Down Payment: This is an up-front partial payment, which is common for large purchases like a home. Your down payment will be a percentage of the house purchase-price and is due at closing.
For a $200,000 home, your down payment could be between $6,000 - $40,000 or more.
Below, we’ll discuss how to decide which percentage is right for you.
Earnest Money: Think of this like a security deposit. When a seller accepts your offer and takes the house off the market, the earnest money protects them in the event that you cannot go through with the sale.
The earnest money, sometimes called a “good faith deposit,” is typically 1% - 3% of the purchase price. Most often, it is $1,000. As long as the sale goes through, this money will be applied to your down payment or closing costs.
If the sale falls through due to contingencies like a failed home inspection, you will receive your money back. The only time you can lose your earnest money is if you walk away from the sale without a reason covered by contingencies.
For a $200,000 home, your earnest money payment will typically be $1,000, but could be between $2,000 - $5,000. This money is part of the down payment, as long as the sale goes through as planned.
Closing Costs and Settlement Fees: This is the money you will owe to your lender at the time of closing. It includes:
- A processing fee paid to your mortgage lender for loan services, which is typically about 2% of the purchase price.
- Escrow fees, which are paid to the title company or escrow company to set up escrow for your earnest money. These costs cover the final closing paperwork and handle the exchange of funds and recording of deeds. They vary by company and purchase price.
- Real estate commissions to the agents. These are a percentage of the purchase price which has been agreed upon in advance in the seller’s and buyer’s contracts.
- Taxes and other fees to the county.
- Charges to other third party providers, such as an appraisal fee (as applicable).
In some cases, buyers are able to negotiate for the seller to pay some or all of these costs.
For a $200,000 home, the sum due at closing will typically be $6,000 - $12,000.
Inspection Fees: This is what you will pay a professional home inspector to perform an inspection prior to closing. The cost will depend on your location, the square footage of the home, and the service provider you choose.
For a 2,000 square foot home, the inspection will cost around $300.
How Much Should You Pay For a Down Payment?
The percentage you choose for your down payment will fall into one of three categories:
- 20% or more
- 5% - 19%
- Less than 5%
If you pay less than 20%, your monthly mortgage payment will include an extra PMI fee, or Private Mortgage Insurance. It is intended to protect your mortgage lender in the event that you can’t make your payments.
PMI is usually 0.5% - 1% of your loan amount each year. You can request to cancel your PMI once you’ve made enough mortgage payments to reach 20% equity in your home.
So the larger your down payment, the less PMI you’ll have to pay in the long run. You could also make additional mortgage payments to help you reach 20% equity faster.
Many lenders will only approve a mortgage loan if the down payment is 5% or greater. Some specialty lenders will go as low as 3%.
Credit, Debt, and Income
Mortgage lenders want a well-rounded financial picture of you before approving a mortgage loan. That’s why it’s important to fully understand your finances before you apply.
First, check your credit reports. This is what lenders will look at to determine the mortgage rate you qualify for—better credit often means a lower interest rate.
A lower interest rate can save you a lot of money over the course of a 15-30 year mortgage. It also means a lower monthly payment. If you aren’t in a rush to purchase a home, it may be worth taking action to improve your credit score before you start house-shopping.
Once you begin the home-buying process, try to avoid making any large purchases, particularly if they involve a credit pull (like getting a new credit card or a car loan). Lenders will also be looking at your recent checking account statements as part of the approval process. It pays not to show a history of large spontaneous purchases.
Do you make debt payments each month, such as student loans, car loans, hospital bills or credit card payments? Lenders will also look at your debt-to-income ratio, first to determine your ability to pay your mortgage each month and second to decide what home purchase price to approve you for.
Finally, lenders want to see that you have steady, consistent income. For that reason, you don’t want to change jobs right before applying for a mortgage loan or during the purchase process if you can help it. Lenders will want to evaluate the length of time you’ve been at your job with special considerations for variable income or self employment.
Still not sure if you’re ready to buy a house? Our expert home loan consultants are here to help you make the best decision for you!
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