On the day you actually buy your new home, in addition
to your down payment and the prepaid property tax and homeowners
insurance premiums, you'll need cash for various fees associated
with the purchase. These expenses are known as closing costs and
are paid by both buyers and sellers.
Some closing costs you pay up-front when you apply
for a mortgage loan. That includes money for a credit check on all
applicants and an appraisal on the property. Keep in mind that even
if you don't eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered
when evaluating your financial situation. These may include, but
are not limited to:
* Title insurance fee;
* Survey charge;
* Loan origination fee;
* Attorney fees or escrow fees;
* Document preparation fee;
* Garbage or trash collection fees; and the big one
* Points - up-front interest paid in return for a lower interest
rate. Each point is one percent of the loan amount. Sometimes you
can contract for the seller to pay your points.
NOTE: Consider closing costs when choosing one mortgage
plan over another. The good news is that if your cash is limited,
some mortgage plans allow the seller to pay some or all of your
closing costs, such as title insurance, escrow fees, and points.
Certain closing costs can sometimes be added to the amount of mortgage
loan you're receiving.
Figuring
Out Your Monthly Income
When you apply for a home loan (and even long before
that, when you first speak to a REALTOR®) the first question
may likely be "How much is your income?" In making this
determination, lenders consider the income of all parties who will
be owners of the property. Be prepared to provide a monthly accounting
of all sources of income.
Figuring
Out Your Monthly Debt
Lenders are interested mainly in your present monthly
payments because they want to be sure you can handle the mortgage
payment you'll be applying for. Different mortgage plans consider
payments on any debt that won't be paid off within, for example,
six months, nine months, or a year.
Amount
of Your Down Payment
Your down payment is paid in cash and is not included
as part of the loan amount. The bigger your initial down payment,
the smaller your loan, which reduces the amount of your payments.
How much you'll put down depends on the cash you
have available and the amounts you'll need for closing costs and
prepaid property taxes and homeowners' insurance.
Mortgage plans have various down payment requirements
and they can range from 0% down on a VA – Veterans Administration
Loan - to between 3 and 5% down on a FHA – Federal Housing
Administration Loan - to 20% down, the traditional amount for a
conventional loan. In addition, special state programs for first-time
home buyers may set different sums, which are usually lower than
conventional financing.
If you put less
than 10% down on most loans, you'll be asked to protect the lender
by carrying private mortgage insurance (PMI). Carrying PMI ensures
that the debt is repaid if you default on the loan. This adds approximately
an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment
requirements, also charge for mortgage insurance premiums (MIP).
Return
to Buying a Home
