This BLOG On Down Payment And Closing Costs Required For Home Purchase Was PUBLISHED On August 20th, 2019
The home buying and mortgage process is a process.
- It cannot be done overnight. Many renters and first time home buyers often ask how much is needed to purchase a home
- Many higher-income millennial renters are afraid of even thinking about purchasing a home because they are under the assumption that 20% down payment is required
- This is not the case
- Home buyers can purchase homes with 3% to 5% down payment
- Down Payment and Closing Costs required on a home purchase depends on the loan program
- VA and USDA do not require any down payment
- All home purchase and refinance mortgage transactions require closing costs
- Down Payment is a fixed percentage of a home purchase
- Closing costs depend on third-party charges and are different
We will cover Down Payment And Closing Costs on this blog.
How Does Home Buying Process Work And How Much Down Payment And Closing Costs Required
Let’s go over the basic home buying process:
- Borrowers need to get pre-approved
- With a solid pre-approval letter, they can enter into a real estate purchase contract
- Home sellers require an earnest money deposit
- Earnest money is paid prior to the start of the mortgage process
- Lenders will verify where the earnest money came from
- Earnest money can be deducted from the cash-to-close required
- Home buyers will bring the down payment and closing costs required less the earnest money deposit to closing
What Upfront Costs Besides Down Payment And Closing Costs Required
The home buying and mortgage process should not start until borrowers have all the necessary down payment and closing costs required. Plus any upfront fees needed.
Here are the three costs required to get the keys to the home:
- Earnest money to the home seller
- The required down payment for the home purchase
- Closing costs reflected on the final Closing Disclosure
Many home buyers often ask when and at what time frame the earnest money, down payment, and closing costs are due during the home buying process. Bottom line is that all the costs above are the costs required to purchase a home. But home buyers should understand the distinction of the three costs.
When Is The Earnest Money Paid During Home Buying Process
Earnest money serves as a good-faith deposit by the home buyers. The larger the earnest money, the more skin in the game buyers have. Larger earnest money deposits shows strength of the buyers. Home buyers will larger earnest money deposits often get the bid in multiple offer situations.
Karry Razik, a top producing Illinois licensed real estate agent said the following with regards to earnest money deposits:
Earnest Money deposits is a sign that you will honor the real estate purchase contract. It may also serve as liquidated damages that the seller keeps if you breach the contract. The earnest money is due when the contract is accepted by the seller or shortly after. It is normally paid to an impartial third party, like a title company. That is why you should have available earnest money in your checking account before you start making offers on homes. Once deposited, these funds are often held in an escrow account until closing. The term “liquidated damages” means that the seller gets to keep the earnest money if you don’t follow through. It cancels the agreement and limits the amount the seller can get from you for bailing out. For this reason, higher earnest money deposits are safer for sellers, while lower deposits are less risky for buyers. Local customs influence what’s considered a reasonable earnest money amount. It can be as low as $500 to $2,000, or between 1 to 5 percent of the purchase. Or it can be as high as 10 percent. I strongly recommend that buyers attach an earnest money check to the offer. It shows that you are serious and have the ability to close the deal. If you have the money and are really serious, you can just put up your entire down payment right there. If the seller accepts your offer, this money will go toward your down payment and closing costs. Note that earnest money can be either refundable (this is almost always the case) or non-refundable (what you might have to do to compete with cash buyers in very hot markets). Refundable earnest money must be returned to you if something goes wrong with the transaction that was addressed ahead of time in the contract.
Are Earnest Money Deposits Refundable
Earnest money deposits can be refunded if the real estate purchase contract has contingencies.
- Contingencies is a home buyer’s right to get out of the purchase contract
- Earnest money can be jeopardized if there are no contingencies
- Examples of contingencies are appraisals, loan commitment, home inspection, or other subject-to clauses
- In hot housing markets with multiple purchase offers on the same home, buyers often forgo contingencies
- Some home buyers may do the home inspection prior to entertaining a home purchase contract to forgo the home inspection contingency
- Some buyers will get a TBD Underwriting Approval to forgo the mortgage contingency
- If a buyer decides not to proceed with purchasing the house without a particular contingency, the earnest money goes to the home seller
Some buyers will offer a home purchase with non-refundable earnest money to secure the deal on multiple offer deals.
How Much Down Payment Is Required On Home Purchase
VA and USDA Loans does not require any money down. VA and USDA loans offer 100% financing on owner-occupant home loans.
- FHA requires 3.5% down payment for borrowers with at least a 580 credit scores
- Under 580 credit score borrowers need to come up with 10% down payments
- Conventional Loans require 3% to 5% down payment on owner occupant homes
- Second homes require 10% down on conventional loans
- Investment properties require 15% to 25% down payment
- NON-QM Loans and bank statement loans for self-employed borrowers require 10% to 20% down payment
- The amount of down payment required is dependent on borrower’s credit scores
- Condotels require 25% down payment
- Non-warrantable condos require 20% down payment
- 2 to 4 unit conventional loans require 15% to 30% down payment
- The down payment is paid at closing
Mortgage underwriters verify funds for down payment prior to issuing a mortgage approval. Down payments can be gifted. Using 401k for down payment is allowed.
Closing Costs And Other Fees Required For Home Closing
All home loans have closing costs. Closing costs are not just lender fees but any third-party charges in the making of the home loan.
Here are examples of closing costs:
- Real Estate Attorney’s Fees
- Title charges
- Title Insurance
- Recording Fees
- Transfer Stamps
- Transfer Taxes
- City, County, State fees and taxes
- Homeowners insurance
- appraisal fees
- Home inspection fees
- Origination fees by lenders
- Credit Reporting Fees
- Document Prep Fees
- Processing and Underwriting Fees
- Discount Points
Closing costs vary depending on the title company, the state, county, and city. Closing costs vary. It is not a set percentage like the down payment. Most closing costs range between 2% to 6% depending on the transaction and location type.
For more information about this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org.