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The Down Payment
Saving
for the Down Payment
Saving
funds for a down payment should be part of an overall program to get
your finances in order prior to shopping for a home. This includes
rounding up financial records, examining your spending habits, and
setting a budget you can live with. Remember, too, that the down payment
is not the only up-front expense. An allowance for closing costs should
also be included in your savings budget.
How
much is required?
The
down payment is usually expressed as a percentage of the overall
purchase price of the home, and varies depending on the lender, the type
of financing and amount of money being lent. In the past, the typical
down payment was 20%, but in recent years lenders have been willing to
offer conventional financing with as little as 3% down. U.S. Government
financing programs, such as those offered by the Dept. of Veterans
Affairs (VA) or the Federal Housing Administration (FHA), also require
minimal down payments.
Private
mortgage insurance
Typically,
if your down payment is less than 20% of the purchase price, lenders
will require you to carry PMI, or private mortgage insurance. This
insurance protects the lender in case of loan default, and usually
involves an up-front payment at closing, as well as a monthly premium.
However, once you have paid off 20% of the loan, you can request the
policy be canceled. Some lenders cancel the premium automatically, while
others require you to make a request in writing.
Gifts
If
you are having trouble saving enough money, many lenders will allow you
to use gift funds for the down payment--as well as for related closing
costs. The gift may come from family, friends or other sources, but
remember that lenders usually require a "gift letter" stating
the gift doesn't have to be repaid. In addition, some lenders will also
require you to pay at least a portion of the down payment with your own
cash. Thus, if you plan to use gift money to purchase your house, ask
your lender about their policies regarding gifts.
Earnest
money
In
many areas buyers are usually required to deposit earnest money
with the seller when they make an offer. If the offer is accepted, the
earnest money is then credited towards the down payment. The amount
varies widely depending on the seller and local custom, but be prepared
from the outset to have funds earmarked for this purpose. This is NOT
custom for Rockland County
***Don't
forget closing costs
In
addition to the down payment you will also need to save for additional
fees associated with the loan. Known as closing costs, these charges
cover items such as title insurance, documentary stamps, loan
origination fees, the survey, attorney's fees, etc. When you submit your
loan application, lenders are required to supply you with a good faith
estimate of your closing costs.
Some
buyers are surprised by the amount of the closing costs, which can
easily run into the thousands of dollars. Remember, though, that closing
costs can be negotiated with the seller. For example, you may agree to
pay the full asking price in exchange for the seller paying all the
allowable closing costs.
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