Buying a home requires more than saving for a down payment. Buyers also typically pay closing costs, which cover expenses associated with getting a mortgage and transferring ownership of the property. These costs are separate from the down payment and can add thousands of dollars to the amount needed at closing. These costs typically range from 3% to 6% of the home’s purchase price.
Closing cost assistance can help reduce the amount of cash a buyer needs to bring to closing. Assistance may come from government or nonprofit programs, sellers, lenders or allowable gift funds. Depending on the source, the assistance may or may not need to be repaid.
In a Nutshell
Closing cost assistance can come from several sources. State and local programs, nonprofits, sellers, lenders and eligible gift donors may all help cover some closing costs.
Eligibility varies. Assistance programs may have requirements related to income, location, credit, first-time buyer status, property type or loan type.
The amount of help varies, too. Depending on the source, assistance may cover a portion or potentially all of your eligible closing costs.
Not all assistance has to be repaid. Grants and some credits generally don't require repayment, while assistance structured as a loan may need to be repaid.
You may be able to combine assistance sources. Depending on the program and mortgage rules, buyers may be able to use assistance toward both their down payment and closing costs.
How Does Closing Cost Assistance Work?
Closing costs are the expenses associated with finalizing your mortgage and transferring ownership of the home. They may include lender fees, appraisal costs, title services, government recording charges, prepaid property taxes and homeowners insurance, and initial escrow deposits.
Closing costs can vary, but a helpful estimate is about 3% to 6% of the home’s purchase price. For example, if you’re buying a $300,000 home, you might pay around $9,000 to $18,000 in closing costs, in addition to your down payment.
Assistance can reduce this upfront expense. For example, if a buyer has $10,000 in closing costs and receives $5,000 in assistance that can be applied to those expenses, the buyer may only need to bring $5,000 toward closing costs, assuming all applicable program and loan requirements are met.
It's important to distinguish closing costs from cash to close. Cash to close can include the down payment and other amounts due at closing, minus credits and amounts the buyer has already paid.
Types of Closing Cost Assistance
There are several ways buyers can reduce the amount they pay out of pocket for closing. Here are the different types of programs available and how you can use them, so you can figure out which options might be most helpful.
Down Payment and Closing Cost Assistance Programs
Many down payment and closing cost assistance programs allow eligible funds to be used for both expenses. State and local housing finance agencies are common sources, and some nonprofit and community organizations also offer assistance.
Programs can take different forms, including grants, forgivable loans and deferred or repayable loans. Requirements vary and may include income, location, credit, property and loan criteria.
Neighbors Bank offers down payment assistance compatible with different mortgage options.
Seller Concessions
Another way to lower the amount you need at closing is through seller concessions. A seller concession is when the seller agrees to pay some of your eligible costs as part of the purchase agreement.
How much a seller can contribute depends on your loan type and, in some cases, your down payment or loan-to-value (LTV) ratio.
| Loan Type | Maximum Seller Contribution |
|---|---|
| Conventional | 3% with an LTV above 90% |
| 6% with an LTV of 75.01%–90% | |
| 9% with an LTV of 75% or less | |
| FHA | Up to 6% |
| USDA | Up to 6% |
| VA | Up to 4% for certain seller concessions* |
For example, if you’re buying a $300,000 home with an FHA or USDA loan, the seller may be able to contribute up to $18,000 toward eligible costs. That could make a meaningful difference in how much money you need to bring to closing.
Keep in mind that these are maximum allowances, not guaranteed amounts. What a seller agrees to contribute is negotiable, and the amount you can actually use depends on your eligible costs and the rules of your loan program.
*VA treats seller concessions differently from some other loan programs. The 4% limit applies to certain concessions, while some seller-paid closing costs are not subject to that 4% limit.
Lender Credits
A lender may offer a credit that covers some of the buyer's closing costs or prepaid expenses. Lender credits can reduce the amount of cash needed upfront, but they aren't necessarily free money.
A lender may provide a credit in exchange for the buyer accepting a higher mortgage interest rate. This can lower upfront costs, but it increases the monthly payment and potentially the total interest paid over the life of the loan.
Gift Funds
Eligible gift funds can sometimes be used toward closing costs. For example, under Fannie Mae's conventional loan guidelines, acceptable donors can include certain relatives and some non-relatives with qualifying relationships to the borrower. Gift funds aren't permitted for investment properties under those guidelines.
Buyers generally need to document the source and transfer of gift funds and provide a gift letter stating that repayment isn't expected. Requirements vary by loan program, so buyers should discuss potential gifts with their lender before receiving the funds.
Who Qualifies for Closing Cost Assistance?
There isn't one set of qualifications because assistance can come from different sources.
Formal assistance programs may consider factors such as:
Household income
Where the property is located
Whether the buyer is a first-time homebuyer
Credit history
Mortgage type
Purchase price
Property type and occupancy
Not every program is limited to first-time buyers. Some are available to repeat buyers who meet other eligibility requirements. And, it’s important to note that in the context of mortgages and closing costs assistance, first-time homebuyer generally means you haven’t owned a residential property in the last three years.
Seller concessions, lender credits and gift funds have different requirements and generally aren't subject to the same income or first-time buyer restrictions as government or housing-agency assistance programs.
How to Find Closing Cost Assistance Programs
Start looking for assistance early in the homebuying process. State and local housing finance agencies, nonprofit organizations, community programs and mortgage lenders may offer options. Check their website or reach out to someone at the organization to find out what types of assistance are available.
Make sure you start looking for closing cost assistance early on in the mortgage process. Programs can have separate applications, eligibility requirements and limited funding. Some may also require homebuyer education or other steps before closing.
Buyers can also review our Down Payment Assistance Guide to learn more about available options.
How to Apply for Closing Cost Assistance
The closing cost assistance application process depends on the source, but generally might involve steps like these:
Estimate your closing costs. Review your Loan Estimate to understand how much you'll need to cover.
Explore assistance options. Ask your lender about available programs, lender credits and other potential sources.
Check eligibility. Review income, credit, property, location and loan requirements.
Gather documentation. You may need income records, bank statements, identification and other financial documents.
Complete the application. Some programs have their own application and approval process.
Complete any required education or additional steps. Certain assistance programs require homebuyer education or counseling.
Tell your lender about your interest in assistance as early as possible. Some programs must be approved before closing, and the assistance may need to be coordinated with the mortgage.
Can You Combine Down Payment and Closing Cost Assistance?
In some cases, buyers can use assistance toward both their down payment and closing costs. Whether multiple sources can be combined depends on the specific assistance programs and the rules of the mortgage being used.
For example, suppose a buyer purchases a $250,000 home and qualifies for $8,000 in assistance. If the program allows the funds to be split between the down payment and closing costs, the buyer might apply $5,000 toward the down payment and $3,000 toward eligible closing expenses.
This can reduce the amount of personal savings needed to complete the purchase, although buyers may still need to meet minimum borrower contribution requirements.
FAQs About Closing Cost Assistance
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.