It is best to complete the qualification process before you begin looking for a home. You will know exactly what you can afford and how much money you will need to bring to closing. Your mortgage consultant will provide a good faith estimate of funds needed for closing as well as a credit approval letter to attach to your offer.

How much down payment is needed for a home purchase?

• The typical range of cash down payment is between 5% - 20% of the sales price. Some buyers put down more than this, and others put down less.
• There are "zero down" programs available.
• Qualifying veterans may purchase homes with zero down payment.
• A good mortgage lender will be able to suggest the right loan program for you from many that are available.
• Normally, buyers putting less than 20% down are required to buy mortgage insurance to protect the lender.
• To avoid mortgage insurance, some of our clients put 10% down, and get an 80% first lien, and 10% second lien (an 80-10-10 loan). The second lien has a shorter term and higher rate.
• The "80-10-10" is a good program for buyers who have not sold their current home, and plan to pay off the 2nd lien as soon as their home sells or are buying a home over $400,000 as mortgage insurance becomes more expensive as the amount insured goes up.  So for high loan amounts it is not an effective solution.
• “80-15-5” another program for buyers with only a small down payment
• “80-20” zero down payment.  When a borrower has less than 5% down the bank charges extra fees on the first loan for the additional risk and the interest rate on the second is higher.

How much earnest money is typical?

• There is no standard amount of deposit to submit with your offer.
• The earnest money shows the seller that you are serious and are not going to walk away from the transaction.
• For 100% financing, I suggest an amount close to the money required for the buyer to have at closing.   
• After acceptance of the offer, this deposit will be delivered to the buyers agents real estate company and held in an escrow account until settlement.
• It is credited back to you on the closing statement.

Should you pay discount points?

• One discount point is equal to 1% of the loan amount.
• A discount point is interest paid at closing in order to lower the interest rate.
• Discount points are a deduction on your federal income tax return as part of your home mortgage interest.
• If you do not plan to keep your loan for many years, discount points are not a good idea.
• If your payment is reduced by $17 by paying $2,000 in discount points, it will take 10 years to recoup the investment.
• The  money required to lower your interest rate .25% changes daily based on the bond market.
• In a buyers market I try to negotiate money to lower your interest rate from the seller.

Should you pay an origination fee?

• An origination fee is also interest paid at closing in order to pay for a special program like 100% financing.
• One discount point is equal to 1% of the loan amount.
• Fannie Mae “80-20” financing has 1.5% loan origination which is a program fee for the layering of risk associated with 100% financing.
• Borrowers with impaired credit will pay origination for the risk associated with their credit profile.
• You can choose to have a higher rate and keep your cash, or you may pay the origination fee and have a slightly lower payment.  It is always best to pay the fee instead of rolling it into your interest rate.  Over time you will pay much more in interest on the money than the original fee.

What is an escrow account?

• An escrow account is often set up by your lender to collect (as a part of your monthly payment) for your homeowners insurance and real estate taxes, which are due annually.
• When they are due, these bills will be paid on your behalf by the lender.
• Banks will charge you an extra fee on your settlement statement, usually .25% of your loan amount, not to have an escrow account.  This is because an unpaid county tax bill will be paid before a mortgage in the event of foreclosure.  Your bank does not want any lien ahead of their lien.  

Setting up the escrow account.

• At closing, you will see an escrow analysis which shows the initial deposit that you are making into the escrow account and the subsequent monthly deposits which will be made as part of your mortgage payment, and the payment of the taxes and insurance.  At the low point in your account the bank is not allowed to have more than a two month cushion in the account.  As your property taxes increase, this cushion will be absorbed and your escrow payment will go up to cover the tax increase.  At settlement you will pay a tax service fee of approximately $80.  This is a third party company which will report your taxes twice a year to the bank to keep your escrow account current.   
• At the end of each year, the escrow account is re-evaluated, reflecting any changes in your taxes and insurance.

What is "prepaid interest"?

• Normally, interest is paid after it has accrued. (For example, your January 1 mortgage payment is interest and principle for the month of December.)
• However, at closing, interest is collected in advance from the closing date to the end of the month.
• If you close on January 10, interest from January 10 through January 31 will be collected at closing.
• Your first payment will be due March 1, which will cover the interest accrued during February.
• If you close near the end of the month, the interest paid at closing will be less than if you close near the beginning of the month because you have the money fewer days in the month you settle.
• People sometimes hear that it "costs more to close early in the month". You pay the bank the per day rate for the total days you have the money.

What is mortgage insurance?

• If your down payment is less than 20%, lenders normally require mortgage insurance which protects the lender in event of default.
• This insurance is provided by private companies for the protection of your lender in the event that you default on the loan.
• The premiums are added to your payment, and vary according to the size of your down payment.  Mortgage insurance is now tax deductible.
• If you have mortgage insurance, it would be smart to re-evaluate your loan-to-value ratio each year by watching sales in your neighborhood.
• When you have reached an 80% loan-to-value ratio, the insurance can be discontinued by getting an appraisal and providing it to the mortgage insurance company.

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