Preparing to buy a house is very important. Why? Before you begin searching for a new home, you need to know what you can afford. Gathering your financial information, exploring how much you spend, and creating a livable budget are your first steps. Your goal is to find what kind of payment you can conservatively afford.
What are the upfront costs?
The first, and largest, up-front expense will be a down payment which is a percentage of the final cost of the home. Factors that will affect your down payment include your lender’s standards, the financing you choose, and the total amount of money on loan. Traditionally, a twenty percent down payment is a standard amount. However, the recent past many lenders and government programs have offered conventional loans with deeply discounted down payments, even as low as three percent.
What is PMI?
PMI is private mortgage insurance. Often times individuals miss this factor in their monthly payment. Private mortgage insurance protects a bank if someone can’t pay. In many cases, if you put down less than 20% of the purchase price of your home, then you will need to pay private mortgage insurance. Once you have successfully paid off 20% of the loan, then the PMI can be cancelled.
Gifts
If you can’t save enough money, most lenders today will allow you to use gifted money for the down payment and closing costs. These gifts may come from friends, family or other people, but your lenders will most likely require a "gift letter" stating the gift does not need to be repaid. Also, keep in mind that some bankers will also require you to pay at least a portion of the down payment with your own cash. Therefore, make sure you know your banker’s gifts policies, if you plan to fund the houses purchase with a money gift.
Earnest Money Deposit
Buyers are typically required to pay earnest money with the homes seller when they make a offer. The earnest money deposit indicates to the seller your commitment to the offer. If your offer is accepted, the earnest deposit money will be credited towards the down payment on the house. The amount varies depending on the seller and local custom, but plan to set aside funds from your budget for this.
Closing Costs
One often overlooked, yet major cost in buying a home is closing costs which are in addition to the down payment. Closing costs are fees linked to originating the loan. Changes cover items such as title insurance, loan origination fees, documentary stamps, attorney’s fees, and a property survey.
When finally submitting your application for a loan, banks are required to provide you with a good faith estimate of your closing costs. Be prepared to have closing costs totaling in the thousands of dollars. Don’t forget that most things are negotiable with a seller and you may be able to have the seller cover a portion or all of the closing cost.
