Setting A Budget For Down Payment And Closing Costs

As I stated previously, I strongly recommend buyers to have at least 12 months of their house payment in reserves in case of emergencies and/or unexpected expenses of owning a home.  However, this is typically not a lender requirement.

How Much Do Mortgage Lenders Require For Down Payment?

There are many types of loans available today:

• FHA Loans: An FHA loan is a loan that’s guaranteed by the Federal Housing Administration and is a very common loan for first-time home buyers.  The minimum down payment required for an FHA loan is currently 3.5% of the sales price.  Closing costs and prepaids are additional, but the seller is allowed to pay all or part of the closing costs and prepaids up to 6% of the sales price.  FHA loan limit for the D/FW area is currently $271,050, not including upfront MIP.
• VA Loans: A VA loan is a loan that’s guaranteed by the Veterans Administration.  Only qualified veterans are allowed to get VA loans.  VA loans do not require a down payment but still have closing costs and prepaids.  VA allows the seller to pay up to 4% of the sales price towards these expenses.  VA loan limits are currently $417,000 and a qualified veteran may purchase more with additional down payment if they qualify.
• Conforming Conventional Loans: Conforming Conventional loans are loans that conform to the underwriting standards of either Fannie Mae or Freddie Mac.  The down payment for these loans is typically 5%, but some special programs exist that may lower the down payment for qualified individuals.  The loan limit in the D/FW area for Fannie/Freddie loans is currently $417,000.
• Jumbo Loans: Jumbo loans are loans greater than the $417,000 limit required by Fannie Mae and Freddie Mac.  The down payment on these loans varies from one lender to the next.

How Much Are Closing Costs And Prepaid Costs?

In addition to the minimum down payment required by each specific loan type, there are certain closing costs and pre-paid items that must typically be paid at closing.  Many of these costs (in some cases, all of them) may be negotiated to be paid by the seller.

Common Closing Costs:

• Lender origination fee – The upfront cost a lender charges to originate a loan.  Lenders typically give buyers the option of paying a higher interest rate in exchange for lowering this cost and vice-versa.
• Appraisal fee – The cost to perform the appraisal.  The appraisal is a professional opinion of the market value of a property.  The appraiser will also determine if the property meets the lender’s minimum standards.
• Document Preparation Fee – The fee the closing attorneys charge to prepare the closing documents. The closing attorney is typically selected by the lender.
• Title company escrow fee – The fee a title company charges to perform the title search and all the services for closing.
• Title Insurance (Owner’s title policy and lender’s title policy) – A title insurance policy protects the buyer against defects in the title, such as a claim from a previous owner or lienholder that was not recorded or wasn’t discovered during the title search.  The real estate contract promulgated by the Texas Real Estate Commission includes a section that allows the buyer to negotiate this cost to be paid by the seller.  Lenders will also typically require the buyer to purchase an additional title insurance policy that will protect the lender’s interest in the property.  The fee for the lender’s title insurance is typically much lower than the cost of the owner’s title policy when purchased together.  Owner’s title insurance policy rates are regulated by the State of Texas and do not vary from one title company to the next.
• Miscellaneous Title Company Charges – Other charges for services such as faxing, copying, recording deeds and liens, overnight delivery fees, etc., are typically passed on to the buyer.
• Survey – A survey is a physical drawing of the property boundaries, improvements, easements and other visible and non-visible features of a property.  In some cases, the seller may have an old survey that can be used instead of having to order a new one.
• Home Owner’s Association Transfer Fees – The cost to transfer membership in the home owner’s association to the new owner.   There is a separate contract amendment that addresses these fees.

Common Pre-Paid Costs (Expenses which are required by the lender to be paid in advance):

• Property Tax Reserve To Establish An Escrow Account – A lender will typically collect 2-3 months of property taxes at closing to be placed into the escrow account for the mortgage.
• Homeowner’s Insurance – Many lenders typically require one year of homeowner’s insurance to be paid at closing.  The annual premium is then divided by 12 and monthly payments are paid into an escrow account that will be used to pay the following year’s premium.   Most lenders will also collect 2-3 months of insurance in the escrow account in addition to the first year’s premium.
• Prepaid Interest – Interest from the closing date to the end of the month.  Interest on mortgages is typically paid in arrears, so the interest for the next month is paid with the first monthly payment that’s due after closing.

Can The Seller Pay Some Or All Of The Buyer’s Closing Costs?

Yes.  Each lender has specific requirements as to how much they will allow a seller to pay towards the buyer’s closing costs.  This must be negotiated up-front with a seller in writing as part of the real estate contract.  Most lenders will allow the seller to pay between 3-6% of the total sales price towards the buyer’s closing costs.

Budgeting For Other Expenses Of Buying A Home:

In addition to the down payment and closing costs associated with buying a home, there may be other expenses which won’t become apparent until you find the home you’re looking for.  These include costs to fix up/repair the home, deposits for utilities, moving expenses, etc.  It’s nearly impossible to know how much these will be prior to finding a home but reasonable estimates can be made.  These other costs include, but may not be limited to:

• Moving and packing costs.
• Utility deposits.
• Remodeling costs.