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Down payments are required on almost every mortgage loan out there right now. Only a couple programs do not require the buyer to have a little “skin in the game.” For first time home buyers having a large cash reserve can prove to be a problem. Let’s look at a $70,000 house with a 5% down payment. This means you will borrow $66,500 from the lender, add $3,500 of your own money, and give the $70,000 to the seller. Because a down payment does not include closing costs or cash-to-close, you will also need to have other money at the time of closing. This could mean that you need around $9,000 total for the 5% down payment and the money for closing. The following informati0on is an excerpt from "The Essential Guide to Buying Your First Home" - a free eBook from AmeriFirst Home Mortgage.
A down payment can come from your own savings account, but the money could also come from your 401(k) or as a gift from an eligible family member (parents, children, siblings). Gift funds may be considered a higher risk by the underwriter of your mortgage. This means if your file is “iffy” (like a lower credit score or income issues) the gift funds could be the difference between an approval and a denial. So the best bet is to save every dollar you can for the down payment on your first home.
The money you need at the closing table will include a down payment, closing costs and cash-to-close (or pre-paids). Think of it like different buckets. There’s a bucket for the seller (which is where the giant mortgage check and your down payment goes) and one for the mortgage lender (which is where the rest goes). In the mortgage lender bucket you will put the closing costs (fees paid to the mortgage lender for processing and funding your loan) and pre-paids. The pre-paids cover things like your escrow account, so your mortgage lender can pay your property taxes and homeowners insurance.
Learn more with "The Essential Guide to Buying Your First Home" at the button below. The free eBook offers more insight into the home buying process.
(cash photo: Flickr user JMR Photography)
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