Down payments, Earnest Money, Upfront Appraisal Fees, Homeowners Insurance, and the dreaded Closing Costs are all expenses faced by buyers when purchasing a home. How much money do you really need to buy a house?
The days of Zero Downpayment Loans have been gone for a few years. There are still some programs left which offer down payment assistance but most programs still require a contribution from the buyer. Mortgage officers provide great knowledge of the special programs including the Dakota County Bond Program. Also, the Veterans Loan, known as a VA loan does still offer a true Zero Downpayment loan.
Special down payment assistance programs aside, the standard options for down payments are 3.5% for an FHA loan and 5%, 10% or 20% down payment on a Conventional Loan. The calculation of the down payment is straight forward, simply the purchase price multiplied by the percentage you plan to put down.
Closing Costs are the second portion of money needed to buy a house and the calculation of these costs is more elusive.
Closing Costs are often estimated to be 3% of the purchase price of your home. I like to explain it this way:
The first 1% is usually your Loan Origination Fee. This fee pays the mortgage company for the work they do setting up your mortgage, the loan officer and processor have a share of this fee.
I refer to the second 1% as government and processing fees. Included in this portion are mortgage registered taxes, title updating fees, appraisal fees, title company fees, recording fees and such.
The final 1% is money the mortgage company collects from you to start and fund your escrow account. The escrow account funding is approximately 5 months worth of property taxes, three months of insurance and one full year of homeowner’s insurance.
The % amounts are just estimates and when the price of a home is lower than $200,000 the closing costs are higher than 3%. This happens because many of the closing costs are fixed costs, so as the price of the home goes down the percentage associated with those costs is higher.
Now for some good news! It is possible to ask the Sellers of the property you are purchasing to pay for some or all of your closing costs. Mortgages have certain restrictions and limitations about Sellers paying your closing costs, but most allow up to 3% of the purchase price to be paid by the Sellers of the home.
You are rolling in the closing costs and really self-financing them into your purchase. If a Seller will accept a $200,000 offer and pay 3% ($6000) towards your closing costs, then it’s fair to assume you could have purchased the home for $194,000 if you were to pay for your own closing costs.
Today’s interest rates are at all time lows, making this closing cost self-finance practice very affordable and popular.
If you negotiate the closing costs into the price of the home, the total amount of money needed to buy a home is just 3.5% of the purchase price. Mortgage programs including FHA and VA allow the 3.5% or a portion of it to be Gift Funds. When you receive gift funds it must be from a Parent, Grandparent, or other type of Significant Relationship and the donor must sign a gift letter confirming the funds as a gift.
Buying a home in Lakeville, Apple Valley, Eagan, Rosemount, Burnsville, Farmington, Savage and Prior Lake is more affordable now than ever before. The affordability is based on Home Prices and Mortgage Interest Rates. Get started today!