How Much Down Payment And Closing Costs Will I Need On Home Purchase?
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
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.
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 You 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 you do not have the extra funds to come up with closing costs for your purchase, talk to your mortgage lender and see if you qualify for a lenders credit towards closing costs. Most mortgage lenders can give you a lenders credit towards your closing costs for a higher mortgage rate.
Down Payment For Home Purchase
The minimum down payment needs to be shown on your bank account for you to get a mortgage approval and get a clear to close. Closing costs cannot be used towards your down payment. However, unless you buy a new construction home from a builder, you will get a tax proration from the previous year. All property taxes are paid in arrears and the seller owes you the prior year’s property taxes. You can use tax proration credits towards your down payment. For example, say you are purchasing a $100,000 home and you have a FHA insured mortgage loan for $96,500. You need to show $3,500. Say your closing costs of $3,000 is covered by the sellers concession and you have a $3,000 tax proration. The $3,000 tax proration can be used to offset your $3,500 down payment and the only amount you need 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 and there are many instances where home buyers get cash back at closing.