Down Payments And Closing Costs On Home Purchase
This Article Is About Down Payment And Closing Costs On Home Purchase
Many first time home buyers are very concerned about 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
- That is not the case
In this article, we will cover and discuss the down payment and closing costs on home purchase.
Mortgage Loan Programs And Minimum 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
- HUD 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%:
- Also required is an annual mortgage insurance premium of 0.85% 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 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 loans is available to first time home buyers
- Fannie Mae/Freddie Mac defines first time home buyers as those who did not have ownership in a home in past three years
- 5% minimum down payment is normally required on conventional loans
- Any conventional 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 loan on a home purchase
VA LOANS, USDA RURAL DEVELOPMENT LOANS, HOMEPATH LOANS will be discussed in future blogs.
Down Payment And Closing Costs On Home Purchase Required
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 the following:
- title charges
- transfer stamps
- attorneys fees
- appraisal fees
- one year homeowners insurance upfront
- inspection fees
- 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 To Offset 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
- Conventional mortgage loans allow up to a 3% sellers concession towards closing costs on primary properties:
- 2% sellers concessions for investment properties
- 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 leftover 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 homebuyers do not have the extra funds to come up with closing costs for home purchase, talk to the lender
- See if the borrowers can qualify for a lenders credit towards closing costs
Most 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 cashback at closing
Mortgage Borrowers who have any questions Down Payment And Closing Costs On Home Purchase can contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Or email us at [email protected]
Gustan Cho NMLS ID # 873293
This BLOG On Down Payment And Closing Costs On Home Purchase Was UPDATED On October 2nd, 2019