First time home buyers often wonder how much money they need to have n order to buy their first house. The answer is, of course, it depends. This could be broken down into three catagories: Down Payment, Closing Costs, and Post-Closing Asset Reserves.
1.) Down Payment:
a. The down payment is a portion of the purchase price/appraised value a home buyer pays upfront when they close on a home. If you already own a home the general rule of thumb is properties require a 20% down payment to avoid private mortgage insurance.
b. First time home buyers typically have options to put 10%, 5%, or as little as 3% down and still avoid paying the monthly premium for private mortgage insurance. Which option a borrower qualifies for depends on each financial profile, the subject property, and other factors. This helps first time home buyers purchase their first home without having the benefit of equity in a current residence or the financial penalty of private mortgage insurance. It also allows first time home buyers to build equity they can later use for a down payment for the purchase of another home.
c. There are also government loan programs that possibly offer as low as 0% down. These loan programs are only available to certain Veterans and in designated Rural Development areas.
d. In some cases a lender may allow a portion of the down payment to come in the form of a gift from a family member. The amount allowed will depend on the scenario and the individual(s) giving the gift will need to sign a letter stating there is no expectation of repayment.
2.) Closing Costs
a. Closing costs are the fees and other costs charged by a lender related to a given loan. Examples of closing costs are, but are not limited to:
Appraisal Fees
Credit Report Fees
Title Search Fees
Title Insurance
Lender Fees
Prepaid items such as: Real Estate Taxes, Homeowner’s Insurance
b. Closing costs differ from lender to lender and often range between 2%-6% of the loan amount (this is a general rule and closing costs could be more or less than 2%-6% of a loan amount).
3.) Post-Closing Asset Reserves
a. In addition to the closing costs and the down payment, lenders often want to verify that a borrower has sufficient asset reserves post-closing. Reserves show the lender that the borrowers have liquid funds available in case there are unforeseen expenses that might impact their ability to make their future mortgage payments.
b. Oftentimes these are calculated relative to your monthly mortgage payment amount (principal, interest, real estate taxes, and homeowner’s insurance). A lender may require zero, 2 months, 6 months or possibly more left over in a borrower’s account post-closing depending on a bevy of factors.
If you have any questions about any of the items above or would like to explore or discuss the options of your specific scenario you can call one of the knowledgeable loan officers here at Saco & Biddeford Savings.
Visit our Home Loans page for additional information.
