Conventional Loan Requirements for Financing Closing Costs

The Quick Read: Financing closing costs on a conventional loan works differently on a purchase than on a refinance. On a refinance, the costs can be rolled into the new loan balance, as long as the total stays under the leverage cap. On a purchase, the loan cannot simply grow to cover them. A seller credit or a lender credit does that job instead, and each has its own limits. Every route is subject to lender guidelines and full file review.

Three different mechanics get lumped under one phrase. Rolling costs into a balance, taking a seller credit, and taking a lender credit are separate tools with separate rules. Mixing them up is where borrowers and agents get surprised late in the file.

What “Financing Closing Costs” Actually Means

There are four ways to handle closing costs. Pay cash. Roll them into the balance on a refinance. Take a credit from the seller on a purchase. Take a lender credit in exchange for a higher rate over the life of the loan.

The Loan Estimate shows all of this. It lists total closing costs, any lender credits, and the closing costs financed from the loan amount. The Closing Disclosure should be compared line by line against it. Across the wholesale programs Lendmire places consumer files with, the files that run clean are the ones where the borrower picked a structure before the Loan Estimate went out, not after.

How the Loan Gets Underwritten, Step by Step

The same sequence applies on most conventional files.

1. Pick the structure. Cash, financed on a refinance, seller credit on a purchase, or lender credit.

2. Read the Loan Estimate. Confirm total costs, credits and the amount financed.

3. Order the appraisal. Value sets the ceiling. On a purchase, credit limits are measured on the lower of the sales price or the appraised value. On a refinance, financed costs raise the new loan amount, which raises leverage.

4. Run automated underwriting. The usual income, asset, credit and ratio rules apply. Across the conventional programs Lendmire works with, the wholesale floor is a 620 decision score, and the automated finding governs most files, with a total ratio ceiling of 50%. Manually underwritten loans run tighter, at 36% or 45% depending on reserves and score factors.

5. Disclose every credit. On a purchase, interested-party contributions must be disclosed. Undisclosed ones, including “silent” seller seconds, make a loan ineligible for sale to Fannie Mae, per the Fannie Mae Selling Guide on interested party contributions.

6. Reconcile at settlement. The Closing Disclosure shows credits and financed amounts. Cash back beyond what the rules allow changes the transaction to a cash-out.

A larger balance from financed costs flows straight into the payment and the ratios. That is the quiet friction on refinance files. The costs fit under the leverage cap but push the ratio over.

Refinance: Rolling Costs Into the New Loan

On a refinance, rolling costs in is a standard, allowed move. A rate-and-term (limited cash-out) refinance is a new first mortgage that pays off the existing first mortgage. Fannie Mae’s limited cash-out refinance rules require that at least one borrower on the new loan be on title when the application is taken. Inheritance and property awarded in a divorce or separation are the named exceptions.

In the wholesale programs Lendmire arranges, a rate-and-term refinance on a one-unit principal residence goes to 95% LTV. It reaches 97% where the existing loan is agency-owned and the first-time-buyer program allows it. The new loan can pay off the existing first mortgage, the closing costs and a purchase-money second lien, with only incidental cash back. Mortgage insurance applies above 80%. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

The 95% to 97% tier carries extra conditions. It is fixed-rate only, a 1-unit principal residence, every borrower occupying, and run through automated underwriting. The same Fannie Mae section allows combined leverage to go higher when the second lien is a Community Seconds loan.

The key point: financed costs are part of the loan amount. They count against LTV. They only fit if the total stays under the cap.

Cash-out refinances can finance costs too. The Fannie Mae cash-out refinance section says proceeds may pay closing costs, points and prepaid items. But the leverage is lower. A conventional cash-out on a one-unit principal residence caps at 80% LTV, and 75% on two- to four-unit principal residences. The first mortgage being paid off has to be at least 12 months old, and a borrower needs six months on title, with delayed financing, inheritance and legal-award exceptions. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Purchase: Why the Loan Doesn’t Just Grow

A purchase loan is sized to the price and the leverage tier. The wholesale conventional envelope runs 97% LTV on a one-unit principal residence with a fixed rate when at least one borrower is a first-time buyer, meaning no ownership interest in a residence in the previous three years. Otherwise it is 95%. Two- to four-unit principal residences go to 95%. Second homes go to 90%. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

Those caps are the point. The lender cannot lend above the leverage tier, and the down payment fills the rest. So closing costs on a purchase get covered another way, through credits.

Seller and interested-party credits

An interested-party contribution is a cost normally paid by the buyer but paid instead by someone with a financial stake in the sale. Three rules decide how it works.

• Limits are measured on the lower of sales price or appraised value, not the loan amount.
• Credits can’t be used for the down payment, reserves or minimum borrower contribution.
• Credits can’t exceed the borrower’s actual closing costs. Any excess is treated as a sales concession, deducted from the price, and leverage is recalculated.

Fannie Mae states that the limits range between 2% and 9% of the property value. Where a file lands in that range depends on leverage and occupancy: higher leverage gets the smaller allowance, and an investment property gets the lowest. Fees a seller pays under local custom sit outside those limits, and that treatment is time-sensitive, so check the current Guide.

A gift of equity from a related seller is not an interested-party contribution when its conditions are met.

Fannie Mae’s announcement SEL-2025-03 also changed the vocabulary. The Guide now speaks of “maximum financing concessions” inside the interested-party framework. It also raised the limit on lender incentives and tightened treatment of realtor rebates and affiliated lenders.

Lender credits

A lender credit is a rebate on the Closing Disclosure that offsets some closing costs. Per the CFPB’s closing disclosure explainer, it is typically provided in exchange for a higher interest rate. Fannie Mae excludes a lender credit derived from premium pricing from the interested-party definition, even when the lender is an interested party. So it does not eat into seller credit limits.

Cash or gift-card-style lender incentives are a separate category. They can’t come from the loan transaction itself, the borrower must qualify without them, and no repayment can be required. If the lender is affiliated with an interested party, the incentive counts as a sales concession.

Where the General Rule Breaks

A low appraisal. On a purchase, a low value lowers the credit ceiling and can push the file into a higher leverage tier. On a refinance, financed costs against a lower value can blow past the cap. Ask for appraisal reconsideration with recent comparable sales before you restructure the whole deal.

The 95% to 97% refinance tier. The conditions above apply. Miss one, and the file falls to the standard cap.

Cash back. Fannie Mae’s cash-out page limits cash to the borrower to the greater of 1% of the new loan amount or $2,000, and lets the lender refund overpaid fees. Bigger cash back reclassifies the loan. Confirm the cap against the limited cash-out section before relying on it for a rate-and-term file.

Excess credits. A seller credit above actual costs can’t be pocketed. It becomes a sales concession.

Occupancy. The same credit rules run tighter on investment property, and cash-out leverage drops to 75%. Occupancy decides the leverage.

Income-limited refinance programs. Fannie Mae and Freddie Mac have refinance programs with income limits and their own rules. Those files need program-specific review, not the general rule.

Manufactured housing. Leverage differs by product. Check the product matrix before promising anything.

Pay Cash, Credit, or Finance? The Decision in Practice

Nothing here is free. The CFPB’s loan cost guidance explains that “no closing cost” loans are paid for in one of two ways: a lender credit funded by a higher rate, or costs rolled into a larger balance. When a seller pays, the seller usually asks for a higher price, so the buyer still pays through the loan.

The break-even question is how long you keep the loan. A credit or financed cost that saves cash today costs more every month. Freddie Mac’s refinancing FAQ warns that a “no-cost” refinance may mean a higher rate and rolled-in costs, likely costing more over the life of the loan. If you plan to sell or refinance again within a few years, a credit can make sense. If you plan to hold for decades, paying cash usually costs less in total.

Picture a buyer putting 5% down with limited cash reserves. Seller credits can cover closing costs, but they can’t touch the down payment or reserves. The buyer still has to bring the minimum contribution from their own funds. That is the line lenders hold. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

Now picture a homeowner refinancing at 90% LTV. Financed costs raise leverage. If the total crosses 90%, the deal works to a tighter tier with different mortgage insurance treatment. Mortgage insurance applies above 80% LTV. The borrower may request cancellation at 80% of the original value with good payment history, no subordinate liens and no decline in value. The servicer must end it automatically at 78%. Published typical annual premiums run from 0.58% to 1.86% of the balance. That is a range, not a quote, and it varies by file. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.

Documents the Underwriter Checks

Think of this as the requirements list that matters most:

• Appraised value and the lower-of-price-or-value test
• Total leverage after any financed costs or credits
• Occupancy, which sets the leverage tier
• Credit score against the program floor, and the total ratio
• Reserves and the source of funds for the down payment
• Title status on a refinance, including time on title
• Disclosure of every credit and concession
• Waiting periods after credit events: the agencies set four years from a chapter 7 discharge, seven from a foreclosure, and four from a short sale or deed-in-lieu, shorter with documented extenuating circumstances

Documentation gaps cause more delays than the rules themselves. A purchase contract that doesn’t show the seller credit amount, or a seller credit that appears late, forces a redisclosure and a re-run of the findings.

Key Terms Defined

Interested-party contribution: A cost normally paid by the buyer that is paid instead by someone with a financial interest in the sale.

Sales concession: A credit above the allowed limit that is deducted from the price, with leverage recalculated.

Lender credit: A rebate that offsets closing costs, typically in exchange for a higher interest rate.

Limited cash-out refinance: A new first mortgage that pays off the existing first mortgage and closing costs, with only incidental cash back.

LTV (loan-to-value): The loan amount divided by the lower of the price or the appraised value.

Seasoning: The minimum time a borrower has held title or an existing loan has been in place.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

Next Step

Lendmire’s conventional loan programs are arranged through wholesale lenders. For a related question, Lendmire’s piece Can You Roll Closing Costs Into a Conventional Loan? covers the refinance side in more detail.

If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B3-4.1-02, Interested Party Contributions

2. Fannie Mae Selling Guide B2-1.3-02, Limited Cash-Out Refinance Transactions

3. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions

4. Fannie Mae Selling Notice (agent fees)

5. Fannie Mae Selling Guide Announcement SEL-2025-03

6. CFPB’s closing disclosure explainer

7. CFPB, Get to know loan costs

8. Freddie Mac refinancing FAQ