HOME BUYER FAQ’S

How much of a down payment do I need to buy a home?

To buy a home, you may not need a down payment at all. There are various mortgage programs, such as the VA Home Loan Guaranty program and the USDA Rural Housing Loan, which allow 100 percent financing.

Additionally, U.S. municipalities often offer down payment “grants” to first-time home buyers, which can make it possible to purchase a home with no money down. Absent these programs, buyers should expect to make a minimum three percent down payment for a conventional loan; and 3.5 percent for an FHA-backed loan.

Can I use gift funds for my down payment on a mortgage?

Yes, you can use gift funds for a down payment on a mortgage. To use a cash gift for down payment, however, you’ll have to prove that they come from an acceptable source.

Provide a paper trailing showing the gift funds leaving the giver’s account, and being deposited into your account or into escrow. You’ll need a “gift letter” from the giver, indicating his or her relationship to you, the amount of the cash gift, and a statement that giver does not require repayment. There is no limit to the number of monies that can be gifted to a home buyer.

Are there any fees when a home buyer works with a real estate agent?

No, real estate agents are “free” for home buyers; the seller typically pays their commission. Furthermore, because of conflicts of interest. there are almost no situations in which it makes sense for a home buyer to employ the same real estate agent as the home seller.

What is Private Mortgage Insurance or PMI?

Private Mortgage Insurance (PMI) is an insurance policy which makes homeownership possible for home buyers who don’t want to make a twenty percent down payment. You, the borrower, pay PMI premiums to protect your mortgage lender from default and foreclosure.

Should you fail to repay your mortgage, the lender can “cash in” the homeowner’s PMI policy to recover its lost monies. Conforming mortgage lenders require PMI when the home buyer makes a down payment of less than 20 percent.

PMI later self-cancels when the balance drops to 78 percent of the initial sales price. You can also apply with your servicer to remove it (once the loan balance drops to 80 percent (you may have to pay for an appraisal or refinance altogether to get this benefit).

What are points? How do I know if I should buy them or not?

A point is simply 1 percent of the loan amount. If you choose to “buy your rate down,” or pay “discount points,” you will get a lower interest rate.

All else being equal, the more you pay upfront, the lower your interest rate and monthly payment will be. But paying points may not pay off unless you keep your mortgage long enough to recoup your upfront costs with your monthly savings.

Deciding whether to pay points is a personal decision. Home buyers with plans to sell or refinance within a few years should usually not pay discount points. In for a 30-year fixed-rate mortgage, one discount point should reduce the rate by .125 to .25 percent.

For many home buyers, discount points are 100 percent tax-deductible in the year in which they are paid.

Credit score range breakdown: fair, good, excellent

Mortgage credit scores (FICO scores) come in many types, depending on the industry (mortgage vs auto financing, for example), version, and which of the three major credit bureaus you ask – Experian, Equifax, or TransUnion. FICO scores range from 300 to 850.  Lenders use the middle score if your reports contain three scores.

If your report only contains two scores, it’s the lower one that counts when you apply for a mortgage. Credit scores range as follows:

      • 720+ = Excellent
      • 680 to 719 = Good
      • 620 to 679 = Fair
      • < 620 = Poor

You can generally secure a mortgage approval with credit scores of 620 or higher, depending on the overall strength of your application.

 

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