How Much Money Do I Need For A Home Purchase

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How Much Money Do I Need For A Home Purchase

This BLOG On How Much Money Do I Need For A Home Purchase Was UPDATED On July 30th, 2019

How Much Money Do I Need For A Home Purchase
Gustan Cho Associates

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

In this article, we will cover and discuss How Much Money Do I Need For A Home Purchase.

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

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 of how much money do I need for a home purchase is closing costs
  • The down payment is fixed and mandatory by mortgage lenders
  • As mentioned, the down payment requirement depends on the mortgage loan program

In the following paragraphs, we will discuss the minimum down payment requirements on the loan programs.

HUD Down Payment Guidelines

HUD Down Payment Guidelines

How Much Money Do I Need For A Home Purchase with an FHA Loan?

  • FHA requires 3.5% down payment for Borrowers who have at least a 580 Credit Score
  • 10% down payment for borrowers who have under 580 FICO
  • All the borrower needs to worry about is closing costs which we will cover later on this blog

Fannie Mae And Freddie Mac Down Payment Guidelines

Fannie Mae And Freddie Mac Down Payment Guidelines

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
  • 5% down payment for seasoned home buyers
  • First time home buyers are defined as a home buyer who has not owned a property in the past 3 years
  • All buyers need to worry about is closing costs which we will cover later on this blog

VA Down Payment Guidelines

VA Down Payment Guidelines

How Much Money Do I Need For A Home Purchase with a VA Loan?

  • VA Loans do not require any money down
  • Borrowers can get 100% Financing
  • All the borrower needs to worry about is closing costs which we will cover later on this blog

USDA Down Payment Mortgage Guidelines

USDA Down Payment Mortgage Guidelines

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
  • This holds true as long as the donor of the gift can sign a gift letter
  • The gift letter states that the down payment is a gift and is not a loan and it does not need to be paid back
  • Part of the down payment can be gifted on Conventional Loans

What Are Closing Costs

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 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
    • Escrows of homeowners insurance and property taxes are mandatory by lenders on government loans and conventional loans with less than 20% equity
  • Any other costs and fees associated with the closing of  home purchase

How Much Are Closing Costs

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 buyer do not have to come up with closing costs and closing costs can be covered in two ways:

  • Sellers concessions
  • Lenders credit

Maximum Sellers Concessions Allowed

Maximum Sellers Concessions Allowed

Home sellers can contribute Closing Costs through sellers concessions.

Here is the maximum amount of closing costs allowed with sellers concessions towards home buyers closing costs:

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

Lender Credit Versus Sellers Concessions

Lender Credit Versus Sellers Concessions

If the home sellers do not want to give sellers concessions, lenders can offer lender credit:

  • Lenders can credit borrower’s closing costs in lieu of higher mortgage interest rates
  • Most realtors know about sellers concession for buyers
  • Borrowers are allowed to use sellers concessions to cover only closing costs
  • Cannot be used for the down payment on a home purchase

Guidelines On Overages Of Sellers Concessions

Guidelines On Overages Of Sellers Concessions

Overages on Sellers Concessions cannot be kicked back to home buyers:

  • Needs to go back to home sellers if it is not used up
  • Any overages on sellers concessions are used to buy down the rate of the borrower

In the event, if borrowers are short of closing costs because he or she did not get enough sellers concessions, borrowers can get the shortage of closing costs through a lender credit.

They do not have to worry about coming anything out of pocket.

Property Tax Prorations Can Be Used For Down Payment

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 sell their home, they owe one-year property taxes to the home buyer:

  • This is because the property taxes are one year behind
  • Illinois homebuyers can use the property tax credit by the home seller towards their down payment
  • However, they need to show the 3.5% down payment

Case Scenario Of Property Tax Prorations

Case Scenario Of Property Tax Prorations

Let’s take a case scenario example on 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 are $3,000

So on the above example, the borrower only needs to come up $500 to close on the home. This is because the closing costs are covered with the sellers’ concessions. 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 Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com.

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