How Much Money Do I Need For A Home Purchase?

This BLOG On How Much Money Do I Need For A Home Purchase?

One of the most common first time home buyer questions is How Much Money Do I Need For A Home Purchase. On all home purchase transactions, there are two types of funding a home buyer needs:

  • The home buyer needs to come up with the down payment. The minimum down payment requirement depends on the mortgage program. VA Loans and USDA Loans do not require down payment requirements
  • All home purchase transactions have closing costs

How Much Down Payment Do I Need To Purchase A Home?

To the question of how much money do I need for a home purchase, the first part of the money needed is the down payment. The second part of the question on how much money do I need for a home purchase is closing costs. Down payment is fixed and mandatory by mortgage lenders. As mentioned, the down payment requirement depends on the mortgage loan program. Here are the minimum down payment requirements:

  • How Much Money Do I Need For A Home Purchase with a FHA Loan? FHA requires 3.5% down payment for FHA Borrowers who have at least a 580 FICO Credit Score. 10% down payment for borrowers who have under 580 FICO Credit Scores. All the borrower needs to worry about is closing costs which we will cover later on this blog
  • How Much Money Do I Need For A Home Purchase with a Conventional Loan? Conventional Loans require a 3% down payment for first time home buyers and 5% down payment for seasoned home buyers. First time home buyers is defined as a home buyer who has not owned a property in the past 3 years. All the borrower needs to worry about is closing costs which we will cover later on this blog
  • How Much Money Do I Need For A Home Purchase with a VA Loan? VA Loans do not require any money down and VA borrowers can get 100% Financing. All the borrower needs to worry about is closing costs which we will cover later on this blog
  • How Much Money Do I Need For A Home Purchase with a USDA Loan? USDA Loans do not require any down payment on a home purchase. All the borrower needs to worry about is closing costs which we will cover later on this blog
  • With FHA Loans, down payment can be gifted 100% by a family member as long as the donor of the gift can sign a gift letter that states that the down payment is a gift and is not a loan and it does not need to be paid back
  • Part of down payment can be gifted on Conventional Loans

What Are Closing Costs?

Besides the down payment, home buyers will need to come up with closing costs. Closing costs on a home purchase are fees and costs that are associated with the home purchase and closing of your home loan. Here are some examples of closing costs:

  • Title charges
  • Origination fees
  • Attorney’s fees
  • Appraisal costs
  • One year homeowner’s insurance premium
  • Pre-paids which are escrow reserves required by your lender of homeowners insurance and property taxes
  • Any other costs and fees associated with the closing of your home purchase

How Much Are Closing Costs?

Down payment on a home purchase is easy to figure out because lenders require a certain percentage of the home purchase price for the down payment. However, closing costs vary from city to city, and county to county on the state the home buyer purchases a home. The good news is that home buyers do not have to come up with closing costs and closing costs can be covered by two ways:

  • Sellers concessions
  • Lenders credit

Home sellers can contribute Closing Costs through sellers concessions. Here is the maximum amount of closing costs allowed with sellers concessions towards a home buyers closing costs:

  • FHA Allows up to 6% sellers concessions
  • VA allows up to 4% sellers concessions
  • Fannie Mae and Freddie Mac allows 3% sellers concessions for primary and second home financing and 2% sellers concessions for investment homes
  • USDA allows up to 6% sellers concessions

If the home sellers does not want to give sellers concessions, a mortgage lender can give the borrower a lender credit where the mortgage lender can credit closing costs for par or all of the borrower’s closing costs in lieu of a higher mortgage interest rate. Most realtors know about sellers concession for buyers.  Borrowers are allowed to use sellers concessions to cover only closing costs and cannot be used for down payment on a home purchase.

Overages on Sellers Concessions cannot be kicked back to home buyers and needs to go back to home sellers if it is not used up. However, any overages on sellers concessions are used to buy down the rate of the borrower.

In the event if the borrower is short of closing costs because he or she did not get enough sellers concessions,  the borrower can get the shortage of closing costs by the mortgage lender through a lender credit and not worry about coming anything out of pocket.

Property Tax Prorations Can Be Used For Down Payment

There are states like the state of Illinois where property taxes are paid in arrears. What this means is that when a home sellers sells their home, they owe one year property taxes to the home buyer because the property taxes are one year behind. Illinois home buyers can use the property tax credit by the home seller towards their down payment. However, they need to show the 3.5% down payment. Lets take a case scenario example on a home purchase:

  • Say the home purchase price is $100,000
  • Property Taxes for the property is $3,000
  • Down Payment required is 3.5% or $3,500
  • Closing Costs is $3,000
  • Sellers concessions is $3,000

So on the above example, the borrower only needs to come up $500 to close on the home because the closing costs are covered with the sellers concessions and the $3,500 down payment is credited with $3,000 from the property tax credit prorations by the home seller.

If you have more questions on how much money you need for a home purchase, please contact Gustan Cho at 262-716-8151 or email us at gcho@gustancho.com.

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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