How Much Money Do You Need Up Front?
Beyond obtaining a mortgage loan, you will have to provide some money up front for costs associated with buying a home. A buyer must have funds for earnest money, the down payment, mortgage insurance, closing costs and evidence of available funds for other housing costs. Your lender can help you figure out how much money you will need up front.
Earnest money is a deposit made by a buyer of real estate toward the down payment as evidence of his or her commitment to purchase the home. The listing broker typically holds this money in an escrow account. Your REALTOR® can tell you how much earnest money is normal in your area and for the type of property you are purchasing. It can range from $500 to 2% of the offer.
The down payment is the money you pay after you agree to buy the property. The money offsets the total mortgage and is a percentage of the value of the property. That percentage is determined by the mortgage selected. Down payments usually range from 3 to 20% of the property value.
Funds for your down payment can come from: a savings account, bonuses, and commissions; mutual funds; securities; proceeds of life insurance; IRA, 401(k) or Keogh funds; charitable organization gift programs; and government grant programs and subsidized secondary financing. Check with your lender for any restrictions about funding sources.
You can also use gift money from a relative toward a portion of your down payment. Some mortgage lenders may require that a certain amount of the down payment come from documented savings that you have accumulated personally. Ask your lender about their gift money requirements.
The larger your down payment, the smaller your monthly mortgage payments will be.
You may be required to purchase Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP) if your down payment is less than 20%. This insurance protects the lender in case you are unable to pay your mortgage back. Your lender can estimate the cost of insurance. In the mortgage section of this guide, you will learn more about insurance.
Closing costs include points (the amount paid to maintain or lower the interest rate of the loan; each point is equal to 1% of the loan amount), taxes, title insurance, financing costs and items that must be prepaid or escrowed and other settlement costs. These costs generally range between 4 ¼ to 5 ½ % of the property value. You will receive an estimate of these costs from your lender after you apply for a mortgage.
This is just a brief overview of the funds associated with mortgages. To read more, click here. Some loans require that you go through homebuyer education before you apply for a mortgage. Before you leave the lender’s office, be sure to ask what steps you should take next.