What Can You Afford to Spend on a Home?
The best approach in buying a home is to first understand how a home is financed and what funds you will need to close the transaction. There are three crucial elements:
(1) a down payment (2) closing costs (3) the mortgageWhen you know the amount of down payment and closing costs you can afford, and how much mortgage money you will be able to borrow, you can know how much home you can buy.
Do You Have Enough for a Down Payment?
A down payment is the money you pay up front toward the house.
The more cash you pay as a down payment, the less money you will pay each month on the mortgage, and the lower the interest costs will be over the life of the mortgage.
Typically, a conventional loan will require from 5-20 percent of the purchase price as a down payment.Excellent credit history, sufficient income and funds to use towards the purchase will make a difference in the loan program the lender will recommend.
Loans through the Federal Housing Administration (FHA) or Veterans Administration (VA) carry very attractive down payment requirements of 0-31/2 percent or less. There is usually a maximum on the amount of money you can borrow with these types of loans, and VA loans are only available to veterans. FHA and VA loans are available at competitive interest rates. An additional benefit is that the seller may pay part of the loan costs. In addition, when the time comes to sell, the next buyer may be able to assume the loan, subject to certain conditions.
If permissible, secondary financing may be used as an alternative way to finance your new home. This means that another lender may hold a second mortgage for a portion of the purchase price. The remainder that is not financed will be funds that you will pay for the down payment.
Typically, conventional lenders are willing to accept a lower down payment (than 20 percent down) if private mortgage insurance (PMI) is secured. PMI protects the lender in case of default on the loan. It will cost a little more, but it can reduce your required down payment.
What are Closing Costs?
Closing costs are the amounts that are required to close the transaction. These consist of the costs of borrowing money, establishing the loan, and preparing the necessary documents to finalize the sale. These costs are a necessary part of the buying process.
The Costs of Borrowing Money. These include what some lenders call "discount points," a one-time charge to adjust the yield on the loan to what market conditions demand. Each point equals one percent of the mortgage amount. For example:two and one-half points on a $100,000 mortgage would cost $2,500.
The Costs of Establishing a Loan. These include the loan origination fee, appraisal fee, and credit reports. Premiums for hazard and mortgage insurance are usually paid at closing. Also, prepaid interest will be collected for the period between closing and the end of the purchase month.
The Costs of Document Preparation. Title costs are paid to search the public records to determine if the property you want to purchase is free from any other ownership or liens. Recording and transfer fees cover the legal recording of the deed with the proper governmental agencies as well as the transfer taxes.
