So you’re thinking about buying your first home. Or maybe selling and moving up. Though most prospective borrowers come to me with some idea of the funds necessary for down payment, many don’t have a good grip on the additional funds necessary for costs and pre-paid expenses.
Minimum required down payments vary by loan program – Great Midwest Bank offers four primary programs: Conventional Fixed, Portfolio ARMs, FHA and WHEDA. I discussed down payments, loan-to-value and the necessity for mortgage insurance in this previous post. When you make an offer, a portion of your down payment is provided to the seller in the form of an earnest money deposit. $1,000 – $2,000 is typical, but I’ve seen deposits as large as $10,000 to strengthen an offer in a competitive bidding situation. These funds are credited to you at closing.
But what will you need in addition to that down payment? Well, of course, you’ll have to typically pay closing costs, which can vary greatly among lenders. All lenders are required to provide you with a Good Faith Estimate if you apply. In today’s mortgage environment, Great Midwest is among the low-cost providers due to our ownership structure, financial strength and direct relationship with institutional providers like Fannie Mae. In some situations, we may be able to offer a reduced- or no-cost loan by passing along a higher interest rate. Advertised rates usually assume an excellent credit score and a large down payment. To access their programs, Fannie Mae charges lenders higher fees to make loans to borrowers with lower credit scores and/or smaller down payments, which are passed along to those borrowers.
Not all buyers understand some of the pre-paid expenses necessary, either before or at the time of closing. Some are more obvious: A home inspection (not typically included as part of the loan transaction, but a $300-400 expense nevertheless) and the first year’s premium for property insurance. Other pre-paid expenses include daily interest through the end of the month at time of closing (many purchase closings take place at the end of a month, which minimizes this expense), real estate taxes for the month that is “skipped” following closing, insurance premiums for that same month if that is included in escrow (not typically at Great Midwest) and, finally, mortgage insurance premiums, if applicable.
In recent years, home sellers have been willing to assist buyers with the costs and pre-paid items noted above. Every situation is unique, and the more competitive the sale, the less apt sellers will be to chip in.
Rest assured, one of our Loan Officers will provide you with a firm estimate of your total “Cash to Close” at the time of pre-approval so you can shop confidently for a home and know exactly how much cash you’ll need to close on your new home.
Find a local, experienced Loan Officer for more information.
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