Here are 3 ways to buy a home with no closing cost. Often a client can come up with the down payment but the additional cost of closing and prepaid escrows for taxes and insurance might just be out of reach. Often having the cost paid can allow the client to choose a different type of financing such as FHA vs Conventional. The additional cost of closing can put a strain on a buyer’s budget and may influence their decision on whether or not they are ready for a mortgage. Also in many cases there is money to be obtained without asking or in some cases just by asking. Rather than borrowing more money or putting off the mortgage completely, there are several ways buyers can reduce their expenditures/one time transactional cost by having the closing costs paid on their behalf, thus allowing the purchaser to only need to bring the down payment to the table.
Key Note: You can use any combination or Seller, Lender, and Realtor Credits to achieve your goal of reducing your acquisition cost.
Seller Credit
The easiest way to accomplish this is to have the Seller Credit pay the closing costs and prepays. By negotiating for a seller credit towards closing, buyers can dramatically reduce the acquisition cost. Of course, intangibles such as the seller, the market, the loan, and the property itself will affect the amount the seller will be willing to pay. For example, FHA loans allow the seller to contribute 6% of the sales price to actual costs. This means that if the seller agrees to sell a house for $100,000, that same seller can pay up to $6000 worth of closing costs and prepaid items for the buyer. VA loans, on the other hand, have restrictions on the amount of closing costs a veteran has to pay and these are covered by the seller, the lender, or the realtor. In all cases the closing cost and prepays can be paid by the seller. Depending on credit score a client is better off to put 5% down conventional and ask for a seller to pay all allowable cost vs. going FHA 3.5% down and have to pay closing. They work out to be about the same cash to close depending on purchase price. Conventional loans will allow up to 3-6% depending on the down payment. This is an easy way to buy a home with no closing cost or reduce the cost.
Lender Credits
A second way to pay the closing costs is to have them paid by using Lender credits. If a buyer cannot gather enough funds to pay the closing costs, a lender can grant Lender credits that will either reduce or completely eliminate these costs. In some cases the credit is available without you asking and is required to be given to you (usually from a mortgage broker). These credits do sometimes have a higher rate to them but not always. If you have a client that can afford a higher interest rate, they can raise the interest rate slightly to have all the costs paid.
There is a trade-off however, because lender credits will usually result in slightly higher interest rates (.125 to .25), but in some cases there can be a swing of up to 2 points if you shop around. All lenders apply lender credits differently so be sure to contact them for more information. Often the Trade-off is worth it.
Example of a Mortgage Broker: First Meridian Mortgage is a Mortgage Broker, and on a ‘Lender paid transaction” is required to tell the lender in advance the price that is requested for originating a loan. This can only be changed quarterly and is not based on any one deal. Set in “stone” so to speak. In First Meridian Mortgage’s case we have a set price of 1.00% paid to FMMC by the lender. This is a key piece of information because that means every dollar a Bank prices a loan above 1.0% in premium goes to the client in the form of a credit (reverse points). The broker cannot make more than he has agreed to work for so if you choose a slightly higher rate you get every dollar of the pricing benefit. There are many banks and lenders that price there loans at 1.5% – 3% on average. So you can see if you would use a mortgage broker and the price is set and the normal quotes would be 1.5% – 3% and they have a structure like First Meridian Mortgage of 1.0% you would have a lender credit in the range of .5% – 2% of the loan amount toward your closing. In many cases the lender credits given at First Meridian Mortgage for the same interest rate a lender is offering is in the thousands of dollars in the clients favor. This can allow a client to buy the house or in some cases qualify for a larger house. See below
Example of a Lender: A lender does not and usually will not tell you or disclose what they make on a loan. If you call a lender, the price is set by secondary and he can manipulate the price on a daily basis. You have no way of knowing if the market improved or not by his day to day pricing. It is ‘NOT SET IN STONE” what he is willing to work for. The bank can keep the overage on loans and is not REQUIRED to give you the credit. The loan officer may in some cases get to use the overage on future deals that is not yours. If the market improved the lender can give you a partial benefit and keep the difference. A mortgage broker would still only be able to get what he had agreed to work for, so if the market improved you would get every penny of the improvement. The reality is there is a lot “Less truth in lending using a Lender”. Many lenders do not provide lender credits toward closing cost.
Fundamentally, finding a mortgage broker with a low Lender Compensation plan is going to give you day in and day out the lowest interest rates and largest credits toward closing cost. This is another easy way to buy a home with no closing cost or reduce the cost.
Realtor Credit
Similarly, another way to eliminate or reduce closing costs is to negotiate a Realtor Credit. It should be understood that the buyer and seller effectively “Hires and Fires” the realtor in a real estate transaction. The realtor and the buyer negotiate what compensation the realtor will receive for representing them in their real estate purchase. You can negotiate anything that you want to, and they have the right to accept or decline the offer of employment. In most transaction the seller of the home offers up a percentage of the sales price (usually 2-3%) for a Buyer’s Agent as commission/compensation for bringing a buyer to a house and effectively helping to sell the home. Most of the time the Buyer’s Agent works for the posted amount paid by the seller. You can ask for a piece of the compensation that is offered by the seller that would be paid to your Buyer’s Agent. I often will see .5% – 1% realtor credit toward buyers closing cost. Remember that the agent can say no or they may accept the offer of employment. Some agents will say they do not offer this as an option. At that point you can stay with them or ask another agent if they would like to work for you and offer a realtor credit toward your closing cost.
Another common mistake is when a client buys a new construction home. Clients often think they can walk into a builder’s model home and get a better deal without a realtor. What they do not realize is that they have already priced in the cost of the realtor into the transaction. So going in without a realtor just increased the profit of the home for the builder by often 3% if you do not have one. A suggestion would be to ask a realtor to represent you on the builder deal and credit a portion of the commission toward the closing cost. What most clients do not know is that on a builder deal the Buyer’s Agent does not write the contract. The builder uses his own contract and a Representative from the builder will write up the contract. Remember that builders will usually pass on any and all fees they can to the buyer and it is easy to do based on the fact they are using their contract which is written in their favor. Asking for part of the Realtor sales commission as a credit can offset some of these costs and you have representation.
Keep in mind that the size of the transaction and the amount that you are asking for will also dictate the willingness for both parties to come to a meeting of the minds. This is another easy way to buy a home with reduced or no closing cost.
These three ways Seller Credits, Lender Credits and Realtor Credits are not the only ways to purchase with reduced or no closing cost, but these is the most common that I see. Keep in mind that the different mortgage programs will dictate the amount of credits that are allowed and how they are applied. In some cases if credits exceed allowable amounts they have to be used, lost or in some cases applied to the loan as a principal curtailment. The key is to get the maximum credits with the lowest price on the house and the maximum credits with the lowest interest rate. You should consult with your lender in most case to determine your individual needs. Remember interviewing a few agents, loan officers, and effective negotiating the contract can save you thousands of dollars at closing, buy more house, and save over the life of the loan.
Notice; Information about the author: Kevin Retcher is the Owner of First Meridian Mortgage since 1996 and can be reached at 703-799-5636, kevin@firstmeridianmortgage.com. His opinions are his and his alone, and not to be taken as legal advice. Always consult with a licensed professional. Also excuse grammar and spelling, I work with math for a living. © First Meridian Mortgage Corporation. NMLS# 180004 www.nmlsconsumeraccess.org, ©KSA Insurance agency, License NPN 8036794 VA License, Rates are subject to change without notice.