Can closing costs be rolled into your mortgage?

Question: Dear Kari, A friend of mine recently purchased a home and mentioned that she rolled her closing costs into the loan so she wouldn't have to pay them up front. Is that actually possible, and if so, how does it work? Answer: That is an excellent question! The short answer is yes, in several cases and several types of mortgages most closing costs can be included into a mortgage, but some restrictions and rules do apply. This process is known as financing the closing costs. Instead of paying those costs in cash up front at the closing table, they are added to the mortgage, spreading the costs over the life of the loan. While this results in a slightly higher loan balance and monthly payment, it greatly reduces the amount of cash outlay. Many buyers like this strategy because it can allow them to set aside some cash for home improvements or have savings for a home emergency down the road. In addition, for many folks, rolling closing costs into a mortgage is more than just a convenience, it serves as a critical financial tool for buyers who have the income to support a mortgage but lack the large lump sum of cash required to bring to the closing table. Close costs are a variety of fees and service expenses buyers are required to pay to complete a home purchase. Typically, these costs range from 1.5 to 4 percent or more of the home's total purchase price. Closing costs that are commonly rolled into a mortgage: · Title search and insurance fees, making sure there are no issues preventing clear title transfer at closing. · Fees covering the official recording of the new deed and mortgage with local government offices. · Home inspections fees to professionally have the home's condition evaluated. · Loan origination fees charged by the lender for processing and underwriting the loan. · Home appraisal fee for the home to be professionally evaluated along with matching the purchase price. · Mortgage points, also known as discount points, are paid to lower the interest rate on the mortgage. · Mortgage insurance premiums (MIP for FHA) or private mortgage insurance (PMI) for conventional loans, if required by the lender. Closing cost that are not commonly rolled into a mortgage: · Prepaid property taxes that are due soon after closing. · Any outstanding or prepaid homeowners association fees. · The first year of homeowners insurance. It is good to note that lenders work within their certain loan-to-value (LTV) ratio limits. These limits vary by each lender and what type of mortgage you choose. This ratio is a percentage comparing the loan amount to the property's appraised value, calculated by dividing the loan amount by the home's value. This helps lenders assess their risk, and lenders review this before making the mortgage. Keep in mind when considering rolling closing costs into your mortgage, this will increase your LTV ratio, and financing too many close costs might push you over those limits. Since each lender has different requirements with rolling in closing cost costs, you will want to first find out if they allow it and if you meet their requirements. Lean on the expertise of your professional real estate agent and they will guide you through the process and help you craft the best possible strategy for your new home purchase. I wish you the best in your home buying process!