So, What's It Really Going To Cost Me? The Role of Capital In Mortgage
The ultimate question: how much of my own money do I need to buy a home? The answer is – it depends! But let’s take a step back and start with why.
Borrowers need a down payment to show the lender that you are serious about the investment of buying your own home, by being willing to put in your own money (called a down payment), not just the lender’s money.
The amount could vary, depending on which loan program you use. There are various programs for borrowers to use, some of the most popular being:
Conventional – requiring 5% down
FHA – requiring 3.5% down
VA – requiring 0% down
What are the different loan programs? The explanations of the various loan programs are beyond the scope of this article, but please see our resources section at the bottom of the blog post or go to our Tools page for more information!
Various down payment sources may be used. The first, most obvious one, would be cash from savings. The next would be gift funds (see the Ask Ark section below for eligibility requirements for gift funds) and the last would be down payment assistance programs. These programs help prospective home buyers get into a home faster by offering assistance through a grant for down payment costs or closing costs. Find more information in the Resources section below.
At the same time, the more money you have after closing, the less likely you are to default. All in all, a lender is looking to understand: Does the applicant have a financial cushion to fall back on if their income is unexpectedly interrupted? Have they shown a pattern and habit of saving money over time?
In most cases the lender will want to verify that an applicant has an amount equal to 2 months’ worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account, after they subtract any cash required for down-payment & closing costs.
It’s also important to know what the source of your assets are. Is it savings? Was it a gift? Was it a one-time settlement or bonus? Discuss your entire financial status/picture with your Mortgage Advisor.
Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Typically, home buyers will pay between about 2 – 5% of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs.
What costs should you expect at closing?
Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Here is a list of fees that may be included in closing. It’s not likely that your loan will include all the fees listed here. Closing fees can be rolled into the loan or paid at closing.
- Lender Fees
- Credit Report: A credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
- Origination Fee: This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
- Application Fee: This fee covers the cost for the lender to process your application. Before submitting an application, ask your Mortgage Advisor what this fee covers. It can often include things like a credit check for your credit score.
- Discount Points: “Points” are prepaid interest. One point is one percent of your loan amount. This is a lumpsum payment that lowers your monthly payment for the life of your loan.
- Underwriting Fee: Covers the cost of analyzing whether or not to approve you for the loan.
- Property Tax: Typically, any taxes due within 60 days of purchase will be paid at closing.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Mortgage Tax (NY only)
- Private Mortgage Insurance (PMI), if applicable: If you’re making a down payment that’s less than 20%, you’ll likely be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.
- Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Third party fees (appraisal, attorney, etc.)
- Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien, and it protects the lender if there is a problem with the title.
- Recording: A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Survey (if applicable): This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.
- Escrow Deposit for Property Taxes & Insurance (Prorated reserves)
- Homeowners Insurance: Covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Property Taxes
- New Jersey – city only
- New York – city, village and school
- Mortgage Insurance (when applicable)
- “Why is this paid twice?” Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
Down Payment Assistance programs –