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I say hold on to as much of your cash as you can. The lender will want to see two to three month's of payments somewhere. If you liquidate everything to pay closing costs, you won't qualify.

It's common for FHA sellers to pay part of the buyer's closing costs, and you could certainly ask the seller to pay all of them. A seller of your "dream home" might not offer this to you, but if you look for distressed situations, a seller going through a divorce or relocating due to employment, a house that's been on the market for more than three months, a house that needs a lot of work, etc., you might find a workable situation without having to pay more than market value.

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