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Mortgage
Glossary | All About Adjustable Rate
Mortgages | Getting Your
Finances in Order
Your Credit History | When
Should You Pay Points on a Loan? | Saving
for the Down Payment
Closing Costs
Saving
funds for a down payment should be part of an overall program
to get your finances in order prior to shopping for a home.
This includes rounding up financial records, examining your
spending habits, and setting a budget you can live with. Remember,
too, that the down payment is not the only up-front expense.
An allowance for closing costs should also be included in
your savings budget.
How
much is required?
The down payment is usually expressed as a percentage of the
overall purchase price of the home, and varies depending on
the lender, the type of financing and amount of money being
lent. In the past, the typical down payment was 20%, but in
recent years lenders have been willing to offer conventional
financing with as little as 3% down. U.S. Government financing
programs, such as those offered by the Dept. of Veterans Affairs
(VA) or the Federal Housing Administration (FHA), also require
minimal down payments.
Private
mortgage insurance
Typically, if your down payment is less than 20% of the purchase
price, lenders will require you to carry PMI, or private mortgage
insurance. This insurance protects the lender in case of loan
default, and usually involves an up-front payment at closing,
as well as a monthly premium. However, once you have paid
off 20% of the loan, you can request the policy be canceled.
Some lenders cancel the premium automatically, while others
require you to make a request in writing.
Gifts
If you are having trouble saving enough money, many lenders
will allow you to use gift funds for the down payment--as
well as for related closing costs. The gift may come from
family, friends or other sources, but remember that lenders
usually require a "gift letter" stating the gift
doesn't have to be repaid. In addition, some lenders will
also require you to pay at least a portion of the down payment
with your own cash. Thus, if you plan to use gift money to
purchase your house, ask your lender about their policies
regarding gifts.
Earnest
money
Buyers are usually required to deposit earnest money with
the seller when they make an offer. If the offer is accepted,
the earnest money is then credited towards the down payment.
The amount varies widely depending on the seller and local
custom, but be prepared from the outset to have funds earmarked
for this purpose.
Don't
forget closing costs
In addition to the down payment, you will also need to save
for additional fees associated with the loan. Known as closing
costs, these charges cover items such as title insurance,
documentary stamps, loan origination fees, the survey, attorney's
fees, etc. When you submit your loan application, lenders
are required to supply you with a good faith estimate of your
closing costs.
Some buyers
are surprised by the amount of the closing costs, which can
easily run into the thousands of dollars. Remember, though,
that closing costs can be negotiated with the seller. For
example, you may agree to pay the full asking price in exchange
for the seller paying all the allowable closing costs.
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