Properly Structuring your Down Payment and Closing Costs

Mortgage and Lending with Network Funding LP NMLS 2297

This Article was published in 6 Southern California newspapers an February 28th, 2010

By: Brent Bruce

One of the biggest questions that many homebuyers have is how much money they are going to need to have available in order to buy a house. This can be a difficult question to answer since there are so many different ways a home purchase can be structured.

There are three main factors that add up to the total amount of cash needed to buy a house.

First, there is the amount of the down payment. The down payment is going to depend on both the purchase price of the home, and the loan program that is being used. For instance, if someone is going to use an FHA, (Federal Housing Administration) insured loan, they would need to have a down payment of at least 3.5% of the purchase price. In this case, of you purchased a home for a price of $100,000, the down payment would be $3,500. Different loan programs require different down payments ranging from 0% down to more than 25% down.

Second are the closing costs. Closing costs are charges associated with buying a home. These are title insurance, escrow costs, lender fees, notary fees and appraisal fees, just to name a few. The key is that these are costs associated with buying a home.

Third are the prepaid items. Prepaid items are costs associated with owning a home that are being paid in advance. Prepaid items are, interest, taxes, and home owners insurance to name a few. You pay a portion of these items up front in order to establish all of the requirements of owning a home.

Down Payment, closing costs, and prepaid items are combined. This total becomes the amount of money you will need to have in order to buy a house for the specified price. This often is quite a surprise to a new home buyer, and may be more than they have available.

However, there are many ways in which an experienced loan officer can structure a home loan in order to greatly reduce these costs, and the amount needed to buy a home.

The most common way to reduce the amount of cash that the buyer needs is to ask for a credit from the seller of the home. When making an offer to buy a house your real estate agent can make a stipulation for the seller to credit an amount of money to the buyer. This is usually a percentage of the price of the home. For example, a credit of 2% of a purchase price of $100,000 would be a $2,000 credit. If the seller agrees to this credit, the buyer will need $2,000 less for their closing costs, and prepaid items.

Another way to reduce the costs is to structure a home loan that does not have lender fees. Home loans without lender fees have higher interest rates, but can reduce the closing costs dramatically.

In addition to the lender reducing or waiving the lender fees they can also give an additional credit to cover some of the other closing costs or prepaid items, further reducing the amount necessary from the home buyer. This will, again, have a higher interest rate, but can be a very useful tool when structuring a home loan.

Finally, there is the option of a gift from a family member. Most loan programs allow family members to gift as much as they would like towards a home purchase. The gift must be properly documented and transferred, and must be from an actual family member.

Please note that with most loan programs, the down payment must come from either the buyers own money, or from a family member gift. The down payment cannot be paid for by a seller or lender credit.

Each of these options can be used independently, or as a combination.

Here is an example of how these options can properly be used with a buyer buying a house for $100,000 with an FHA loan and 3.5% down. (These numbers are for example only)

Example 1

(Buyer paying all costs on their own)

Closing Costs $3,000

Prepaid Items $1,500

Down Payment $3,500

Total Amount Needed $8,000


Example 2

(No lender fee loan and 3% seller credit and family gift of $3,500)

Closing Costs $1,500

(Closing costs reduced due to no lender fees)

Prepaid Items $1,500

Down Payment $3,500

Seller credit of 3% -$3,000

Gift from family -$3,500

Total Amount from Buyer $0

In example 2 the home loan had reduced closing costs since it was a no lender fee loan. The seller also credited 3% of the purchase price which was $3000. The reduced lender fees and seller credit reduced the amount of money the buyer needed by $4,500. The remaining $3,500 was paid for by a gift from family, leaving the home buyer with nothing to pay.

This is just one example of how a home loan and purchase contract can be structured to reduce the cash needed to buy a home. The best way to structure a home buying plan, tailored to your needs, is to make an appointment to sit down with an experienced home loan officer in your area. It may be well worth your time.

Brent C. Bruce

Branch Manager

Allied Home Mortgage Capital Corporation

8480 Red Oak Street

Rancho Cucamonga, CA 91730

Phone (909) 463-4750

Email -

Website -


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