Requirements Of Down Payment And Closing Costs On Home Purchase

This BLOG On Requirements Of Down Payment And Closing Costs On Home Purchase Was UPDATED On September 28th, 2017

Many first time home buyers are very concerned on how much money they would need to save in order to be qualified to be able to purchase their new home.

  • Believe it or not, many people who dream of buying a home someday are still under the impression that they need a minimum of 20% down payment plus closing costs.

Mortgage Loan Programs And Minimum Required Down Payment And Closing Costs

FHA MORTGAGE

If you are applying for a FHA insured mortgage loan, you only need a 3.5% down payment for a home purchase.  There will be closing costs that you will be required to pay but there are ways of having to pay closing costs out of pocket.  FHA allows home buyers to receive up to a 6% sellers concession towards a buyers closing costs which can include prepaids.  All FHA insured mortgage loans require an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 1.35% paid in 12 equal monthly installments for the duration of the life of the FHA loan.  The only way to get rid of the annual mortgage insurance premium is by paying off the FHA insured mortgage loan or by refinancing it to a conventional loan.  I will explain that in a later paragraph on this blog.

CONVENTIONAL MORTGAGE LOANS

There are 3% down payment conventional mortgage loan programs and 5% conventional mortgage loan programs.

  • The 3% down payment conventional mortgage loan program will only be good until the end of this year and will expire in January 2014. 
  • Effective January 2014, the 3% down payment conventional loan program will no longer be in existence and only the 5% minimum down payment conventional mortgage loan program will be effective. 
  • Any conventional mortgage loan that has a loan to value of greater than 80%,  private mortgage insurance premium will be required. 
  • A maximum of a 3% sellers concession towards a buyers closing costs is allowed on a conventional mortgage loan on a home purchase.

VA LOANS, USDA RURAL DEVELOPMENT LOANS, HOMEPATH LOANS will be discussed on future blogs

Down payment and closing costs

When a home buyer buys a home, they need to have a down payment as well as closing costs.

  • Closing costs on a home purchase are third party costs which includes title charges, transfer stamps, survey, attorneys fees, appraisal fees, one year homeowners insurance upfront, escrows, inspection fees, and other third party fees and charges. 
  • It is normally 3% of the purchase price of the new home, more or less.  
  • Closing costs are not set costs and vary from county to county and state by state. 
  • Closing costs for a purchase is substantially higher in Florida than it is in Illinois. 
  • There are ways where buyers do not have to come out of pocket for closing costs.

Sellers Concessions

The first way of coming money out of pocket for closing costs on a home purchase is by asking the sellers to give you a sellers concession towards your closing costs on your purchase.

  • FHA insured loans allow up to 6% of sellers concessions towards a buyers closing costs and conventional mortgage loans allow up to a 3% sellers concession towards closing costs. 
  • Make sure you do not ask too much closing costs where there will be a surplus. 
  • Any surplus in closing costs does not go to the buyer. 
  • It goes back to the sellers so please keep in mind that you do not waste any sellers concessions credits. 
  • It is illegal to get a cash kickback from left over closing costs. 
  • You also cannot use sellers concessions towards a buyers closing costs towards your down payment.

If you get enough sellers concessions towards a buyers closing costs, you do not have to come up with any closing costs at the closing table.

What If The Seller Of The Property Does Not Give Sellers Concessions Towards Buyers Closing Costs?

There are instances where sellers will not give you a sellers concession towards a buyers closing costs.

  • In the event this is the case and home buyers do not have the extra funds to come up with closing costs for home purchase, talk to the mortgage lender and see if the borrowers can qualify for a lenders credit towards closing costs
  • Most mortgage lenders can give borrowers a lenders credit towards closing costs for a slightly higher mortgage interest rate.

Down Payment And Closing Costs On Home Purchase Depends On Loan Program

The minimum down payment and closing costs on home purchase needs to be shown on bank account for borrowers to get a mortgage approval and get a clear to close.  Sellers concessions cannot be used towards down payment on home purchase.

  • However, unless a home buyers purchases new construction home from a builder, there are certain states like the state of Illinois where property taxes are paid in arrears.
  • On states like Illinois where property taxes are paid in arrears, home buyers will get a tax proration. 
  • All property taxes are paid in arrears in Illinois and the seller owes home buyers the prior year’s property taxes. 
  • Illinois home buyers can use tax proration credits towards their down payment on home purchase. 
  • For example, say Illinois home buyers purchasing a $100,000 home and have a FHA insured mortgage loan for $96,500. 
  • The Home Buyer need to show $3,500. 
  • Say closing costs of $3,000 is covered by the sellers concession and this buyer has a $3,000 tax proration. 
  • The $3,000 tax proration can be used to offset the $3,500 down payment and the only amount needed to bring to closing is $500.00. 
  • There are many cases where buyers do not have to bring anything to the closing table due to the tax prorations .
  • There are many instances where home buyers get cash back at closing.

Mortgage Borrowers who have any questions Down Payment And Closing Costs On Home Purchase can contact Gustan Cho of The Gustan Cho Team at USA Mortgage at 1-800-900-8569 or email us at gcho@gustancho.com.

Gustan Cho NMLS ID # 873293

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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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