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    How Much Cash Do You Need Upfront Before Getting A Mortgage?

    House and Money with Pad of Paper and Pen

    Purchasing a house needs money for the down payment – and for many other things too. It is naturally a huge obstacle to those wishing to buy a home, especially when many fail to appreciate just how expensive it can be to close on a property. 

    The costs go beyond saving up a down payment, so we looked at what is involved, how much it may cost you and how you can reduce those costs.

    The Down Payment

    Many prospective house buyers assume that this payment is their sole initial outlay when purchasing a property. It is typically easy to calculate too, as a set percentage of the property’s purchase price. For example, a 15% down payment on a $200,000 property would equal $30,000. 

    The percentage that the down payment represents varies however. If buyers wish to avoid taking out private mortgage insurance (PMI), then the down payment tends to equal 20% of the purchase price. This is often too great an ask for many first-time buyers, so some mortgage lenders do offer lower percentages, even as low as 3.5% for those that qualify for special FHA or VA mortgage loans. 

    When looking to buy, it helps to shop around and see what lenders are offering.

    Closing Costs

    These costs are often the most problematic, adding on costs many buyers are unprepared for. They often depend on location, as rates vary due to differences in mortgage stamps (a government tax on mortgage loans) or the real estate transfer tax. Closing costs can amount to as much as 2-3% of the total loan. Thus, on a $250,000 mortgage, buyers will have to find an extra $5000 to $7500.

    Costs also vary according to the mortgage lender’s terms, and even from loan to loan. This is due to variations in additional costs, such as application fees and “points”, a fee so named as they are calculated as a percentage point of the loan.

    Escrow Expenses                        

    These are part of any purchase. With most mortgages, lenders will place the house owner’s insurance and estate taxes in escrow, which means the two charges are included in monthly payments, which when due will be paid by the lender. To make these payments, the lender will seek the funds from buyers in advance, by setting up escrow to hold money. 

    A lender may put between two to twelve months of taxes in escrow, so the money required can differ wildly. Buyers are generally expected to pay for a year’s homeowners’ insurance up front, plus an additional two months into the escrow account. With a large down payment, such payments can be negotiated.

    Fees & Utilities

    While these fees are usually lower than other costs, it is still another potential outlay. Such fees usually account for utility costs paid for in advance by the seller, be it water, sewer or trash removal. The oil in a heating tank may have to be paid for by the buyer, but at least the expense is recouped by utilizing what is purchased.

    An additional cost, that like utility fees, would be discussed at closing are association fees for homeowners. Many of these member fees are covered with an annual payment. If the seller has paid for a period after they leave the property, they may wish to recoup costs. It is even plausible that a fee to the association to start membership is required. Sellers are unlikely to cover costs as they are termed as direct expenses. Covering such fees could be construed as an inducement to buy the house.

    Liquid Cash Reserves

    While this is not an expense, it is still a financial requirement that surprises many buyers. Lenders require buyers to have funds in reserve after all upfront costs are paid for. This is because they do not want buyers spending every last dollar they have to purchase a property, as it could leave them susceptible to defaulting on payments in the future. 

    Lenders thus insist on proof of savings as a buffer zone for the near future. Lenders tend to ask for savings equal to the initial two months of mortgage payments, providing security to lenders that the early mortgage payments will be made. Lenders do not receive these funds, they simply ask for evidence of existence, preferably in a liquid and accessible source.

    Conclusion

    As you can see, the up-front costs when purchasing a property go far beyond the down payment amount. Buyers can expect to require another 50% collateral on top of that to close a sale. It is important that when looking to buy, you factor in all the additional costs.

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