As discussed previously, some lenders are willing to make arrangements to pay the borrower's closing costs by increasing the interest rate. Moreover, with an FHA loan, you can actually finance a portion of your closing costs.
As with seller subsidies, most lender contributions toward closing costs are limited to only 3% of the loan amount.
The lender simply increases the interest rate to a level where they will be receiving sufficient income to cover your closing costs and interest. This increase will probably range anywhere from one-half to one full percent, depending on the loan size.
For example, Jesse has enough money for the down payment and reserves but none for the closing costs. The sellers are unwilling to renegotiate, so Jesse arranges for a lender subsidy. His interest rate increases from 7.25% to 8.00%. However, a few months after the closing, he contacts the lender to refinance.
Since the lender still has his file (including appraisal and title), they are able to lower his rate with no lender costs and total closing costs of $50 (to record the new mortgage). The new rate is back to 7.25%, or lower if the market has improved.
The beauty of this approach is that the closing costs are financed short-term, and then they are essentially refinanced away.
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