Essential Homebuyer Information - 2 Most Common Topics
If you are buying a home, or know someone who is, please read/share this simple tutorial of the 2 most common topics every Homebuyer wants/needs to know about.
Topic #1 - FUNDS/CASH TO CLOSE
("How much money do I need to "bring in" to buy this home?")
The terms "Funds (or "Cash") to Close" refer to the total amount of money the Borrower/Buyer will bring in to purchase the new home. The amount of money "brought in" can be summarized in the following categories:
- Down Payment -- The difference between the loan amount and the purchase price. Most Buyers/Borrowers will earmark either a "set dollar amount" or a "percentage of the purchase price" for their Down Payment.
Non-Recurring Closing Costs (NRCC's) -- these are the "one-time costs" associated with creating the new mortgage. These NRCC's can be broken down into 2 sub-categories:
- Lender "Origination" Fees -- This amount will vary depending on which interest rate is selected (higher rates = lower Origination Fees, while lower rates = higher Origination Fees)
- Third Party Fees -- These fees relate to other Vendors involved in the escrow. Examples of Third Party Vendors include (but are not necessarily limited to): Title Insurance, Escrow Company, Appraiser, County Recorder, Notary, Homeowners Association (HOA), etc. NOTE: These fees may not be "marked up" by the Lender (so they will be what they will be). Most Lenders do not know which Third Party Vendors will be involved (much less their fees) before a property is under contract and escrow is opened (this is why Lenders will estimate the total NRCC's up front, then revise them upon discovery of which Third Party Vendors are involved, and what their specific fees are)
Recurring Costs (RC's) -- These are "ongoing costs of homeownership collected up front" when buying a home. THESE ARE NOT FEES TO ACQUIRE THE MORTGAGE LOAN (and therefore should not be co-mingled into the NRCC's category above when shopping for a loan). Examples of RC's include (but are not necessarily limited to) include:
- Homeowners (aka Hazard) Insurance - 1 Year Policy paid in advance (this money is collected "through escrow" and paid directly to your Homeowners Insurance Company)
- Impound (aka Escrow) Account - Initial deposit of a prorated amount of Property Taxes and Homeowners Insurance (your money, which will be applied to future payments of Property Taxes & Homeowners Insurance payments). Depending on the loan program, Impound Accounts are optional. Click here for an example of a California Property Tax Impound Chart.
- Per Diem (aka "Per Day") interest charges. Daily interest charges begin the day the loan funds (aka "the day the Lender let's go of the money for the new loan amount"). Per Diem interest is collected from the calendar day the loan funds, all the way through the end of that calendar month (so the later in the month the loan funds, the less days of "Per Diem interest" are collected). As this number is factored into the Annual Percentage Rate (APR), I recommend taking the APR portion of any Lender quote with a grain of salt. For more information about how Lenders can initially manipulate the APR to lure you in, click here. There are also "prorations" often collected to make sure property taxes are not "overpaid by the Seller" or "underpaid by the Buyer".
Topic #2 - MONTHLY PAYMENT
(Where does all of that money go each month when I make my payment?)
To better understand a monthly payment, think of the acronym PITI for starters. PITI can be defined as follows:
- Principal + Interest (P+I) - The P+I portion of your monthly payment is typically the largest. "Principal" can be defined as the amount of money you have borrowed (and are now starting to pay back). "Interest" is the ongoing finance charge of borrowing that money. Once we can determine the exact amount of your loan, the interest rate, and the amortization period (i.e. the amount of years you are paying back the loan...typically 30 years), we can determine the "P+I" payment to the penny. CLICK HERE TO ACCESS A FREE ONLINE CALCULATOR to determine your exact P+I payment.
Property Taxes (T) - The County Assessor where the property is located considers this home as a source of ongoing revenue. In essence, the County Assessor will assess a "mathematical factor" to multiply by the "property value" (i.e. the new purchase price) to determine the annual/monthly property taxes due once you purchase your new property. An example of how Property Taxes are calculated is as follows:
- Purchase Price ($400,000) x .0125 (1.250% of the purchase price) = $5,000 divided by 12 months = $416.67 per month
- NOTE: If your property has "Mello Roos" property taxes, you can expect the overall mathematical factor to be higher, resulting in higher monthly property taxes
Homeowners Insurance (I) - Lenders always think of "worst case scenarios" and want to make sure the property (collateral for the loan) can be rebuilt in the event of a catastrophe (i.e. if the home was burnt down in a fire). For now, feel free to estimate roughly $70.00 - $90.00 per month (this number will vary depending on your coverage amounts, property characteristics, and insurance company...among other potential factors).
- NOTE: Other names for this insurance include "Hazard Insurance" and "Fire Insurance" (these terms all refer to the same type of Insurance)
In addition to the PITI calculations mentioned above, you "may" also have the following additional payments (depending on your individual circumstances):
- Private Mortgage Insurance (PMI) - Typically when you purchase a home with less than 20% down, the Lender will require PMI. The amount of PMI you will pay monthly will be determined by your down payment percentage, your credit score, property type, and the State in which your property is located. There are often options to "buy out" your PMI up front, which I will be happy to explain if/when desired.
Homeowners Association (HOA) Dues - If you purchase a Condominium, you will likely have HOA Dues to pay. Although you will pay these fees directly to the HOA itself (the same as you would pay a utility bill directly), Lenders will calculate the HOA payment into your qualifying "debt-to-income ratios" (so it is imperative that you let your Lender know if you are considering a home with HOA Dues).
- NOTE: If you have HOA Dues, you will likely be able to reduce the amount of Homeowners/Hazard Insurance down a bit (closer to $35.00 - $45.00 per month).
Related Topic: How to Calculate an FHA Mortgage Payment
Related Topic: FHA vs Conventional (Pros & Cons for each)
Now that you have a strong understanding about the 2 above-referenced topics, it is time to get a better understanding of your mortgage quote. Before you go any further, please CLICK HERE to learn about The Truth Behind Mortgage Advertising.
~ "Loan Amounts" Matter Too! ~
Conforming Loan Amount limits vary among different counties across the country (and change approximately once every 12-18 months). As an example, the conforming loan limits (for a 1 unit property in San Diego County as of 2019) are as follows:
- CONFORMING - Loan amount up to $484,350
- HIGH BALANCE CONFORMING - Loan Amounts from $484,351 - $690,000
- JUMBO (NON-CONFORMING) - Loan amounts of $690,001 and above
Please note that pricing (rates/fees) and approval guidelines will often vary between the 3 above Loan Amount categories.
As I am sure you can imagine, the above information is merely the tip of the iceberg when it comes to pursuing a new home and mortgage. Consider this information an initial "cheat sheet" to get you started.
Please remember that I am more than happy to answer questions specific to the plan you are pursuing. Please do not hesitate to contact me if/when I can be of further assistance. Thank you for taking the time to read this information.