Monday, December 4, 2017 / by Keri McCombs
When looking on Zillow at homes, down at the bottom of the page there is a mortgage payment calculator (by the way, know that it is inaccurate and you want to make sure you connect with an agent who can walk you through what is involved in your monthly mortgage payment). That calculator is set at a default down payment amount of 20%. Given the default setting, many buyers, both first time and seasoned, believe that it is required to have that amount for your down payment. There are many great benefits to having a 20% down payment, and those typically impact your mortgage insurance and your interest rate, thereby making your payment less.
The truth about down payments is that you can purchase a home with $0 down, or up to 3%-5%. This encompasses a wide range of options. For example, if you are a first time home buyer or you haven't owned a home in the last three years, you may qualify for the Washington Bond Loan program, allowing you to forego paying your down payment out of pocket, and the loan for your down payment is essentially attached as a second mortgage on your house. So you do have to pay it back, and it allows you to purchase a home without needing thousands of dollars in the bank.
There are also programs for areas where Fannie Mae wants to encourage home purchases (like more urban areas or small towns with slower economic growth). Long story short, you could have many options for your down payment and it takes having a lender who has access to that information and who can walk you through what viable options you have.
Is A Home Inspection Really A Necessary Cost?
Home inspections are incredibly important in the home buying process. Even for a new construction home, it is vital to have the home inspected. The purchase of a home inspection is to make the buyer aware of possible issues with the home, and it can save a future homeowner thousands of dollars in repair costs. It's never a good idea to forego a home inspection. With all of that said, for some buyers, it can be a stretch to pay for one out of pocket. Typically, a home inspection costs $300-$400. In my opinion, it's the most important few hundred bucks spent when buying a new home.
Speaking of new construction, I worked with first time home buyers last year who purchased a new construction home. They wanted to save money wherever they could, and they almost opted out of having a home inspection completed. At the eleventh hour, they decided to have one done. The inspector found that the builder hadn't put blown insulation in the entire attic. There was a miscommunication among the subcontractors and it never got done. Wow. My buyers were so grateful I advised them to spend the extra $325. It saved them thousands of dollars over time.
Closing costs are a necessary part of buying a home. Yes, you can ask for the seller to pay these on your behalf, and no, it is not standard or customary that they do so (although some are more than willing). So, what exactly are closing costs? Essentially, they are the costs to acquire the home. Typically, they are about 3% of the purchase price, although that can fluctuate, depending upon the price of the home. Closing costs for a buyer include a few different things: the costs to obtain the loan, such as the appraisal fee, underwriting fees, etc. (NOTE: if your lender charges you an origination fee, you definitely want to shop for lenders. It's typically a fee that's 1% of the purchase price and not all lenders charge this. It's an easy way to save a couple grand and you'd never know it).
In addition to loan costs, there are costs with title and escrow. These are costs to insure the title of the home for your loan (in case something weird comes up on the title of the home down the road, your loan is insured). Also, these are costs for the closing agent to coordinate the closing of the transaction, have the deed of the home recorded in your name (so that it's officially your home), and some other fees.
Is There Anything Else?
Something that is another cost is earnest money. It's an additional cost, in the sense that you pay the earnest money up front shortly after your offer is accepted. (I typically recommend your earnest money be 1% of the purchase price). However, your earnest money is not an additional cost in the grand scheme of things; your earnest money counts towards your closing costs and/or down payment that's due at the closing table.
Besides earnest money, there could be additional costs that come up. However, this is a general overview of what to expect when you are buying a new home. One of the most common questions I get is about commission- the buyer doesn't pay the commission for their agent (only in select circumstances where it's agreed upon does it happen). The seller actually pays the commission for both agents.
If you're selling your home, some of this information is very different, besides the no down payment part. I've found that some sellers didn't realize what costs go into selling a home, and there isn't always a lot of explaining on the part of the agent as to why these costs are so critical to a successful home purchase.
I trust you've found this information useful! (Even my many "rabbit trail" comments). For any more information, reach out to me directly at 509-844-5843.