If you are like most people, the thought of navigating through the process of selecting a home, coming up with the down payment, getting a loan, knowing how much money you will need for closing expenses and actually buying the house, is pretty scary. Although everyone that plans to live in their own home must go through it, there is a way to make the process less intimidating. As with most of the unknown processes we go through in life, having information is the key to making such a huge life event more enjoyable.
I have tried to put together some information and links to specific information to build your knowledge of the processes and cost that you will normally go through.
How Much Do I Need To Buy A Home?
If this is your first time buying a home, you're probably aware that you will need to have some money saved for the purchase. You should know that the down payment may not be all of the expenses you will have before you close on your new home. Some of these costs can be rolled into your loan but most cannot. It will be up to your lender in most cases to define just which ones you will need to pay up front. If you have a sharp negotiator as your agent, you may be able to get the seller to pay many of the costs. This really depends on the owner of the property you are considering. For instance, banks or lenders that own properties (REO properties) being sold at a large discount may not be willing to also pay any of your expenses. However, motivated home owners may be more than willing, in order to get rid of a problem home.
Some of the required up front costs include:
- Down Payment
- Lender up front costs
- Prepaid expenses
- Closing costs
In today's market, lenders require that you have something at stake in the transaction. Transactions in the past few years allowed buyers to get into a home without putting any money into the transaction. This is partially the cause of the vast number of foreclosures and bankruptcies. As a result, a buyer generally needs to have a down payment of 3-20% of the sales price of the home being purchased, depending on the lending program.
Lender Up Front Costs
Pre-paid Interest VA Loans
Mortgage Loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay ten days of pre-paid interest.
This is the insurance you pay to cover possible damages to your home and other items. If you buy a home, you will normally pay the first year's insurance when you close the transaction. If you are buying a condominium, your Homeowners' Association Fees normally cover this insurance.
VA Funding Fee
On VA Loans, the Veterans Administration charges a fee for guaranteeing your loan. If you have not used your VA eligibility in the past, this is two percent of the loan balance. If you have used your VA eligibility before, it is three percent of the loan. If you are refinancing from a VA loan to a VA loan, it is three-quarters of a percent of the loan amount. Instead of actually paying this as an out-of-pocket expense, most veterans choose to finance it, so it gets added to the loan balance. This is why the loan balance on VA loans can be higher than the actual purchase amount.
Up Front Mortgage Insurance Premium (UFMIP)
This is charged on FHA purchases of single family residences (SFR's) or Planned Unit Developments (PUDs) and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan. Unlike a VA loan, the homebuyer must also pay a monthly mortgage insurance fee, too. This is why many lenders do not recommend FHA loans if the homebuyer can qualify for a conventional loan. However, condominium purchases do not require the UFMIP.
though it is extremely rare nowadays, some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance (when required) is simply paid monthly along with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.
Prepaid expenses generally include the funds needed to prepay escrow for insurance and taxes.
Homeowners Insurance Escrow
Your lender will divide your annual premium by twelve to come up with an estimated monthly amount for you to pay into your escrow account. Since a lender is allowed to keep two months of reserves in your account, you will have to deposit two months into the impound account to start it up.
Property Tax Escrow
How much you will have to deposit towards taxes to start up your escrow account varies according to when you close your real estate transaction. For example, you may close in November and property taxes are due in December. Your deposit would be higher than for someone closing in May.
Mortgage Insurance Escrow
When required, most lenders allow this to simply be paid monthly. However, you may be required to put two months worth of mortgage insurance as an initial deposit into your impound account.
- Closing/Escrow/Settlement Fee
- Methods of closing a real estate transaction vary from state to state, as do the fees.
- Title Insurance
- Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position. The costs vary depending on whether you are purchasing a home or refinancing a home, so we will not provide a range here.
- Notary Fees
- Most sets of loan documents have two or three forms that must be notarized. Usually your settlement or escrow agent will arrange for you to sign these forms at their office and charge a notary fee in the neighborhood of $50.
- Recording Fees
- Certain documents get recorded with your local county recorder. Fees vary regionally, but probably run between $50 and $80.
- Pest Inspection
- Also referred to as a Termite Inspection. This inspection tests not only for pest infestations, but also other items such as wood rot and water damage. The inspection usually runs around $60 to $75. If repairs are required, the amount to cover those repairs can vary. The seller will usually pay for the most serious repairs, but this is a negotiable item.
- Home Inspection
- Many homes today are being sold "As-Is." This means that rather than having an upfront agreement that the buyer will pay a certain percentage or maximum amount of any deficiencies found in an inspection, the home owner is selling the home in its current condition and not offering to pay for either normal repairs or repairs necessary due to WDO or "wood destroying organisms." While the buyer has the option to walk away if the home's necessary repairs exceed a negotiated limit, a home inspection is critical.
- Since it is the homebuyer's choice to obtain a home inspection or not, this cost is not usually reflected on a Good Faith Estimate. However, having a home inspection is highly recommended. Keep in mind that the home inspector has a certain set of standards he uses when inspecting a home, and those standards may be higher than required by local building codes. An example is that an inspector may note there is no spark arrestor on a chimney but the local building code may not require it. This sometimes leads to conflicts between buyer and seller.
- Home Warranty
- This is also an optional item and not normally included on the Good Faith Estimate. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller. If not offered by the seller and if your agent is unable to get the purchased negotiated into the purchase, the buyer can purchase the policy with the cost coming due at the time of closing. This cost is typically $375 to $450 and includes a "service fee" of $50 to $100 for each service call. If you have interest in this coverage, remember to ask your agent for details.
- Loan Tie-in Fee
- Although this sounds like a lender fee, it is not. When charged, it is usually by a settlement agent (escrow, lawyer, etc) and is to compensate them for services they provide in dealing with the lender.
- Sub-escrow Fee
- When charged, the source of this fee is usually the title insurance company. It is usually to compensate them for activities in coordinating with the settlement agent (lawyer, escrow company, etc).
- Courier Fee
- Sometimes charged and deals with the costs associated with ferrying documents around between the lender, title, escrow, settlement, etc.
- Homeowner's Association Transfer Fee
- If you are buying a condominium or a home with a Homeowner's Association, the association often charges a fee to transfer all of their ownership documents to you.
Be sure to ask your lender for a "GOOD FAITH ESTIMATE" as soon as you start the process. They may provide this as soon as they have your application conditionally approved and they are required by law (RESPA) to have it within 3 days of your application.