Often when someone thinks about purchasing a home, they think about having enough money to cover the down payment, keeping their debt-to-income ratio low and having a stable credit score. However, there are several other costs that homebuyers must take into consideration and prepare for that need to be paid for before closing day.
When a homebuyer receives the loan estimate form, it is crucial to review the loan costs section. Here a homebuyer will discover that the lender charges at least one to four percent of the loan amount. That means a house that costs $500,000 will have a loan origination fee of at least $5,000.
This is known as an origination fee. Found in the fine print of the initial mortgage process, it may include expenses such as an application, processing, verification and rate-lock, underwriting and administrative fees. A homebuyer will be expected to pay these fees at closing.
One of the most significant expenses associated with purchasing a home is the down payment. For FHA loans, a purchaser will need at least 3.5 percent of the total cost of the loan, while conventional loans will call for three to 20 percent. Therefore, if a homebuyer purchases a home for $300,000 using an FHA loan, the down payment will be a minimum of $10,500.
Private Mortgage Insurance (PMI)
If a homebuyer makes less than a 20 percent down payment, the lender will apply a mortgage insurance premium, known as PMI. The purpose of PMI is to protect lenders — not the homebuyer. If the homeowner stops making payments, the PMI will be supporting the needs of the lender.
In addition to conventional loans that require less than a 20 percent down payment, all FHA and USDA loans require mortgage insurance. PMI is a fee that is included in a loan and monthly payments. Therefore, if PMI is included in a mortgage, the loan payment will be higher.
To read more about homebuying expenses, click here.