Understanding Loan Terms

Down Payment, Closing Costs, Oh My! Understanding The Home Loan Financial Responsibilities

8 December 2017 by Gregory Hall

Buying a home is a complicated process. Not only do you need to navigate through the enormous selection of properties for sale, but you will also need to secure a method of payment. Buying the home with cash is ideal, but it is not a realistic option for most people. Therefore, applying for a loan is the most common method for people who want to buy a home. Unfortunately, most people are not prepared for the various financial responsibilities that come along with a home loan.

Paying a monthly mortgage is one thing, but finding the money to use as a down payment and to cover closing costs will add more stress to your budget. With this guide, you will be able to navigate through the financial responsibilities of using a mortgage to buy a home.

Down Payment

During the application process, your lender or bank will give you a few different options for a loan. Not everyone will qualify for each type of loan, so you will need to provide your lender with income statements and credit reports to determine which financing option is right for you.

The down payment will be applied to the total price of the home, reducing the actual amount you need to borrow. It also shows the bank you are ready and able to secure a mortgage, increasing your chances of an approval during the application process.

Most lenders require at least a 3 percent down payment, but your down payment will be based on a few different things, including the following:

• Property Type
• Credit History
• Sale Price
• Loan Type

Down payments of 20 percent are also possible unless you are willing to pay PMI, or private mortgage insurance. If you do not put the 20 percent down, the PMI will be included in your monthly loan payment.

If you are applying for a jumbo loan, a jumbo down payment will also be necessary. In most parts of the country, a jumbo loan is classified as a loan for $417,000 or more. In other areas, the jumbo loan starts at $625,000. These loans usually require a down payment of 20 percent or more.

Closing Costs

A common misconception many buyers have is that their closing costs are part of the down payment. Unfortunately, this is not true, so you will need to factor in these costs when buying a home.

Closing costs are not included in the sale price of your home, either. While some lenders will roll these expenses into the total loan, paying them up front will ensure you are not borrowing, and paying interest, on these costs for the total life of the loan.

Closing costs will include the following:

• Mortgage loan application fee
• Appraisal fees
• Home inspection fee
• Attorney fees
• Credit report costs
• Courier charge
• Pest inspection fees
• Title insurance costs
• Homeowner's association dues

These costs will add up, increasing the total amount you need to pay at the time of closing. Additional expenses, known as escrow costs, will also need to be factored in and paid during the closing of your new property.

Escrow is a common part of closing that most buyers find confusing. Homeowner's insurance and property taxes will be placed into this escrow account and then dispersed by your attorney at closing. Both the insurance and tax fees will be prorated according to the time of the year you are closing on the home.

The financial responsibilities of buying a home may be frightening, so proper understanding is imperative. By understanding the down payment and closing costs that are required, you will be prepared for the process of buying a home. For more information, contact a mortgage broker in your area.

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