How to Finance Closing Costs on an FHA Mortgage

One of the primary benefits of a Federal Housing Administration loan is the low minimum down payment. Besides down payments, one of the largest sources of out-of-pocket expenses is closing costs. Depending on the area of the U.S. and what time of year it is, closing costs including escrows can run from 3 percent to 5 percent of the purchase price. There are ways to finance the closing costs of an FHA loan to help reduce the amount of money a borrower needs to bring to closing, possibly nothing out-of-pocket.

• 1

  Increase the purchase price of the home enough to cover the additional closing costs, then ask the seller to pay all closing costs to a maximum seller contribution of 6 percent. As long as the home appraises high enough, the increased purchase price increases the loan amount, which will finance the closing costs without affecting the seller's net profit.

• 2

  Talk to the lender about a slightly higher interest rate so the lender can pay the closing costs. The lender makes money on the "yield spread" --- the difference between the lender's rate and the rate he is charging borrowers. The lender can increase the rate on the loan so that he makes more money on the loan, which he can use to pay the closing costs.

• 3

  Take out a collateralized loan to cover the closing costs. This is a loan on another piece of real estate or against an investment, retirement account or insurance policy. Depending on whether the money has to be paid back, the lender may have to include the new loan payment as a monthly debt for qualification purposes.

• 4

  Use the money from a disaster relief loan, if one is available. These are loans administered by the Federal Emergency Management Agency, Small Business Association or state agency to help individuals who have lost their homes in a natural disaster. This repayment would also count toward qualifying monthly debt.

• 5

  Get a loan through a state or local housing agency that provides money to low- and moderate-income homebuyers for down payment or closing costs. Many of these programs focus on first-time homebuyers. California Housing Finance Agency and Pennsylvania Housing Finance Agency are two examples.