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I'm back again!!

Just to recap, I've begun recently looking at houses under 130K. I am eligible for a zero-down FHA loan at 5.99%, but my income is too high to qualify for closing cost assistance. I only have $2500 in savings but have been aggressively working on saving more for my closing costs fund (all of this assumes I actually decide to buy, which is still an open question).

Just came back from the meeting to submit documents for the preapproval process. I learned (what I didn't know before) that it is possible to roll closing costs into a home purchase. Instead of offering 5% or so less than asking (typical in this area), I would offer something close to full price but request closing costs (estimated 4-5K) credited back by the seller at closing. In essence, I'd be financing the closing costs by adding them to my mortgage.

The immediate advantage of this for me is that I would be able to make an offer on a house even before I've finishing saving the 4-5K closing costs, which I estimate I will have by the end of May or the middle of June. If I do want to make an offer before then, I'll have no choice but to finance the closing costs since I won't be able to afford to pay cash.

My question is, if I don't find a house I like before June (which would be ideal according to my timetable anyway), is it to my advantage to finance closing costs even though I could manage (barely) to pay them up front?

Advantages that I can see: I'd be able to keep my savings in cash to deal with the million-and-one unexpected costs that I've been told come up when you buy a house. Some of those costs could be handled by the $400 or so I am able to save out of every biweekly paycheck (ie after I finish building the 4-5K fund), but perhaps not all, and I am really trying not to increase my debt. If I pay closing, I will be emptying out every account I have except my retirement plan at work (I can't touch that, by law).

Disadvantages that I can see: I wouldn't get the tax benefit of deducting points & prepaid mortgage interest, since those would become part of the principal of my loan -- I would only be able to deduct the interest on the slightly higher loan amount. (I already itemize & have deductions that exceed the standard, so tax considerations rank pretty high with me.) I would potentially owe more than the house is worth, even if only 5K more, and that might leave me upside-down in the mortgage if I have to sell sooner than expected.

Does anyone know if it is possible to split the difference -- pay part of the closing costs up front & roll the rest into the loan?

Are there other factors I should be taking into consideration? What do you think of the practice of financing closing costs generally? If you've actually read this far, thank you!! All advice is welcome.

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