What Is a No-Closing-Cost Mortgage?

What Is a No-Closing-Cost Mortgage?

No-closing-cost mortgages allow borrowers to skip paying closing costs upfront, either by rolling them into the loan amount or by charging more in interest. In both cases, you'll likely end up paying more than if you paid the closing costs on closing day. A monthly payment that includes closing costs is not only more expensive, but will limit the amount of home equity you build each month. And paying a higher interest rate will increase the amount you pay on your mortgage overall.

How a No-Closing-Cost Mortgage Works

Here are the two methods lenders use to provide no-closing-cost mortgages:

1. Closing costs get rolled into the loan. Instead of paying closing costs when you first buy a home, the lender will add them to your loan and you'll pay them off monthly as part of your mortgage payment. Closing costs usually range from 2% to 5% of the loan amount. For example, if you take out a $275,000 loan, adding closing costs to the total will bring your loan amount to $280,500 at the low end and $288,750 at the high end. You'll pay interest on that higher amount throughout the loan term.
2. The lender covers the closing costs and charges you a higher interest rate. Alternatively, the lender will pay for certain closing costs, or cover closing costs up to a certain amount, and you'll get a higher interest rate in exchange. This is sometimes referred to as purchasing lender credits. While you won't have to part with 2% to 5% of the loan amount upfront, you'll pay more in interest over the life of the loan. Using our example from above, if you receive a 7% interest rate on a no-closing-cost loan instead of a 6.6% rate on a traditional mortgage, you'd pay $26,377 more in interest over 30 years. Compare that with paying just $5,500 to $13,750 in closing costs at the start.

No-Closing-Cost Mortgage Requirements

Like other mortgage types, no-closing-cost mortgages come with the following eligibility requirements:

• Credit score: The minimum credit score needed to buy a house depends on your lender and the mortgage you're seeking. But conventional loans, the most common mortgage type and likely the mortgage you'd get if it has a no-closing-costs feature, typically require a credit score of at least 620.
• Debt-to-income ratio (DTI): Lenders of conventional loans generally prefer your DTI—or the proportion of your monthly gross income that goes toward debt—to be 36% or less, though the maximum allowed DTI can reach 50%.
• Down payment: You can put as little as 0% down on certain no-closing-cost loans. But you'll pay private mortgage insurance (PMI) if you put down less than 20%, which will increase your monthly payment.

No-Closing-Cost Mortgage vs. Traditional Mortgage

A traditional mortgage requires a borrower to pay certain upfront costs, including a down payment and closing costs, to secure the loan and buy a house. A no-closing-cost mortgage shifts some closing costs to either the loan amount or the interest rate to limit the amount you pay initially.

Pros and Cons of a No-Closing-Cost Mortgage

There are clear benefits and drawbacks to a no-closing-cost mortgage, and it's key to understand exactly how much it'll cost you in total before choosing one. Here are the major pros and cons:

Should You Get a No-Closing-Cost Mortgage?

Although no-closing-cost mortgages seem less expensive at first, they will cost you more over the life of the loan. They can be beneficial if you're under a time crunch to move or refinance and you don't have enough cash on hand.

But in general, if you need to roll your closing costs into the loan or interest rate in order to afford a home, a no-closing-cost loan isn't the sure bet it sounds like. You may be able to move in sooner, but your mortgage will cost more over time—making the home less affordable in the end. Consider a no-closing-cost mortgage only if you calculate how much it will cost you and are comfortable with, and can afford, the tradeoffs.

How to Get a No-Closing-Cost Mortgage

To get a no-closing-cost mortgage, follow these steps:

1. Shop around for lenders. Many mortgage lenders offer no-closing-cost loans, but not all. Start by looking at credit unions you're eligible to join, since they may offer lower interest rates or more favorable terms than banks or online lenders.
2. Ask how the costs are covered. Once you find a few lenders you're interested in, check the terms and conditions of the loan to understand how it works. Confirm whether the closing costs will be rolled into the loan or the interest rate, and how much more you'd pay in interest if it's the latter.
3. Compare loan estimates. Apply for mortgage preapproval and undergo a credit check. Each lender will then provide you with a loan estimate. This will give you the approximate loan amount and interest rate you may qualify for based on your personal and financial information, and it will help you compare potential offers. (Preapproval isn't a guarantee your final mortgage application will be approved.)
4. Run the numbers. Ideally, compare no-closing-cost loan estimates with a few traditional loan estimates so that you can evaluate the cost differences. Calculate how much you'll pay in total interest charges and how much you'll pay per month. A mortgage calculator can help.

Mortgage calculator

Alternatives to a No-Closing-Cost Mortgage

If it turns out a no-closing-cost mortgage isn't a good fit for you, consider these alternatives:

• Pay closing costs upfront. Go with a traditional mortgage and pay closing costs along with your down payment on your closing date. While it's a lot of money to hand over, it will potentially save you thousands in interest charges over your loan term.
• Ask for a seller concession. You can always ask the seller to cover some of your closing costs. This is most likely to work in a buyer's market, or if the seller is especially motivated by personal circumstances to make the sale quickly.
• Seek down payment assistance. There are many state and local programs that provide down payment or closing cost assistance to eligible borrowers, especially first-time homebuyers. Check with your state's housing finance agency for available programs. You can find your local agency on the National Council of State Housing Agencies' website.

Frequently Asked Questions

The Bottom Line

There's no such thing as a mortgage with no closing costs. Choosing a no-closing-cost loan means you'll pay them at a different point in the process, which will end up costing you more over time. When deciding whether to move forward with a no-closing-cost loan, the biggest question is how much you're willing to pay to limit the amount you must hand over in cash at closing. If you go for it, compare multiple options and choose the loan that will have the smallest impact on your mortgage costs in total.