Buying a home is likely the most significant financial transaction you will make in your lifetime. While preparing to purchase a house is exciting, it’s understandable to feel a bit overwhelmed (especially as a first-time buyer).
Take a deep breath and relax. We’re here to help ease your mind as we address some of the most commonly asked questions for first-time homebuyers.
How Much of a Down Payment Do I Need?
The down payment for a home is a lump sum paid upfront to the lender and is a percentage of the home’s total purchase price. The amount required for the down payment will vary depending on the type of mortgage you choose. Though the recommended down payment amount is 20% for a conventional loan, several other mortgage programs are available with minimum down payments ranging from 0% to 5%. These programs include FHA and USDA loans along with other first-time homebuyer loans. Look into the different mortgage programs you qualify for to determine which loan type will work best for you.
Though a 20% down payment may be more than the minimum required for your loan type, it still has its benefits. A larger down payment provides you with instant equity in your home and greater buying power. Plus, the more you can swing for a down payment means more of your money will go to the principal loan balance - reducing the amount of your future monthly payments.
What is Mortgage Insurance? Do I Need It?
Private mortgage insurance (PMI) is insurance coverage for your lender. It protects them in the event you default on your mortgage loan, thus causing the lender to foreclose on the property (and likely lose money). Lenders generally require PMI if you put down less than 20% on the home.
Having mortgage insurance is not necessarily a negative, as a lower down payment allows you to become a homeowner without putting up as much cash at closing. Even if you can afford to put 20% down, there are other ways that money could be more beneficial to you on your homebuying journey. Something will inevitably go wrong sooner or later, and having some extra funds stowed away for an emergency can be a lifesaver. You could also use the additional funds to replace major systems such as HVAC or knock out some remodeling. Work with your lender and real estate agent to determine where your money will work the hardest for you.
What is a Cash Offer?
A cash offer means that the buyer intends to pay for the home in full themselves without the need for outside funding from a lender. Removing a mortgage loan from the equation eliminates potential challenges or delays from working with a lender and can considerably expedite the home sale timeline.
Although a cash offer can undoubtedly appeal to a seller, it is not the “golden ticket” to securing a home purchase. Under a cash offer, there are no contingencies as there are with the structure of a loan. If you choose to pursue a cash offer, it’s crucial to have a trusted real estate agent and lender on your homebuying team who can help you review and understand the terms of the agreement.
What are Closing Costs?
Closing costs are one of the most significant barriers to purchasing a home besides a down payment. These are fees related to the closing or purchase of a property. Sellers and buyers pay different closing costs. For example, the seller’s closing costs tend to cover the real estate agent fees, while the buyer’s costs focus on the actual closing of the deal. Examples of buyer-related closing costs include:
- Title Insurance
- Home Inspection
- Home Appraisal
- Lender Fees
- Prepaid Homeowner’s Insurance
- Prepaid Property Taxes
- Attorney Fees
Closing costs vary by state; however, they typically amount to 3% to 6% of the property sale price. If you were purchasing a $200,000 home, you could expect the closing costs to be between $6,000 - $12,000. Like a down payment, this payment is due upfront at closing.
What Happens at Closing?
When you arrive at your scheduled closing date, you will meet with a closing agent, your real estate agent, the real estate agent for the seller, and possibly the seller. The closing agent will present several documents for you and the seller to sign. Though the closing agent will briefly explain each document, it’s wise to take some time to review and discuss them with your real estate agent to make sure you understand exactly what you are signing. After all, you’re committing to paying a significant and longer-term investment. If ever there was a time to be sure of what you’re signing, this is it.
Prior to the scheduled closing date, your lender is required to provide you with information explaining the closing costs (typically referred to as a closing disclosure), along with a “good faith estimate” of how much money you will need to provide at closing, and a list of the documents required. If there is anything you don’t understand or have questions about, do not hesitate to ask. Your mortgage team is there to support you through this momentous occasion!
What Documents Will I Need?
Most lenders will request the documents listed below; however, verify the requirements with your lender to ensure you have everything you need beforehand. Here’s a list of commonly required documents for a mortgage loan:
- Copies of your driver’s license to verify your ID and your current address.
- Paystubs from the past 30 days.
- Statements from all financial and investment accounts for the past 60 days.
- W-2 forms and/or tax returns for the past 2 years.
- Proof of employment/income for the past 2 years.
- Letters of explanation and documentation for any circumstances in your history (such as bankruptcy or foreclosures).
We’re Here to Help!
Purchasing a home is exciting, but it can also be a little intimidating. Two of the most important steps in the home buying process are finding an excellent real estate agent and working with a lender you trust to ensure you make the right financial decisions.
If you have any other questions about buying your first home or want to learn more about the home buying process, we are ready to help. Please give us a call at 202-479-2270 to speak with our team.