I know a lot of first-time home buyer's aren't sure how much money they are going to need in order to purchase a home, condo or townhouse. I have put together a handy guide to hopefully clear up some of the costs associated with buying a home. The figures I am using are ESTIMATES, so do not hold me to the penny. Furthermore, I am not a lender so the information regarding down payment and lender expenses is, again, estimated to give you an idea. When considering purchasing a property, you need to speak with a lender before you begin your search. They will give you a clearer understanding of the costs associated with the loan.
When not purchasing a property with cash, you will presumably be using a lender. Here are some expenses you will most likely encounter:
- DOWN PAYMENT:
The amount of DOWN PAYMENT you'll be required to put down will depend on your loan amount. For example, if you are using an FHA loan program (which is typically 96.5% financing) then you will need to basically come up with 3.5% out of pocket. There are all kinds of tricks with FHA about seller concessions, but to keep this example simple, let's say you'll need 3%.
**Please not that this guide was written prior to the FHA downpayment requirement being raised from 3% to 3.5% which took place in January 2009. The mathematical ESTIMATES given below will be slightly off with regard to the current downpayment mandated by FHA.
EXAMPLE: You want to purchase a home for $200,000. 97% financing = $194,000 and a 3% down payment would mean you need $6000 out of pocket.
If you are using a loan program such as the NO FEE MORTGAGE PLUS through Bank of America, you may have a 90% LTV (loan-to-value ratio). This means you would need to put 10% down. Based on a purchase price of $200,000, you would need $10,000.
The only way to REALLY know what you're looking at as far as a down payment is to get pre-qualified for a loan. For those of you that are eligible for 100% financing, you will not be responsible for a down payment, but will be responsible for other costs associated with acquiring real property.
FHA loans require a 1 time funding fee, which can be in the vein of 1% (or slightly higher) of the loan amount. This funding fee is NOT an out of pocket expense, but rather rolled on top of the loan.
EXAMPLE: $200,000 purchase price
97% LTV = loan amount of $194,000
One time funding fee at 1.5% would = $2910
$194,000 + $2910 = $196,910 = total loan amount
- OTHER EXPENSES:
There are other expenses associated with purchasing a home. This example is based on a newer home in good shape in Alachua County with a sales price of $176,000. Some of these expenses include (all amounts are approximate - different service providers will vary in cost!):
- Homeowner's insurance premium cost for 1 year: estimated $1000
- Home appraisal: $350
- Credit report (for lender): $40
- Home inspection: $275
- Interest paid at closing: varies, (see below)**
Estimated closing costs:
Please see this link for an example of a Buyer's ESTIMATED expenses form that will showcase some of the closing costs, pre-paids and escrow items. Estimate is based on a real lender GFE (Good Faith Estimate) for a property I sold with the following terms:
- FHA loan, 30-year fixed interest rate of 6.375%, closing on 12/6 (**closing date is important as it affects the amount of pre-paid interest the buyer will have to pay for).
- Typically, as stated above FHA = 97% financing. In this example we were able to tweak it to approx. 97.38% LTV with an approx. 2.62% down payment. This means a core loan amount of $171,400 and a down payment of $4600.
- This example uses a funding fee of 1.5%, or $2571. Remember this fee is on top of the loan, not out of pocket.
- with a $1000 deposit (a.k.a earnest money or escrow money, used as a good faith deposit when making an offer to purchase real property)
- Estimated home owner's insurance of $1000 per year and Real estate tax estimate of $2592 per year.
Buyer Estimated Expenses link for the above example (you may need to print for best quality):
Other expenses could include (at your request): a mold inspection, lead-based paint evaluation (for homes older than 1978), radon test, attorney fees (should you desire your attorney review things, etc.), roof test, water test, septic inspection, foundation inspection, etc. The above expenses included the estimated cost for a home inspection and termite inspection only.
Other things that can affect the amount you bring to closing:
1) Interest: Interest is paid in advance. At what point during the month you close will affect the amount of pre-paid interest you will be responsible for paying, as I mentioned above. If you close on December 15th, you will be responsible for interest between the 15th and 31st and December. If you close on the 6th of December (as in the above example), you will be responsible for 25 days of interest: the 6th-31st. Please consult a lender for further info.
2) Real estate taxes: Real estate taxes are paid in arrears. If you buy a property in March '08 and the tax bill doesn't come out until November 1st, 2008, the seller's of the property will not have paid their taxes in yet. If the closing date is March 31st, the real estate taxes will be prorated and given as a credit on the closing statement from the seller to the buyer and will apply to the tax bill for 2008. The seller will owe a credit from 1/1/2008 - 3/31/2008 as they occupied the property during this time. The lender will most likely will collect 3 months of tax reserves from your funds at closing. The credit from the seller to you will essentially even out. Consult a lender for more info about how many months they will require for reserves (they are all different and it also depends on the time of year).
Please leave comments or contact me directly with any questions you may have concerning expenses for a purchase. It is also important to note that some loan programs (such as FHA) allow a certain amount of seller concessions (FHA is up to 6%). Without complicating things too much, there is a way to ask for a credit toward closing costs and pre-paids from the seller, and then be responsible for a significantly smaller amount of expenses and your down payment only. You're welcome to contact me for more info.
Angela Elliott is a licensed Florida REALTOR® with Century 21 Classic Properties in Gainesville, FL. Please visit my profile for more about me and browse my Gainesville, FL real estate website for additional Alachua County information and listings. Your phone calls are always welcome at (352) 256-7038 as are your e-mails to email@example.com. A portion of all my closed sales will be donated to the Alachua Co. Humane Society (View my mission statement).