How much money will I need to buy the house or bring to closing? That’s a great question and one that I hear often prior to even getting pre-approved for a home loan. Each situation is different and the amount will be determined by a variety of factors. The amount can be as little as $0, and then it goes up from there. Here are some guidelines~
A down payment can be used in any loan program. However, there are minimum requirements for each. FHA requires 3.5%, USDA and VA do not require a down payment, and Conventional requires anywhere from 3% to 20%. There are advantages and disadvantages to each loan program based on your individual circumstances.
Closing Costs is a broad term that involve several different fees and costs, most of which are determined and set by other companies and government agencies that are involved in or have in interest in your home.
The biggest amounts are the lender fees, mortgage insurance, title, homeowners insurance, and taxes.
We, as the lender, will charge you a processing fee and underwriting fee which are flat rates and does not depend on the loan amount. Depending on your credit score there may be points added to the loan that factor in the amount of closing costs.
The mortgage insurance will have an upfront fee which is a percentage of the loan amount. This is required of most loan programs such as FHA, USDA, and Conventional. Conventional with 20% or great down payment, and VA loans do not require mortgage insurance.
Title fees are charged by the Title company and will vary by the company and the purchase price of the home. Property taxes are determined by city and/or county. Homeowners insurance will be determined by the insurance company that you choose. The property taxes are paid for the current year remaining and also added to the escrow amount. Homeowners insurance is paid for a full year and also added to the escrow amount.
These costs do not cover everything, but are some of the major factors in determining closing costs and the cash that needs to be brought to closing.
How Can I Bring Less?
The good news is that you can lower the amount of what you need to bring to closing by having the seller contribute up to the percentage allowed by the loan program. This can often mean you will need to only bring the down payment amount to closing – or not much more. Contact me for more information on how I can make this happen for you.
What is the difference between being pre-qualified versus being pre-approved for a home loan?
Pre-qualified is no more than a loan officer asking some questions regarding your income, debt, what you think your credit score might be, and what information might be on your credit report. And if it looks good enough based on what you tell the loan officer, then they certainly can give you a pre-qualification letter stating that you are qualified for a home loan. This will come with the condition that all information will still need to be verified and meet underwriting and loan program guidelines. This can often be given in just minutes. And the application for the loan carries a higher risk of not being able to get all the way through processing and underwriting once the information required for the loan starts being verified.
A pre-approval goes beyond that. A good loan officer will be able to give you better peace of mind that the loan will make it all the way through to you getting the keys to your new home. That loan officer will start the process of gathering from you basic documents to analyze and to verify information that you gave them before you even start shopping for a home. Some of the requested documents might be – a driver’s license and social security card to verify legal name and identity, as well as pay stubs, W2s, 1099s, and tax returns to verify income. Credit reports will also be pulled to verify FICO score, payment history, and other information on the report. By taking the time to properly analyze your situation, the risks are greatly reduced and there is a much greater chance that the loan will make it through processing and underwriting. Therefore, when the loan officer gives you a pre-approval you will be able to shop for a home with a much greater confidence.
Make sure you maintain a low debt-to-income ratio by avoiding large purchases. Because a large payment and balance can cause a significant decrease the amount of home that you can buy.
Depending on your income, a $400 car payment can decrease your home purchasing power by many thousands of dollars. If you are needing a car, then try to wait until AFTER you get the keys to your new home. But if you need a car before the home, then try to purchase an inexpensive one, and pay cash.
It is important to analyze your goals for homeownership. What sacrifices are you willing to make to stop renting and start owning? By putting off the large car payment for a little while, may allow you to get into your dream home now.