Is financing the closing costs a thing??

Question

BPers!

Found a off market deal we'd like to pursue in Pittsburgh PA. It is a portfolio of properties (all are cash flowing well) for $630k. We have not done a deal of this size and even though we've found a creative way of funding it, the closing costs are presenting a problem. We are looking at about $30k in closing costs and even though we have some capital, that is way over our budget. We've overcome the obstacle of funding it but what do you do for the closing costs?

Chris Mason · Answer

Hi Carloz,

You can finance closing costs into the interest rate via the magic of discount points that are a negative number, but not into the loan balance directly.

I did this personally when I purchased my first home many moons ago. Took an $8k lender credit (aka negative discount points) to cover many closing costs in exchange for a higher rate. The higher rate translated into an extra $150/mo. Then I refinanced six months later, call it $3k in closing costs.

$8,000 - $150*6 - $3000 = $4100 in the green. Those numbers are for a loan amount smaller than yours, and I didn't want to go crazy and absolutely max it out because....

...Big risk of course is that I had no guarantee for where rates would be six months in the future when I refinanced. So I picked a higher rate that I wouldn't kill myself if I was stuck with it, but not the highest available.

Stephanie Medellin · Answer

@Carloz Gil There are two ways to indirectly finance the closing costs into the loan.

1.  Lender credit - With a higher rate, you can often receive a lender credit equal to half a point, one point or more of the loan amount.  It looks like you need about 5% of the purchase price for closing costs, so you will most likely need money from somewhere else to make up the difference.

2.  Seller credit - Offer slightly more and ask the seller for a credit to cover closing costs.  Depending on the loan type, you may also be limited to a certain percentage of the purchase price.  With investment properties, it's typically 2%.

Alternative Options:

• Don't escrow taxes and insurance, and your cash to close will be reduced by the initial escrow deposit for these items.
• Negotiate for the seller to directly pay for certain closing costs in the contract (such as settlement fees, title insurance, or transfer taxes).  These won't count in the 2% limit, because they are not crediting funds to you, they are simply paying for these items.

Elise Bickel Tauber · Answer

Mostly residential (4 units or under), but one or two had an llc and could only finance through their llc so they had to go commercial. I believe one of them used my commercial vendor, Riverforest. Justin is the president. If you want to message me or email me I can get you his contact info.

Hope he can help :)

Travis Wylie · Answer

@Elise Bickel - Any idea what lenders your clients were using or the type of  loan they were trying to get (i.e. residential/commercial)?

Elise Bickel Tauber · Answer

I've done a lot of deals in the last couple years where my clients are rolling in closing costs to the financing. As long as the numbers work for everyone it is win-win.

Stephanie P. · Answer

@Carloz Gil

Hey Carlosz

Ask the lender you're using for lender credit and then ask the seller for a seller concession to cover the costs.  You may  have to raise the sales price and the interest rate to make it work, but if the numbers work, do it.

Stephanie

Chris K. · Answer

@Carloz Gil

Maybe find a private lender who can lend you the money in exchange for personal guarantees and a high-interest rate. It will restrict your cash flow until you pay it off so you would need to pay it off as soon as possible.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Andrew Postell · Answer

@Carloz Gil most loans will only lend up to a specific "Loan-to-Value" ratio (LTV).  And most loans will not allow closing costs to be rolled into the loans.  There are tons of different lenders out there.  So if the value of this book of properties is something like $900k then there could be a theoretical lender that might lend just on the value. Ask this scenario in the Pennsylvania forum to see if any local people have any lenders that might be able to help in some way.  Or maybe have a private person lend you the closing costs.  Just some ideas.  Good luck!

Dave Skow · Answer

on a purchase  with  traditional lending -  closing costs  cant  be  rolled / financed in ...if you are  using a more creative  source  -  you might  ask the lending  source for some alternative  options

Is financing the closing costs a thing??

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