How To Buy And Finance Your First Home In Today’s Housing Market

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover how to buy and finance your first home for homebuyers in today’s competitive housing market. Home prices have been skyrocketing for the past several years. HUD and the Federal Housing Finance Agency (FHFA) have increased FHA and conforming loan limits for the past six years due to increasing home prices. Average home prices have been increasing double digits the past four years in most parts of the country. The 2022 FHA loan limit for counties with the national average home value is now capped at $420,680. 2022 conforming loan limits are capped at $647,800. High-balance mortgage loans for 2022 are at $970,800 on both FHA and conforming loans.

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Are You Ready for Homeownership?

Mortgage rates are still low but forecasted to increase. Inflation rates are soaring and keeping cash in the bank is not the wisest choice of investment. Many renters who did not plan on buying a home until years later are now reconsidering buying a home before they get priced out of the housing market. There are many moving parts to buying and financing your first home.

Preparing to Buy Your First Home

A lot of steps in the mortgage process may not make sense to many who are not familiar with the real estate and/or mortgage industry. However, we will detail the information on how to buy and finance your first home so anyone can easily understand. By the time you are done reading your blog, you will fully understand the basics of how to buy and finance your first home, the mortgage options available to you, can I have multiple jobs in the past two years, what the down payment and closing costs are, what are the credit and income requirements, and how much money you will need to be ready to make an offer on a home. 

First Step On How To Buy And Finance Your First Home: Tips for Successful Homeownership

The first step in getting ready on how to buy and finance your first home is to understand the basics of the homebuying and mortgage process. We will detail the step by step guide for first-time homebuyers about the best mortgage options, the best loan programs available for them, how much money they will need, the ways of not paying closing costs out of pocket, the qualification and pre-approval mortgage process, the steps leading to the clear to close and closing. 

How Much Money Do I Need To Buy A House?

Many people think they need a lot of money saved to purchase their first home so they do not even want to consider ever becoming homeowners. You do not need a 20% down payment or great credit. You can qualify for a mortgage on a home purchase with little to no money down and the closing costs can be paid with seller concessions and/or a lender credit. We will go into detail about what the down payment and closing costs entail in later paragraphs of this article. Before you jump to conclusions, you should contact one of our mortgage experts at Gustan Cho Associates and we can explain in more detail how much you qualify for, what your monthly housing payments will be, and how much money you need to buy a house.

How To Buy And Finance Your First Home With As Little Money Out Of Pocket As Possible

In general, all home purchase and refinance mortgage loans require closing costs. With the exception of USDA and VA loans, home purchase loans require a minimum down payment requirement. Homebuyers will need two types of funding requirement on home purchases:

  1. down payment
  2. closing costs on a home purchase

The down payment requirement is a fixed percentage of the home purchase price on most mortgage loan programs. All real estate transactions, whether it is a home purchase or a refinance, have closing costs. However, VA and USDA loans are exempt from down payment requirements. Closing costs are any costs and/or fees incurred with the real estate transaction. There is no set amount on how much closing costs are. Closing costs vary on the county and state the property is located, the type of property, the loan amount, the type of home mortgage program, the loan size, the borrower’s credit profile, and other factors.

How Much Are Closing Costs

No two closing costs are the same. The good news is that most homebuyers do not have to pay closing costs out of their pocket. Closing costs at Gustan Cho Associates are normally paid for by the seller with a seller concession and/or a lender credit. In the event homebuyers are short of closing costs, the lender can offer a lender credit so they do not have to come up with money out of pocket in lieu of a higher mortgage rate.

Down Payment Requirements On Home Purchases

Each home mortgage program has a minimum down payment requirement on a home purchase. With the exception of VA loans and USDA loans, down payments on home purchases are required on FHA, USDA. Conventional, Jumbo, and portfolio loans. All home purchase transactions require closing costs on a home purchase. Closing costs are any fees and costs that are associated with the origination of the mortgage loan and costs associated with the home purchase. Any third-party charges including pre-paid and discount points are considered closing costs in a real estate transaction.

What Are Closing Costs With Mortgage Transactions

Closing costs on home purchase includes third party costs such as the following:

  • attorneys fees
  • appraisal fees
  • home inspection fees
  • origination fees
  • credit report fees
  • processing and/or underwriting fees charged by lenders
  • discount points
  • title charges
  • city, county, state real estate stamps and/or transfer fees if applicable
  • pre-paid (escrow accounts)

Any other third-party fees and/or charges that are associated with the closing of a home purchase.

How To Buy And Finance Your First Home: What Are Typical Closing Costs

Examples Of Types Of Closing Costs

Down payment requirements are a fixed percentage required based on the home purchase price. The down payment on a home purchase depends on the mortgage loan program.

Let’s take how the down payment requirement on a home purchase works:

  • For example, HUD, the parent of FHA, requires a minimum a 3.5% down payment on a home purchase FHA loan
  • Conventional loan programs require a 3% to 5% minimum down payment on a home purchase
  • 3% down payment is required on conventional loans but you need to be a first-time homebuyer
  • Fannie Mae and Freddie Mac define first-time homebuyers for those who have not had ownership in a home in the past three years
  • Non-first-time homebuyers need a 5% down payment on conventional loans
  • Jumbo mortgage lenders normally require a 20% to 30% down payment on a home purchase
  • Jumbo loans are home loans that are larger than the maximum conforming loan limit of $647,200
  • VA loans and USDA loans are government-backed loans and do not require any down payments
  • Lenders offer 100% down payment on VA and USDA loans due to the government guarantee
  • Gustan Cho Associates offers non-QM loans where the down payment requirements vary between 10% to 30%
  • However, closing costs are not a fixed rate
  • Closing costs vary on every real estate transaction and is different in every state, county, city

Normally, closing costs on home purchases average 2% to 3% of the home purchase price.

Examples Of Closing Costs

Here are some examples of the types of closing costs a home buyer can be charged on a real estate purchase transaction by lenders and third-party vendors:

  • Costs and/or fees to run your credit report
  • Loan origination fees
  • Discount points
  • Processing fees Underwriting fees
  • Home appraisal fees
  • Home inspection fees
  • Title search fees
  • Depending on the city, municipality, state, there may be government junk fees and/or charges
  • Recording fees
  • Title insurance costs and/or fee
  • Pre-paid

Appraisal fees are normally paid outside closing.

Factors Determining Closing Costs

Other closing costs can include the following:

  • termite inspection
  • well inspection
  • other specialty inspection
  • Attorney fees
  • Surveys
  • City and state transfer tax fees, intangible tax fees, and recording fees

The bottom line is any fees, costs, charges that are part of the real estate transaction are considered closing costs.

How Much Are Closing Costs?

As mentioned earlier, closing costs can vary depending on several factors including where the property is located:

Normally, closing costs are between 2% to 6% or more of the purchase price of the home:

  • Closing costs can sometimes much more depending on the city, county, state the property is as well as the type of property
  • Tentative closing costs will be disclosed on the initial Loan Estimate
  • Often times than not, the disclosures on the Loan Estimate is over disclosed
  • Borrowers will get a more accurate figure on closing costs more towards when they reach closer to the closing date
  • Exact figures for all of the estimates such as homeowners insurance and other third party charges will be needed to get the exact closing costs

Actual closing costs will be listed on Closing Disclosure which is the new HUD -1 Settlement Statement. It is a federal law the Closing Disclosure (CD) needs to be disclosed three days before closing.

Sellers Concessions And Lender Credit To Cover Closing Costs On Home Purchase

At Gustan Cho Associates, most homebuyers do not have to worry about closing costs. This holds true as long as borrowers can get a seller concession. Seller concessions are a credit given to homebuyers for closing costs on their home purchase. Seller concessions can only be used for a homebuyer’s closing costs. Seller concessions cannot be used for the down payment of a home.

Real Estate Agents Request Seller Concessions As Part of Negotiation of Purchase Contract

Real estate agents normally negotiate seller concessions between sellers and buyers. Home sellers normally inflate the bottom line price they want to the home purchase contract and the inflated amount is the amount given as a seller concession. HUD, the parent of FHA, allows home sellers to give up to 6% seller concessions on FHA loans.  Fannie Mae and Freddie Mac allow home sellers to contribute up to a 3% sellers concession for owner-occupant homes and second homes. Sellers can contribute up to a 2% seller concession on investment properties. USDA permits home sellers to offer up to 6% sellers concessions. VA allows up to 4% in seller concessions.

How To Buy And Finance Your First Home: Using Lender Credit To Cover Shortage of Closing Costs

If home sellers are short in closing costs with seller concessions, lenders can offer lender credit to cover borrowers closing costs in lieu of a higher mortgage rate. To qualify for a home mortgage with a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans, please reach out to us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

How To Buy And Finance Your First Home: Understanding Closing Costs Breakdowns

Understanding Closing Costs On Home Purchase is important for mortgage borrowers. There are two types of costs on all home purchases:

  • The first is the down payment
  • The down payment is a certain percentage of the home purchase price that is required by lenders
  • The amount of down payment depends on the home mortgage program
  • FHA loans require a 3.5% down payment of the purchase price
  • Conventional loans require a 3% down payment on first-time homebuyers and a 5% down payment for homebuyers who owned a property before
  • First-time homebuyers are defined as a homebuyer who did not have any ownership in a home in the past three years
  • VA and USDA loans do not require any down payment
  • Lenders can offer 100% financing on VA and USDA loans due to competitive mortgage rates due to the government guarantee by VA and/or USDA

All home purchases and refinance mortgage transactions have closing costs associated with them. We will explain what closing costs are and how they work in this blog. In this article, we will discuss Understanding Closing Costs On Home Purchase Transactions.

Understanding Closing Costs On The Loan Estimate Versus The Closing Disclosure

Every home mortgage, whether it is a home purchase or refinance mortgage, has closing costs. On a home purchase, there are two types of costs required:

  • The down payment and closing costs
  • The down payment on a home purchase is a fixed percentage amount with the exception of VA and USDA loans
  • There is no down payment requirement on VA and USDA loans
  • However, all home loans have closing costs associated with the transaction
  • Unlike the down payment, closing costs vary

How Much Should I Budget For Closing Costs?

Closing costs range anywhere between 2% to 7% of the home’s purchase price:

  • Closing costs are dependent on the lender, location of the property, type of the home mortgage, and type of property
  • The great news is most of our borrowers at GCA Mortgage Group do not pay anything in closing costs
  • Closing costs can be covered with a seller’s concession and/or lender credit
  • Closing costs are any costs associated with taking our home mortgage to complete the real estate transaction
  • It covers any and all costs including third-party charges
  • All potential and actual closing costs need to be itemized and listed on the Loan Estimate
  • Closing costs cannot be under disclosed by more than 10% by the lender
  • Otherwise, the lender is liable to pay for the difference

See the chart below for a list of closing costs that may and/or may not apply to borrowers:

How Much Should I Budget For Closing Costs?

Whether or not a particular cost applies to the borrower, it still needs to be listed on the Loan Estimate.

Whether or not a particular cost applies to the borrower, it still needs to be listed on the Loan Estimate.

Understanding Closing Costs And The Loan Estimate

Many borrowers often get shocked when they see the initial loan estimate. In general, the initial loan estimate is overly disclosed. What this means is it is inflated. Per CFPB compliance guidelines, the loan officer needs to list all potential closing costs. So if a homebuyer is purchasing a home in a rural area, the loan officer may list well and septic inspection and the maximum costs for the inspection in the Loan Estimate regardless of whether or not the home buyer gets the inspection. This is because in the event if the home buyer does need a well and septic inspection and the loan officer did not list it on the LE, the loan officer is liable to pay for this particular closing cost. This holds true even though the loan officer has nothing to do with it. This is the main reason why the loan estimate is over-inflated. If the borrower does not need the well and septic inspection but the costs are listed on the loan estimate, the borrower does not have to pay for the inspection.

Closing Costs Listed On The Loan Estimate Is Always Over-Disclosed

It is better to over disclose than under disclose on the Loan Estimate. The borrower will know the maximum potential closing costs prior to getting the pre-approval letter. A loan officer will not issue a pre-approval letter without the estimated closing costs. This way, the home buyers can ask for the right amount of seller’s concession by the home seller so they can cover the closing costs. In the event, if the sellers will not give a seller’s concession, the home buyer may need to purchase a different home or cover the closing costs as well as the down payment. Most experienced seasoned real estate agents are master negotiators. The real estate agent will negotiate the seller’s concession with the seller’s agent. The loan officer will be in touch with the realtor and instruct the number for the estimated closing costs.

Maximum Seller Concession Credit Allowed

All loan programs allow a seller concession. The majority of borrowers at Gustan Cho Associates do not pay closing costs. Closing costs are normally covered with seller concession and/or lender credit. Here are the maximum seller’s concession allowed for the particular home mortgage program:

  • HUD allows a maximum of a 6% sellers concession on FHA loans
  • VA loans allow up to a 4% sellers concession
  • Fannie Mac and Freddie Mac allow up to a 3% sellers concession on owner-occupant primary homes and second homes and a 2% sellers concession on investment properties
  • USDA loans allow a maximum of 6% sellers concession
  • Non-QM loans generally allow up to a 6% sellers concession for closing cost
  • Jumbo mortgage normally allow up to a 3% sellers concession

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 a faster response. Or email us at [email protected] The team at GCA Mortgage is available 7 days a week, evenings, weekends, and holidays.

Down Payment And Closing Costs On Home Purchase 

Many first-time homebuyers 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 of a home purchase.

Minimum Down Payment And Closing Costs On Government, Conventional, and Non-QM Loans

FHA MORTGAGE:

If you are applying for an 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% seller concession towards buyers closing costs which can include prepaid. 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 Loan Requirements

There are 3% down payment conventional mortgage loan programs and 5% conventional mortgage loan programs. The 3% down payment conventional loans are available to first-time home buyers. Fannie Mae/Freddie Mac defines first-time home buyers as those who did not have ownership of a home in the past three years. A 5% minimum down payment is normally required on conventional loans. For any conventional loan that has a loan value of greater than 80%, a private mortgage insurance premium will be required. A maximum of a 3% seller concession towards a buyer’s 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.

How Much Down Payment And Closing Costs Do I Need To Buy A Home

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 include the following:

  • title charges
  • transfer stamps
  • survey
  • attorneys fees
  • appraisal fees
  • one year homeowners insurance upfront
  • escrows
  • 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 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.

Can Home Seller Contribute 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 seller concession towards your closing costs on your purchase. FHA-insured loans allow up to 6% of seller concessions towards a buyer’s closing costs. Conventional mortgage loans allow up to a 3% seller concession towards closing costs on primary properties. 2% sellers concessions for investment properties.

How To Buy And Finance Your First Home: You Cannot Have Seller Concession Overages

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 seller concessions credits. It is illegal to get a cash kickback from leftover closing costs. You also cannot use seller concessions towards a buyer closing costs towards your down payment. If you get enough sellers concessions towards a buyer’s 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 Seller Concessions Towards Buyers Closing Costs?

There are instances where sellers will not give you a seller concession towards a buyer’s 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 lender credit towards closing costs. Most lenders can give borrowers a lenders credit towards closing costs for a slightly higher mortgage interest rate.

Home Purchase Down Payment Requirement Depends On The Loan Program

The minimum down payment and closing costs on home purchase need to be shown on the bank account for borrowers to get mortgage approval and get a clear to close.  Seller concessions cannot be used towards the down payment on the home purchase. However, unless a homebuyer purchases a new construction home from a builder, there are certain states like the state of Illinois where property taxes are paid in arrears. In states like Illinois where property taxes are paid in arrears, home buyers will get a tax proration.

How To Buy And Finance Your First Home: Property Tax Prorations Can Be Used For The Down Payment

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 a home purchase. For example, say Illinois home buyers purchasing a $100,000 home and have an FHA-insured mortgage loan for $96,500. The Home Buyer needs to show $3,500. Say closing costs of $3,000 are covered by the seller 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.

How To Buy And Finance Your First Home: Property Tax Proration Credit Offset The Cash To Close of Homebuyers 

There are many instances where home buyers get cashback at closing Mortgage Borrowers who have any questions about 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 a faster response.  Or email us at [email protected] Gustan Cho NMLS ID # 873293 Related> Down Payment And Closing Costs Related> Closing Costs Related> Gift Funds For Down Payment And Closing Costs