Before buying a home, it’s important to know how much it will truly cost you. You’re probably aware that there’s a down payment involved in the transaction. What are the other costs?
The down payment may be one of the largest costs related to purchasing a home, so let’s cover that first. A down payment is the portion of the purchase price you give in cash to the seller. The rest of the funds come from your mortgage.
The percentage of down payment required depends on the mortgage program you choose and if you’re using any forms of down payment assistance. The customary 20 percent down payment may not be necessary.
The VA loan and USDA loan are two examples of products that can offer 100% financing, which would mean you don’t need to put any money down. The popular FHA loan product may let you put down as little as 3.5 percent on a home.
There are also several grants and housing programs that provide down payment assistance to eligible first-time homebuyers and those with low- to moderate-income.
Closing costs are costs necessary to complete a real estate transaction. Examples of closing costs are appraisal fees, title insurance fees, and credit report fees. There’s also an origination fee charged by the lender which is typically a percentage of your loan. This fee is to pay for the processing of the loan.
Closing costs vary from state to state and lender to lender. With that said, everything in your real estate transaction is negotiable. You could request that the home seller helps you cover some of the closing costs. They may be willing to lower these costs for you to seal the deal if they’re in a hurry to sell.
Your lender will give you several loan disclosures through the mortgage process to make sure you are aware of each cost. Take time to read through these disclosures to understand each line item so there are no surprises on the closing day.
Taxes are another cost that varies per state. Some states and counties charge a transfer and recordation tax when transferring a property from one person to another. In addition, there are real estate taxes to consider. As the buyer, you may owe real estate taxes starting from the time you take possession of the property. Your real estate agent should explain to you what the various taxes are and how payments are handled.
If you use a mortgage product that lets you put less than 20 percent down, you may be required to pay mortgage insurance premiums, private mortgage insurance, or funding fees.
The FHA loan has an upfront mortgage insurance premium of 1.75 percent of the loan. The annual mortgage insurance premium is up to 1.05 percent. You pay a portion of this mortgage premium monthly.
The VA loan may offer 100% financing with no mortgage insurance. However, there is an upfront VA funding fee of up to 3.3 percent depending on what type of veteran you are and whether this is your first time using the VA loan.
The USDA loan, another 100% financing product, has an upfront mortgage insurance premium of 1 percent, and an annual fee of 0.35 percent. The upfront costs for the FHA loan, VA loan, and USDA loan may be rolled into your mortgage.
In the world of non-government-backed loans, private mortgage insurance may be charged by your lender as well. There are conditions where you may be able to remove your mortgage insurance after you have a certain amount of equity in the home. Ask your lender for details.
Lastly, homeowners insurance is required. Your lender will likely ask to see proof of insurance at closing. Shop around for insurance rates ahead of time to compare deals and secure coverage for your new home.
How much it costs to buy a home will depend on your location, loan product, and the agreement you have with the seller. Costs will vary which is why you want to select an agent and lender who are available to explain expenses throughout the process.