The amount of money you need to get a mortgage depends on several factors, including:
- The cost of the home
- The type of mortgage
- How much you plan to use as a down payment
In addition to the down payment you will need to have funds to cover a variety of things such as closing costs, escrow accounts and more. All of these things together could constitute anywhere from 5% to 25% of the total amount of the mortgage.
The down payment can be the biggest portion by far of the money paid at the time you get a mortgage, but it depends on the type of loan you get. For a VA or USDA loan, there actually is no down payment required, although you are welcome to put down as much cash as you want. You can get a down payment as low as 3.5% for an FHA loan, but for conventional loans you will need to put at least 20% down if you want to avoid the added cost of Private Mortgage Insurance (PMI).
Earnest money, also known as a good faith deposit, is money you actually need to put down before closing. You put up earnest money, which can be as little as a few 100 dollars or as much as 3% of the total loan amount, as soon as you make an offer on a house to prove to the buyer that you are serious. Once you close, the earnest money can be applied to your down payment.
Reserves are made up of money that actually stays in your bank account, but your lender will need to verify that it’s there. The idea of reserves is that your lender will want to know that you have enough money to pay your first few mortgage payments, including principle, interest, taxes, and insurance. Reserves are especially likely to be required for buyers without much of a credit history, and a lender may ask a borrower to have two months to six months of reserves.
Closing costs are generally about 3-4% of the mortgage balance, but lenders sometimes offer discounts for preferred buyers.
What are closing costs?
Closing costs are usually split between the buyer and the seller however this is not mandatory and sometimes homebuyers may have to pay all of these expenses. The buyer or borrower is often expected to pay for the:
- Credit report fee
- Closing fee
- Title search fee
- Flood determination fee
- Homeowner’s insurance
- Courier fee
Each party is also responsible for attorney fees and title insurance. All of these expenses (including the down payment, discount points, and private mortgage insurance) are often loosely referred to as part of the closing costs.
How can I avoid paying private mortgage insurance (PMI)?
If you can’t afford to put 20% down and you don’t qualify for a VA or FHA loan, you will most likely have to pay private mortgage insurance (PMI). Sometimes, however, you may find a lender who has a special offer wherein they will waive the private mortgage insurance in exchange for you paying a higher interest rate. The advantage of this is that interest charges are tax deductible, but PMI is not.
If you are stuck paying PMI on your loan, you can still get out of it eventually. It should be cancelled automatically when you pay off 22% of your loan, or you can contact your insurance company and ask them to cancel it when you’ve paid 20% of your loan. If your home suddenly goes up in value, you could refinance when you’ve built up 20% equity in your home, and then the new loan would not require PMI.
What is the difference between a VA, USDA, FHA, and conventional loan?
A VA loan is simply a loan for someone who served his or her country in the armed forces. The government fully insures a VA loan at no cost, so there is no risk to the lender. Since the lender has no risk, they do not require a down payment or private mortgage insurance from the buyer.
An FHA loan is a government-backed insurance program for mortgages. Qualifying for an FHA loan can be difficult, as they have requirements for the ratio of housing cost to income, the ratio of debt to income, and overall credit score. There are also stringent requirements for an FHA property, which must be appraised by a certified appraiser to be free of major problems before the FHA will insure the mortgage.
An FHA loan has definite advantages, though, and is worth the effort to try to qualify. An FHA loan allows the seller or the lender to assume a greater portion of the closing costs, allowing you to spend less cash up front as a buyer. More importantly, the FHA mortgage insurance premium is considerably less than a private mortgage insurance premium.
A conventional loan is the term given to a normal loan issued by a bank or other lending institution. The terms and conditions of a conventional loan vary greatly from institution to institution.
So how much money do I need to buy a home?
The answer to your unique situation will depend on a lot of different variables but there are many options for people with all different types of budgets. The best way to find out how much money you really need is to get pre-approved for a mortgage and contact several different lenders to inquire about their home loan options.
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