Down Payment and Closing Costs For Home Purchase
In this article, we will cover and discuss the down payment and closing costs required for a home purchase. Many first-time home buyers 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 required for a home purchase.
Mortgage Guidelines on Down Payment and Closing Costs
If you are applying for an FHA 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.
Down Payment and Closing Costs on FHA Loans
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.
Fannie Mae Down Payment and Closing Costs Requirements on Conventional Loans
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 to value greater than 80%, a private mortgage insurance premium will be required. A maximum of 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, and HOMEPATH LOANS will be discussed in future blogs.
Down Payment and Closing Costs on Home Purchase Required
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 of 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 are 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.
Seller Concessions To Offset 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% seller concessions for investment properties.
Overages in Seller Concessions
Make sure you do not ask for 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’s closing costs towards your down payment. If you get enough seller concessions towards a buyers closing costs, you do not have to come up with any closing costs at the closing table.
What If The Seller Does Not Give Seller Concessions Towards Closing Costs?
There are instances where sellers will not give you a seller concession towards a buyers closing costs. In the event, this is the case and homebuyers do not have the extra funds to come up with closing costs for a home purchase, talk to the lender. See if the borrowers can qualify for lender credit. Most lenders can give borrowers a lenders credit towards closing costs for a slightly higher mortgage interest rate.
Down Payment and Closing Costs on Home Purchase Depend on Loan Program
The minimum down payment and closing costs on home purchases 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 home buyer 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 property tax proration.
What Are Property Tax Prorations
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 for 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 is covered by the seller’s 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.
How To Buy a Home With Little To No Money Down
There are many cases where buyers do not have to bring anything to the closing table due to tax prorations. There are many instances where home buyers get cashback at closing. Mortgage Borrowers who have any questions about Down Payment And Closing Costs required for a home purchase can contact us at Non-QM Mortgage Brokers at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Non-QM Mortgage Brokers is available 7 days a week, on evenings weekends, and holidays.
