How Much Cash Does a First Time Homebuyer Need?

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True or False –First Time Homebuyers can’t get 100% financing.
True or False – First Time Homebuyers pay 20% down or pay Private Mortgage Insurance
True or False – 100% Financing means you don’t have to pay anything up front

You may be surprised, but the answer is all three statements above are false. And there is no “one size fits all” answer to how much cash is needed – it depends on a lot of things. Such as:

- Loan programs vary in their down payment requirements. FHA loans now require a minimum of a 3.5% “contribution” by the buyer. Not a 3.5% down payment, but a 3.5% contribution towards the total cost of purchase. FHA loans are available to most buyers who can qualify. USDA loans are available to a restricted group of buyers (based on credit score and income) on a restricted selection of homes (based on location) – but USDA will loan up to 100% of the purchase price. Some credit unions will also loan up to 100% of the purchase price. And surprise, so will some banks, again, under some very restrictive conditions. So talk with your Realtor and several lenders to see what will work best for you.
- Closing costs vary. When you buy a home there are a variety of fees that must be paid. These are in addition to the home price, and are not related to the down payment. So even if you can borrow 100% of the purchase price, you still have closing costs to pay. Your lender can provide a Good Faith Estimate that will list most, but perhaps not all of those fees and costs, so talk to your Realtor too. Somebody has to pay them. It does not have to be you. Perhaps your Realtor can negotiate with the sellers to have them pay some or all of your closing costs. Perhaps a parent or other friendly party will agree to give you funds to cover those costs. Some costs can be “rolled into” some loan programs. For example, the USDA loan program charges a 2% “funding fee”, but you can roll it in – effectively borrowing up to 102% of the purchase price!
- Mortgage Insurance requirements vary. Some loan programs require the buyer to pay for insurance for the loan. It insures the lender, not you. On FHA loans, it is called Mortgage Insurance Premium, or MIP. On conventional loans, it is called Private Mortgage Insurance, or PMI. FHA loans will have an upfront MIP fee and a monthly MIP charge. Since we are talking about cash needed at closing, that just includes the upfront fee, or 1.75% of the purchase price. Conventional loan PMI usually only involves monthly payments; none of it is “upfront”. MIP and PMI can be avoided entirely if you only borrow 80% or less of the appraised value of the home. But there are a few conventional programs that charge no PMI even if you borrow more than 80%.
- Don’t forget your earnest money. If you write a check for an earnest money deposit when you submit the offer to purchase, that money is available for your use at closing. While rare, it is possible, such as when the seller pays all closing costs and you borrow 100% of the purchase price, that you can even get some or all of it paid back to you at closing!

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  • Brooke Fraser

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