First Time Home Buyer: Roll Closing Costs Into Mortgage?

Added February 25, 2009 by Ilyce R. Glink

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Summary: A first time home buyer wants to know whether he can roll the closing costs into his mortgage by increasing the purchase price. Ilyce explains the pitfalls the first time home buyer may face by rolling the closing costs into the mortgage. The first time home buyer could be accused of pulling a scam if he increases the purchase price and rolls the closing costs into the mortgage.

Q: I bought one of your books and the advice was great. Here's my question: We're buying our first home. We don't want to be cash poor when we're done. A friend recommended to us that we ask the sellers if we can increase our purchase price by $5,000, then take that $5,000 back at closing to cover our closing costs, effectively rolling the closing costs into our mortgage financing.

Is this okay? I've heard mixed comments from people, some saying we're trying to pull a scam, others saying it's very common where they live.

A: Depending on how you handle this, it could well be considered a scam.

Many lenders will allow you to roll your closing costs into your loan. And, many sellers will simply pay the closing costs of the buyer. These are both reasonable ways to help you pay your closing costs.

If you have some cash for a down payment, you could also investigate getting a lower down payment loan, perhaps a zero down or 3 percent down loan instead of one with a higher down payment. That would help you reserve some cash.

You may not want to artificially inflate the sales price of the house. In some cases, the closing costs will be higher and the inflated sales price may increase your real estate taxes. You need to remember that you will have to disclose all the details of the transaction to the lender and receive their approval. If you and the seller decide to increase the purchase price and have the seller pay some or all of your closing costs, these amounts must all be shown on the closing statement and each amount must be disclosed to your lender. If you don't properly disclose these amounts to your lender, your actions could be construed as an act of fraud against the lender and you might have unwittingly violated the law .

For more information, you should certainly consult your real estate attorney.

Jan. 19, 2009.

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