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How Closing Cost Assistance Programs Work
Closing cost assistance programs are designed to help low-to-moderate income borrowers pay for mortgage closing costs when they buy a home. When it comes to buying a home, many borrowers overlook closing costs, which can run thousands of dollars. By helping borrowers pay these costs, closing cost assistance programs make home ownership more attainable. Additionally, these programs free up more money for home buyers to spend on their down payment, potentially enabling them to qualify for a larger mortgage and afford a better home.
Most closing cost assistance programs are structured as a grant to the home buyer. If the assistance is provide directly by a lender, borrowers are not required to repay the grant regardless of how long they live in the property. If the assistance is provided by a state or local housing agency or commission -- which is usually the case -- the grant recipient is only required to repay the grant if the home is sold, refinanced or vacated within a pre-determined number of years, typically five years or greater. If the home buyer sells, refinances or moves out of the property during the pre-determined number of years the grant must be re-paid, typically on a prorated basis based on the number of years the buyer has lived in the home.
For example, if the closing cost assistance program requires the home buyer to live in the property for five years for the grant to be fully forgiven and the home buyer moves out after three years, the buyer is required to repay 40% of the grant (two years remaining out of five required years equals 40%). Some programs require grant recipients to pay back the grant in full, plus interest, if they vacate the home before the specified number of years. Closing cost assistance grants typically range from a minimum of several hundred dollars up to $10,000 or more depending on the program.
Most closing cost assistance programs are offered by HUD-approved state and local housing agencies or commissions, although as outlined below, lenders also have the ability to offer closing costs grants. Housing agencies and commissions are typically not-for-profit organizations that coordinate with federal, state and local governments to offer a range of home buyer assistance programs including closing cost assistance programs, down payment assistance programs and home buyer counseling.
- Find HUD-approved housing agencies or commissions that offer closing cost assistance programs in your areaSTATE PROGRAMS
Housing agencies and commissions are not lenders and typically only offer home buyer assistance programs and not the actual mortgage required to buy a home. Mortgages are offered by participating lenders and to be eligible for a closing cost assistance grant, you must qualify for the mortgage based on the lender's guidelines.
This is why we recommend that you contact lenders to get pre-approved for your mortgage at the same time you contact your local housing agency to apply for a closing cost assistance program. Although applying for a closing cost program and a mortgage are two separate processes, both work best when they are coordinated. The lender needs to understand the details of your closing cost assistance grant to approve your mortgage and the program provider needs to understand your loan terms and property information to qualify you for the grant.
We recommend that you contact multiple lenders in the table below to understand the loan you qualify for and to review your low down payment mortgage options. These lenders may also be aware of closing cost assistance grants that you are eligible for. Plus, shopping lenders is the best way to save money on your mortgage.
Lenders and housing organizations are also typically familiar with no or low down payment mortgage programs such as the FHA (3.5% down payment), HomeReady (3.0% down payment) and HomeOne (3% down payment) programs that can make owning a home more affordable. For example, you could obtain a $2,000 closing cost grant from a housing commission and a $200,000 FHA or HomeReady mortgage from an approved lender to buy a home with a low down payment and use the grant to pay for your closing costs, significantly reducing the personal financial contribution required to buy a home.
Home buyers should make sure they are working with a HUD-approved housing agency or commission before applying for a closing cost assistance program or paying any fees. Some individuals and companies attempt to scam people by charging them to access closing cost assistance programs. You should not pay anyone or any company who promises you a closing cost grant in exchange for an up-front fee. To avoid being ripped off, we recommend that home buyers work directly with HUD-approved housing agencies and commissions listed on the HUD web site.
The closing cost assistance program application process can take up to a month or longer so your lender may need to add a buffer to your mortgage process timetable. If you have a short escrow and need to close your mortgage quickly, applying for a closing cost grant may delay the process, which is not ideal. This is why we recommend that you contact a HUD-approved housing agency as soon as possible if you think you may need closing cost assistance. Program funding may be limited so establishing a relationship with the housing agency early can be helpful. It is also important to understand program eligibility guidelines before you apply.
Additionally, because the closing cost assistance program and mortgage processes work best when they are coordinated, we recommend that you contact program providers and lenders at least a month in advance of shopping for a home, if possible. Knowing the qualification requirements for both the program and mortgage improves your ability to get approved for both.
Because many closing cost assistance programs are offered by state and local housing commissions and agencies, program eligibility and qualification guidelines can vary. Home buyers should contact their local housing commission or agency and review the the following key items to determine if they are eligible for a closing cost assistance grant.
Borrower Qualification Requirements
Borrowers must meet credit score, income and other qualification requirements to qualify for a closing cost assistance program and mortgage. Please note that although housing agencies and commissions can help borrowers coordinate the mortgage application process, borrowers must be approved for the mortgage directly by the lender based on the lender’s qualification guidelines. Many closing cost assistance programs and low or no down payment mortgage programs allow more flexible qualification requirements including lower credit scores and higher debt-to-income ratios. Program participants are also required to complete a HUD-approved home buyer counseling class before their mortgage closes. Home buyers should work with their housing organization and lender to understand eligibility and qualification requirements before the apply for a mortgage and closing cost assistance grant.
First-Time or Repeat Home Buyer
Some closing cost assistance programs require participants to be first-time home buyers while other programs are also available to repeat home buyers.
Property Eligibility
To be eligible for the program, home buyers must typically occupy the home as their primary residence and may not be permitted to own another property. The property is usually required to be a single-family residence such as a home or condominium and multi-unit properties are typically not eligible. Some programs also apply a maximum allowable property purchase price.
Income and Asset Limits
Many closing costs assistance programs apply a borrower income limit. To qualify for assistance, the borrower's household gross income cannot exceed the income limit for the program. Maximum household gross income is defined as a percentage of the area median income (AMI) with the income limit varying depending on the number of people in the borrower's household. The more people in a household, the higher the income limit. For most closing cost assistance programs, an eligible borrower can have a maximum household gross income of 80% - 100% of the area median income. Many programs also have an asset maximum, which limits the amount of assets (money in the bank) the home buyer can have at closing. Borrowers should check with their state or local housing agency or commission to determine how the income and asset limits apply to them.
Mortgage Program
Many closing cost assistance programs require participants to obtain a 30 year fixed rate mortgage although some programs also permit 15 year fixed rate mortgages and adjustable rate mortgages (ARM).
Program Fees
Because closing cost assistance programs involve additional work by the housing commission or agency, some programs require participants to pay an extra fee to process the grant application. On the other hand, most programs also limit the amount of fees and points that the lender can charge the borrower. This reduces the risk that the lender exploits the program by charging higher mortgage closing costs and fees.
Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including many no or low down payment prorgrams
A new rule adopted in 2018 allows lenders to offer closing cost assistance grants directly to borrowers. In this case, instead of applying for and receiving the assistance from a HUD-approved housing agency or commission, you receive the grant from the lender that provides your mortgage. Lender programs are a new option for borrowers who find it challenging to pay for closing costs.
There are some unique features to lender closing cost assistance programs that make them very borrower-friendly. First, the assistance must be offered as a true grant that borrowers are never required to repay, so it is effectively a gift from the lender. With some closing cost assistance programs offered by state or local housing agencies, you may be required to repay part or all of the assistance depending on how long you live in your home. With a lender closing cost assistance grant, you are not required to pay back the money. Additionally, lender grants can only be used to pay mortgage closing costs and not your down payment or other expenses. Plus, the amount of the assistance cannot be greater than your closing costs.
Finally, you should not pay a higher mortgage rate to offset the lender closing cost grant. This is called premium pricing and borrowers should make sure that their mortgage rate remains the same whether or not they receive closing cost assistance from their lender. Lenders should not increase your mortgage rate as this can end up costing you more money in interest expense over the course of your mortgage.
While it is too early to know how many lenders will implement closing cost assistance grants, borrowers should check with lenders to determine the home buyer assistance programs they offer.
Use our personalized mortgage quote function to review mortgage proposals from multiple lenders and learn more about the homebuyer assistance programs they offer. Our quote form is free, easy-to-use and does not affect your credit.
Sources
"Bridging the Down Payment Gap: Preparing for the first-time homebuyer opportunity." Single Family. Freddie Mac, October 2016. Web.
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