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Saving for the Down Payment.
Saving for the Down Payment:
Saving funds for a down payment should be part of an overall program
to get your finances in order prior to shopping for a home. This
includes rounding up financial records, examining your spending
habits, and setting a budget you can live with. Remember, too,
that the down payment is not the only up-front expense. An allowance
for closing costs should also be included in your savings budget.
How much is required?
The down payment is usually expressed as a percentage of the overall
purchase price of the home, and varies depending on the lender,
the type of financing and amount of money being lent. In the past,
the typical down payment was 20%, but in recent years lenders
have been willing to offer conventional financing with as little
as 3% down. U.S. Government financing programs, such as those
offered by the Dept. of Veterans Affairs (VA) or the Federal Housing
Administration (FHA), also require minimal down payments.
Private mortgage insurance:
Typically, if your down payment is less than 20% of the purchase
price, lenders will require you to carry PMI, or private mortgage
insurance. This insurance protects the lender in case of loan
default, and usually involves an up-front payment at closing,
as well as a monthly premium. However, once you have paid off
20% of the loan, you can request the policy be canceled. Some
lenders cancel the premium automatically, while others require
you to make a request in writing.
Gifts:
If you are having trouble saving enough money, many lenders will
allow you to use gift funds for the down payment--as well as for
related closing costs. The gift may come from family, friends
or other sources, but remember that lenders usually require a
"gift letter" stating the gift doesn't have to be repaid. In addition,
some lenders will also require you to pay at least a portion of
the down payment with your own cash. Thus, if you plan to use
gift money to purchase your house, ask your lender about their
policies regarding gifts.
Earnest money:
Buyers are usually required to deposit earnest money with the
seller when they make an offer. If the offer is accepted, the
earnest money is then credited towards the down payment. The amount
varies widely depending on the seller and local custom, but be
prepared from the outset to have funds earmarked for this purpose.
Don't forget closing costs:
In addition to the down payment, you will also need to save for
additional fees associated with the loan. Known as closing costs,
these charges cover items such as title insurance, documentary
stamps, loan origination fees, the survey, attorney's fees, etc.
When you submit your loan application, lenders are required to
supply you with a good faith estimate of your closing costs.
Some buyers are surprised by the amount of the closing costs,
which can easily run into the thousands of dollars. Remember,
though, that closing costs can be negotiated with the seller.
For example, you may agree to pay the full asking price in exchange
for the seller paying all the allowable closing costs.
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