closing costs and down payment on your next property. And since you don’t have to move out immediately, you also have more time to search for your new home.
But there are a few downsides to consider. To use a sale-leaseback, you need sufficient equity in your home. You’ll also lose property ownership and your monthly rent may be higher than your previous mortgage payment.
Example scenario
Imagine you own a home worth $300,000 and have $200,000 in equity. Through a sale-leaseback, you sell your home and unlock $200,000 in cash from the sale.
You can remain in your home as a renter, paying monthly rent to the new owners, which gives you time to find your next property without feeling rushed.
The $200,000 from the sale can then be used to cover the down payment and closing costs for your new home, helping make the transition to your next property smoother and more affordable.
6. Use gift funds from family or friends
When cash is tight, it’s common to use gift funds from family or friends to cover closing costs.
How it works
Gift funds are monetary gifts that don’t need to be repaid. This option is best for buyers with family or friends willing and able to provide financial support.
The biggest advantage of using gift funds is that it reduces the financial burden of closing costs without adding to your debt. However, lenders may limit how much of your closing costs or down payment can come from gift funds, and the funds must be documented with a gift letter to meet lender requirements.
While borrowing money from family or friends is another option, most lenders frown upon this because it increases your financial obligations and could make it harder to repay your mortgage. If you borrow money, it’s important to use a written loan agreement outlining all the terms to comply with IRS regulations.
Requirements
When using gift funds to cover closing costs, there are a few things you need to keep in mind:
- Eligible donors: Gift funds must come from close family members; some lenders may allow gifts from long-term partners, friends, or other non-relatives.
- Limits: Lenders may cap the amount of your closing costs or down payment that can come from gifts, and large gifts of $19,000 or more need to be reported to the IRS.
- Documentation: A signed gift letter stating the amount, donor relationship, and that repayment isn’t expected is required.
Which strategy is best for you?
The best strategy for covering closing costs depends on your financial circumstances, homebuying goals, and resources. The table below provides an overview of each option covered in this post to help you decide which approach best suits your needs.
| Strategy | What to know | Best for |
| Negotiate seller concessions | Not guaranteed; market-dependent | Buyers in a buyer’s market |
| Closing cost assistance programs | Income restrictions | First-time or low-income homebuyers |
| No-closing-cost mortgages | Higher long-term loan costs | Short-term savings |
| Roll costs into the loan | Higher loan balance and interest | Buyers with the flexibility to finance a higher amount |
| Home sale-leaseback | Must sell current home | Homeowners with equity |
| Gift funds from family | No loan involved | Buyers with supportive family |
Tips to reduce closing costs
If you need additional help cutting back on closing costs, here are a few tips you can follow:
- Compare lender offers: Get several offers and compare their terms, including interest rates and closing fees, which can vary significantly between lenders.
- Ask about lender fee waivers. Some lenders may waive or reduce certain fees, such as application or origination fees if you ask.
- Shop for services: Shop for third-party services like title insurance, homeowners insurance, and closing agents—lenders may recommend providers, but you’re not obligated to use them.
- Time your closing strategically: Closing near the end of the month can reduce prepaid interest costs.
If closing costs are an issue, I will recommend that they talk with their agent and try to have the closing costs negotiated with the seller, consider rolling the costs into the value of the mortgage, and determine eligibility for grants or loans to assist with the down payment. If the costs are still too high, I will recommend that they wait and prepare a readiness (budgeting and saving) plan to prepare them to be able to buy a new home.
Erin Kinkade
,
CFP®, ChFC®
FAQ
What are closing costs, and why are they important?
Closing costs are the fees and expenses required to finalize a real estate transaction. These typically include lender fees, title insurance, appraisals, taxes, and escrow payments, often totaling 2% to 5% of the home’s purchase price.
They’re important because they represent additional upfront costs you must account for when buying a home. Failing to plan for them could delay closing or force you to forfeit the deal. Understanding closing costs helps you budget and explore ways to minimize them.
Can closing costs be included in a mortgage?
Yes, closing costs can often be rolled into your mortgage, but this depends on the lender and the type of loan. By financing your closing costs, you can reduce upfront expenses, making the purchase more affordable in the short term.
However, this increases your loan amount, monthly payments, and the total interest paid over time. It’s important to consider whether the convenience of financing these costs is worth the additional long-term expense.
Can I use a credit card to pay for closing costs?
In most cases, lenders do not allow you to use a credit card to pay for closing costs. The funds for closing must come from verified sources, such as a bank account, to ensure they’re legitimate and available.
If you’re short on cash, you might be able to use gift funds from family or explore personal loans, but you must disclose them to the lender. Always discuss your options with your lender to avoid violating any loan requirements.
Are closing costs refundable if I back out of buying a home?
This depends on the timing and reason for backing out. Fees for appraisals, inspections, and loan applications are typically nonrefundable because the services have already been performed.
However, if you back out within a valid contingency—such as a financing or inspection clause—you may be able to recover your earnest money deposit. Always review the terms of your purchase agreement to understand what’s refundable and what isn’t.
Can I ask for seller concessions in a seller’s market?
Yes, you can ask for seller concessions in a seller’s market, but it’s more challenging. Sellers are often less willing to cover costs when demand is high, so you’ll need to strengthen your offer to make it appealing.
This could include offering a higher purchase price to offset the concessions or showing flexibility with closing dates. Working with an experienced agent can help you structure the request strategically without compromising the deal.
Can I delay closing to save more money for closing costs?
You can delay closing to save for closing costs, but this requires agreement from all parties involved. Sellers may not be willing to wait, especially in competitive markets, so clear communication is essential.
Keep in mind that delaying the closing could have consequences, such as an expiring rate lock or additional fees. If you need more time, be prepared to justify the delay and address any concerns from the seller or lender.
