Don’t wait until you’re ready to move to start preparing financially to buy a home.
If you’re like the vast majority of home buyers, you will choose to finance your purchase with a mortgage loan. By preparing in advance, you can avoid the common delays and roadblocks many buyers face when applying for a mortgage.
The requirements to secure a mortgage may seem overwhelming, especially if you’re a first-time buyer. But I’ve outlined three simple steps to get you started on your path to homeownership. Today, we are discussing Step 2…Save Up For A Down Payment and Closing Costs.
Even if you’re a current homeowner, it’s a good idea to prepare in advance so you don’t encounter any surprises along the way. Lending requirements have become more rigorous in recent years, and changes to your credit history, debt levels, job type and other factors could impact your chances of approval.
It’s never too early to start preparing to buy a home. Follow these three steps to begin laying the foundation for your future home purchase today!
STEP 2: SAVE UP FOR A DOWN PAYMENT AND CLOSING COSTS
The next step in preparing for your home purchase is to save up for a down payment and closing costs.
When you purchase a home, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage).
Many first-time buyers wonder: How much do I need to save for a down payment? The answer is … it depends.
Generally speaking, the higher your down payment, the more money you will save on interest and fees. For example, you will qualify for a lower interest rate and avoid paying for mortgage insurance if your down payment is at least 20 percent of the property’s purchase price. But what if you can’t afford to put down 20 percent?
On a conventional loan, you will be required to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent. PMI is insurance that compensates your lender if you default on your loan.1
PMI will cost you between 0.3 to 1.5 percent of the overall mortgage amount each year.2 So, on a $100,000 loan, you can expect to pay between $300 and $1500 per year for PMI until your mortgage balance falls below 80 percent of the appraised value.3 For a conventional mortgage with PMI, most lenders will accept a minimum down payment of five percent of the purchase price.1
If a five-percent down payment is still too high, an FHA-insured loan may be an option for you. Because they are guaranteed by the Federal Housing Administration, FHA loans only require a 3.5 percent down payment if your credit score is 580 or higher.1
The downside of getting an FHA loan? You’ll be required to pay an upfront mortgage insurance premium (MIP) of 1.75 percent of the total loan amount, as well as an annual MIP of between 0.80 and 1.05 percent of your loan balance on a 30-year note. There are also certain limitations on the types of loans and properties that qualify.4
There are a variety of other government-sponsored programs created to assist home buyers, as well. For example, veterans and current members of the Armed Forces may qualify for a VA-backed loan requiring a $0 down payment.1 Consult a mortgage lender about what options are available to you.
|TYPE||MINIMUM DOWN||ADDITIONAL FEES|
|Conventional Loan||20%||Qualify for the best rates and no mortgage insurance required|
|Conventional Loan||5%||Must purchase private mortgage insurance costing 0.3 – 1.5% of mortgage annually|
|FHA Loan||3.5%||Upfront mortgage insurance premium of 1.75% of loan amount and annual fee of 0.8 – 1.05%|
If you’re a current homeowner, you may have equity in your home that you can use toward your down payment on a new home. I can help you estimate your expected return after you sell your current home and pay back your existing mortgage. Contact me for a free evaluation!
Closing costs should also be factored into your savings plan. These may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys and other fees associated with the purchase of your home. Closing costs vary but typically range between two to five percent of the purchase price.5
If you don’t have the funds to pay these outright at closing, you can often add them to your mortgage balance and pay them over time. However, this means you’ll have a higher monthly payment and pay more over the long term because you’ll pay interest on the fees.
START LAYING YOUR FOUNDATION TODAY
It’s never too early to start preparing financially for a home purchase. This second step (as well as step 1 in my previous post, and step 3 coming in a future post) will set you on the path toward homeownership … and a secure financial future!
And if you are ready to buy now but don’t have a perfect credit score or a big down payment, don’t get discouraged. There are resources and options available that might make it possible for you to buy a home sooner than you think. I can help.
Want to find out if you’re ready to buy a house? Give me a call! I’ll help you review your options, connect you with one of my trusted mortgage lenders, and help you determine the ideal time to begin your new home search.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.
In my next post we will be discussing Step 3: Estimate Your Home Purchasing Power
- Bankrate –
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