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Am I Ready to Buy a Home?

Making good decisions about their financial future

Am I Ready to Buy a Home?

By: Mike DeKuiper

Owning a home comes with a lot of responsibility, and a lot of work. Before buying a home, it is important to ask yourself if you are ready. A huge part of the responsibility of owning a home is the financial aspect, as you will have bills, repairs, and honestly all of the prep work before even buying a home. Read on to ensure you have yourself before buying a home, as we have covered the costs of owning a home in another post here.

Before Buying:

While you are getting ready to purchase a home, one of the biggest deciding factors is going to be your financial ability. Buying a home isn’t just your down payment – there is much more that goes into that, but let’s first look at your down payment amounts:

Low down payment options:

  • Conventional Loan: 3% down payment minimum for your first time buying a home, or haven’t owned in 3 or more years; 5% down if you have owned a home in the past 3 years. You will incur a PMI, or Private Mortgage Insurance payment if you put less than 20% down, and we will shop for the best rates available to you. This protects the lender in case of non-payment of your mortgage
  • FHA Loan: 3.5% down payment minimum, with a set PMI rate
  • USDA Rural Development Loan: 0% down payment, with a set PMI rate
  • VA Loan: 0% down payment minimum, available to active duty military, veterans, and surviving spouses (certain restrictions apply)

For example, if you are looking to purchase a $250,000 home and can qualify for a conventional home loan, your down payment would be 3% of $250,000; or $7,500. This would make your loan amount $242,500.

You also need to consider your closing costs on top of your down payment. Closing costs, simply put, are the cost of doing your loan. They cover origination fees for the lender to complete the loan, appraisal fees that ensure your home is worth the amount you are trying to borrow, title fees that protect the lender for any errors in titling throughout the process, prepaid taxes and insurance (called your escrow account) to ensure that your taxes and insurance will be paid when due, and other items. Be sure to go over all of the fees with your lender.

Many people believe that you can have closing costs “rolled into,” or a part of your loan. This can be true in certain situations, but is not always true. The only way to have your closing costs be included in your loan is to request “seller concessions,” or that they concede a certain amount of money to cover your closing costs. Here is an example of a conventional loan:

Purchase Price: $250,000

Down Payment: $7,500 (or 3% of the purchase price)

Seller concessions: $7,500 (up to 3% of the purchase price)

Loan Amount: $242,500

Because the seller is conceding $7,500 towards your closing costs, rather than receiving $250,000 for the sale of their home, they are only receiving $242,500, which can be a less favorable offer than someone who offered the full price without concessions. Another example can be when you offer more money for the home, so the seller still receives the same amount for the sale of their home. Using the same conventional example as before:

Purchase Price: $257,500

Down Payment: $7,725 (or 3% of the purchase price)

Seller concessions: $7,500 (up to 3% of the purchase price)

Loan amount: $249,775

Now, the seller is conceding the $7,500 towards your closing costs, however, they are still going to be receiving $250,000 for the purchase of their home. Your loan amount is higher than the previous example, because the purchase price is higher, but your down payment is also higher. A key part of this transaction is that the house must still appraise for the entire purchase price of the home. If the appraisal is completed, and the appraiser says the value of the home is only $250,000, then the seller is still conceding $7,500 and would only receive $242,500 for the sale of their home. Because you are still requesting concessions, this can at times be a less favorable offer, depending on the market and the home. This is where it is important to have a knowledgeable realtor on your side, and that your lender and realtor work together as a team.

There are limits on how much you can request in seller concessions depending on the loan type. Here is a breakdown of the maximum amount of concessions you can request:

Conventional Loan: 3% of the purchase price

FHA Loan: 6% of the purchase price

USDA Rural Development: 6% of the purchase price

VA Loan: 6% of the purchase price

As you can see, government backed loans allow up to 6% seller concessions on the purchase price of the home, and conventional loans allow up to 3%. However, if you are using a government loan (FHA, VA, USDA), and you request a full 6% seller concessions, you cannot use that money towards your down payment – only towards your closing costs, and you cannot go backwards. You can, however, use those funds to buy down your interest rate.

There are so many different factors when it comes to being ready to purchase a home, but one of the biggest factors is ensuring that you have saved up enough money to do so. Even if you find a 0% down payment program, you will need to focus on saving money for your closing costs, unless you are lucky enough to find somebody willing to give you concessions to cover those. To ensure that you truly are ready to purchase a home, it is important to talk to one of us at Stockton Mortgage, go over your complete profile, and build a plan of action for you to succeed in the purchase of your new home!

Let us guide you home.