Down Payment And Closing Costs On House Purchase

Home buyers need to worry about the down payment and closing costs on house purchase when it comes to a home purchase. The down payment is normally 3.5% for FHA insured mortgage loans. Minimum down payment requirements for conventional loans is 5% of the purchase price.  VA loan programs and USDA loan programs do not require down payments.  Both of these two mortgage loan programs offer 100% financing.  All home purchase and/or refinance mortgage loan transactions have closing costs. Closing costs on house purchase are any fees and/or costs associated with the home purchase and/or home refinance of a residential mortgage loan. Examples of closing costs on house purchase are transfer stamps, title insurance, homeowners insurance, pre-paid items ( insurance and tax escrows), and any other fees and costs associated with the transaction of the purchase and/or refinance of the property. Closing costs on house purchase can vary depending on the state and county where the transaction takes place and can be anywhere between 2% to 4% of the transaction amount. On a $200,000 home purchase, closing costs can range from $4,000 to $8,000. Closing costs can really put a dent on a home buyer’s finances.

Ways Of Avoiding To Pay Closing Costs House Purchase

There are two ways a home buyer can not worry about paying for closing costs on house purchase. The first and most common method is by getting a seller’s concession towards a buyer’s closing costs. What is a sellers concession?  A sellers concession is when a seller will contribute toward part or all of the home buyer’s closing costs on house purchase. For example, say a seller wants a net of $100,000 in his pocket from the sale of his home and wants to help the buyer cover his closing costs because the buyer can only come up with the 3.5% down payment for a FHA loan.  The seller can raise the real estate purchase contract price to $105,000 and give the home buyer a $5,000 sellers concession towards the buyers closing costs so the buyer does not have to worry about paying closing costs.  The seller gets his $100,000 net price in his pocket, the buyer does not have to worry about any closing costs and only have to worry about the downpayment and the deal is done.  The home needs to appraise and any left over proceeds from the sellers concession cannot be given to the home buyer in the form of cash.  Any left over sellers concession needs to be returned back to the seller.   A home buyer does not want to waste any sellers concessions.  The maximum amount of sellers concession allowed with a FHA loan is 6% and the maximum amount of sellers concession allowed with a conventional loan is 3%.  Maximum sellers concession towards a buyers closing costs on a VA loan is capped at 4%.   Maximum sellers concession towards a buyers closing costs on an investment conventional mortgage loan is capped at 2%.  Maximum sellers concession towards a buyers closing costs on a USDA mortgage loan is capped at 6%.

What Is A Lender’s Credit?

If the seller is not willing to give a sellers concession towards the home buyer’s closing costs, then the second way the home buyer can offset his or her closing costs is by getting a lenders credit towards a buyer’s closing costs.  What this means is for a slightly higher rate, the mortgage lender can give the mortgage loan borrower cash credit to cover their closing costs.  For example, say a mortgage loan borrower gets approved for a $200,000 mortgage loan at a 4.25% mortgage rate.  Say the closing costs are $5,000.  The mortgage lender can offer to give a lenders credit of $5,000 towards the mortgage loan borrower’s closing costs at a rate of 4.75% in lieu of the 4.25% original par rate.  Maybe at a rate of 4.5%, the lenders credit amount might be $2,500.  The mortgage loan borrower can elect to choose the 4.50% mortgage rate and get a $2,500 lenders credit and pay $2,500 out of pocket to cover the $5,000 in closing costs.

Gustan Cho

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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