Understanding The Down Payment And Closing Costs On Home Purchase

This Article Is About Understanding The Down Payment And Closing Costs On Home Purchase

There are two hard costs when buying a home. The down payment and closing costs. Understanding The Down Payment And Closing Costs on home purchases are important. One of the most common first-time homebuyer questions is how much money do I need?

Unfortunately, many would-be homebuyers are under the assumption they need a lot of money to purchase a home. Many renters do not realize they do not need a lot of money to purchase a home. That is why Understanding The Down Payment And Closing Costs is very important.

The Difference Between The Down Payment And Closing Costs

The down payment on a home purchase is always fixed. For example, FHA requires a 3.5% down payment on a home purchase to qualify. So, on a $200,000 home purchase, the home buyer needs to come up with 3.5% of the $200,000 purchase price or $7,000. However, closing costs vary depending on the property and the location as well as many other factors. No two borrowers can have the same closing costs.

One good news is most home buyers do not have to come up with closing costs. Closing costs can be covered with a seller’s concession and/or lender credit. VA and USDA loans do not require any down payment. VA and USDA loans offer 100% financing. However, all mortgage transactions require closing costs.

Sellers Concessions And Lender Credit

HUD, the parent of FHA, allows up to 6% of sellers’ concession by the home sellers. Homebuyers cannot use sellers’ concessions for the down payment. Sellers’ concessions can only be used for closing costs only. Common questions by homebuyers are the following:

  • What are the differences between the down payment and closing costs?
  • When do borrowers have to come up with the closing costs?
  • Can closing costs be rolled into the mortgage loan balance?

This is why Understanding Down Payment And Closing Costs On Home Purchase is important for borrowers.

Understanding Down Payment And Closing Costs With The Loan Estimate

Understanding Down Payment And Closing Costs On Home Purchase is not difficult. The down payment is very simple. It is a percentage of the purchase price. VA and USDA loans do not require any down payment but they do have closing costs. Federal law states that loan originators need to disclose the cost of originating the loan through the Loan Estimate.

The Loan Estimate itemizes the closing costs for borrowers in a simple-to-follow format. The LE (The Loan Estimate) cannot be under-disclosed. What this means is loan officers need to fully disclose any and all closing costs on the Loan Estimate.

Sections Of The Loan Estimate

Here are the following sections on the Loan Estimate:

  • Section A which is the first section discloses the cost of the loan
  • Section B is the second part of the LE which states services consumers cannot shop for
  • Section C which is the third part of the LE are services consumers can shop for
  • The fourth section discloses the closing cost estimates
  • Section 5 discloses the prepaid costs which are the escrow account
  • Section 6 itemizes the initial escrow payment at closing
  • Section 7 itemizes all other costs

Please review a sample of the Loan Estimate below:

Sections Of The Loan Estimate
Pre-paid items, also known as “other costs” on your closing disclosure. Closing fees from banks, title companies, attorneys, appraisals and any “fees” that you paid in connection with obtaining your loan which are called “loan costs” on your closing disclosure (CD).

Understanding Down Payment And Closing Costs From The Loan Estimate

Most borrowers do not want to take the time and analyze and understand their closing costs. They just want to know the bottom line figure on how much money they need to bring to closing.

Mike Gracz, the National Sales Manager at Gustan Cho Associates said the following about Understanding Down Payment And Closing Costs:

In the 1st section “A”, let’s start by examining “Loan Costs” first as they are the actual costs and fees you paid for obtaining your loan. You will incur your first loan cost the moment you pay for a credit report, appraisal or “application fee”. It makes no difference when you pay for any loan costs that are required to fund your mortgage loan. You will still see the complete charges on your final closing disclosure, but they will be distinguished as paid in advance of the close. The loan costs typically paid at closing will consist of bank/lender fees, discount or origination points, any FHA or VA related “up-front” mortgage insurance premium (MIP), title company charges, escrow account, funds and any other 3rd party expenses like a home inspection.

Please study the chart in the previous paragraph.

Closing Costs Mortgage Borrowers Cannot Shop For Listed On The LE

There are certain costs and fees borrowers cannot shop for. This is listed on the Loan Estimate. Costs such as appraisal fees and credit report costs are costs that consumers cannot shop for. Lenders use an appraisal management service (AMC) when ordering an appraisal.

In the past, the lender used to order the appraisal directly with the appraiser. This is no longer allowed due to potential fraud. Credit reporting fees charged to borrowers are the costs credit bureaus charge the lender without a lender markup.

Disclosing Title ChargesDisclosing Title Charges

Title charges are disclosed in the third section of the Loan Estimate. This section is labeled that these are costs borrowers can shop for. Lenders need to disclose the maximum title charges the borrower will be charged. If the loan officer makes a mistake and lists a cost that is lower than the actual charge, the lender needs to pick up the cost difference. This is why closing costs are overly disclosed.

Mike Gracz of Gustan Cho Associates says the following about Section D of the Loan Estimate:

Section “D” is simply an estimate of the total closing costs you will have to bring to close. It is important to acknowledge that these numbers are not the actual costs, but actually a high estimate. This is done intentionally because the lender may be responsible for any of your costs above the amounts they disclosed to you. Thus, these costs can sometimes be greatly exaggerated. At this point, you can go over the actual fees that can be charged on your loan with your Loan Officer.

Sections E Through J Of The Loan Estimate

Costs such as the following are listed as other costs on the Loan Estimate:

  • City, county, state government recording fees
  • Local transfer taxes or stamps
  • The initial deposit for your taxes and insurance escrow
  • Any owed or due property taxes
  • Any other costs for other services like home inspections
  • Any other closing costs

The above is referred to as prepaid and/or other closing costs on the Loan Estimate.

For more information about the contents of this article and/or other mortgage-related questions, 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 Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. 

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