Some of the biggest misconceptions in buying a home are related to down-payments and closing costs. The first misconception is that a down-payment is the same thing as closing costs. Down payments are one cost in the purchase of a home; and, closing costs are another separate cost in the purchase of a home.
Down payments can range from 0% for USDA loans; 3.5% down for an FHA loan; and 5% to any higher amount down for conventional loans. A distinction to keep in mind is when you put down less than 20% on a conventional loan, you will be required to pay monthly private mortgage insurance (PMI). Once your loan reaches 80% of the loan to value amount, this monthly PMI may be dropped, which can help to save hundreds per month (the exact amount you pay in monthly mortgage insurance depends on the type of loan and the total loan amount).
Closing costs are separate from down payment expenditures. Closing costs are comprised from a variety of expenses related to the purchase of a home—transfer and recordation taxes, home inspection, appraisal, lender fees, settlement company fees, pre-paid taxes and loan interest, etc.
The exact closing cost figure can be supplied by your lender in a good faith estimate. It’s much better to understand this figure prior to making an offer, so that if you are short on cash to close, you may be able to work some buyer closing cost assistance into the offer. This is where the seller gives a contribution to help cover some (or possibly all) of the buyer closing costs. In some scenarios, the seller may contribute up to 3% of the contract price, in other cases the seller may be able to contribute up to 6% of the contract price. It just depends on the type of loan.
There is also the opportunity to receive gift money to help cover closing cost expenses. There are strict guidelines as to who can gift money for down-payment, so discuss this option with your lender prior to making an offer where gift money is needed.
Lauren Bunting is a licensed Associate Broker with Bunting Realty, Inc. in Berlin, MD.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
