When saving to finance the purchase of a new home, it’s important to look past the down payment amount to other costs that arise during the home financing process, at the closing table, and beyond. Here are a few homebuyer tips to help.
Don’t Be Intimidated: Loan Programs and Lenders Make a Difference in Your Home Financing Costs
Many homebuyer tips articles proclaim a 20% down payment is preferred and an additional 6% is needed for closing costs. That means, for a $200,000 home, homebuyers would need to save $52,000 to get started. If home prices rise during the savings process (and they probably will), 26% may be an elusive goal.
In reality, there are many lower down payment options (including zero-down programs), and there are also lower closing cost options. Long before savings goals are reached, homebuyers should talk to a lender about the programs that might be available for their specific scenario, including rolling closing costs into the loan.
Home Financing Costs That Come as Part of the Loan Process
Within three days after the buyer makes a home finance application, the lender will send a Loan Estimate. This document will outline the expected costs for your loan. It will include some costs the lender will initially incur, some costs owed to the lender (like origination costs), and some costs the buyer pays upfront.
Here are some fees that come with a home purchase:
Home inspection — Recommended but not required, an inspection identifies problems with the home.
Home appraisal — Required by the lender, an appraisal confirms the general condition of the property and compares the sales price with comparable sales in the area to affirm value.
Survey – Required by the lender, the survey confirms the boundaries of the property.
Credit report fee – The lender pays and you reimburse to assure the lender of your credit history.
Title search and insurance fees – The search assures no one else has claim to the property, and the insurance protects the lender in case claims appear later.
Attorney and closing fees – These pay the attorney or title company that manages the closing.
Origination fee – This is money you pay the mortgage company for making your loan, typically 0.5% to 1.0% of the loan amount.
Local government fees – These may include a transfer tax or recording fee.
Prepaid Expenses Due at Closing
When you finance a home, your monthly payment includes not only the principal and interest to pay back the loan itself but also taxes and insurance.
The insurance portion covers homeowners insurance and (if required) mortgage insurance. Homeowners insurance pays to repair or replace the home in case of fire or damage, and the lender requires it as a protection of their asset. This is so important that they collect the money in your regular payment and send it to the insurance company when it comes due. Similarly, the mortgage insurance protects the lender against potential default on the loan. It’s required for down payments lower than 20% of the loan’s value.
The lender also collects real estate taxes monthly to ensure payments are made on time and the taxing authority (usually your local government) doesn’t establish a lien on the home.
At closing, you’ll set up your escrow account. The funds you pay each month will be placed in this account. The lender will want to assure there’s enough in the account to pay the bills as they come due, so buyers pay some upfront to get the account started, typically at least two months’ worth.
In addition, it’s possible the seller has already pre-paid some expenses on the home, such as heating oil, real estate taxes, or sewage fees. Those will be pro-rated and reimbursed at closing.
Plan For Your Future Finances, Too
Remember that homeownership costs are just beginning at the closing table. Many lenders will require cash reserves to ensure the borrowers can continue making payments in the event of job loss or emergency. You’ll also want to have room in your budget to pay for maintenance and repairs that will come up.
Purchasing a new construction home will enable you to avoid repair costs in the near future, since the home, its systems and appliances will be brand new and under warranty.