When you decide to purchase a home, you’ll have certain hurdles to overcome separate from the real estate purchase negotiation.
Depends on which loan program you can qualify for what the property occupancy is. Assuming you’re purchasing a primary home- down payment can be as little as 3.5% or in some cases 0% financing on some government loans including USDA and VA mortgages.
Plan on 10% down for a second home and 20% down if the property is going to be a rental. The down payment is the difference between the purchase price and the loan amount, your skin in the game. These monies are due at close escrow less any earnest money you initially put into the transaction when you made your purchase offer. Some contracts are written up putting in earnest money followed by an increased deposit upon release of loan contingency (the point in the transaction where you fully commit to purchasing the property and would have attained loan approval at this point as well).
Use approximate 3% of the purchase price which includes closing costs (independent of discount points) and also accounts for prepaid items such as prepaid property taxes and fire insurance if you plan on having a monthly escrow account where the lender pays the taxes and insurance on your behalf. Otherwise, plan on approximately 1.75% of the sales price and paying property taxes and insurance separately.
How to reduce cash to close when buying a house
Seller concession– let’s say you find house for $400,000. You make an offer to purchase the house for $410,000 with $10,000 back for closing costs. This does make your offer the same as it would be if you offered $400,000 without a credit as the seller’s net proceeds are equal.
However, if you ask for a lower purchase price and ask for credit for closing costs your offer becomes weaker because the seller doesn’t receive as much monies to pay off any liens or encumbrances (like loans) they may have on the home, in other words, their net is reduced, thus making your offer weaker. While credits for closing costs are difficult to obtain, it is still a viable option for reducing your cash to close.
Higher loan amount/Less Down-if you can qualify-taking a bigger loan amount will reduce your cash to close. However, higher loan amount means a few things you must be aware of as informed home buyer:
- higher loan amount means bigger loan-to-value
- bigger loan-to-value potentially means higher interest rate
- higher interest rate has the ability to make loan more pricey
Lender credit-a lender credit simply means taking a higher interest rate in exchange for getting a lender credit to absorb closing costs and subsequent cash to close. This option does mean higher interest rate which means a larger interest expense over time unless you plan to repay your principal each month, which could counteract having to take a higher interest rate. In fact, prepaying your mortgage is something you can do anyway to save substantial interest over the term of the loan.
Agent credit– can come from your buyer’s agent or the listing agent or a combination of the two. While this is definitely challenging to come by, it is something that is an option if cash to close becomes tight. Agents earn their commission and work your tail off for you as a home buyer. So use this option as a last resort scenario if you absolutely need additional funds to close.
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