When a home buyer sets out to purchase their first home they quickly discover that there are a lot of details involved. To make matters worse, the details vary depending on each individual buyers situation. While the general process is the same for each transaction, the details are likely to be somewhat different in each case.
The “down payment” is money that goes directly to the price of the home, and reduces the total principal owed. For example, if you are buying a $100,000 home and you put $10,000 down, your loan amount will be $90,000. If you are buying using an FHA loan, you'll need to have about 3.5% to 5% of the total contract purchase price as a down payment. There are also loans out there for those who can qualify but do not have any cash to use towards a down payment.
Your Credit Score – If you plan to get a new loan to purchase your home, you'll need to qualify. Qualifying for a loan to buy a home involves various criteria, based on the type of loan you'll be using. Folks with very little money usually go with an FHA or USDA loan. Each loan has it's own requirements for how high (or low) a credit score must be to qualify for a particular loan program.
There are a wide variety of programs for buyers with different levels of income and credit. If your credit is bad and you cannot qualify for a traditional home loan, many sellers will consider seller financing. Creative ideas include taking over the existing mortgage payments, or the seller can create a new “note” and you can make payments directly to the seller. This is called “creative financing”. A buyer and seller come up with their own agreement where traditional loans have specific requirements each buyer must meet.
Are you a veteran? If so, you may qualify for loans designed specifically for veterans. These loans may allow you to buy a home with almost no cash up front, as the entire loan amount can be financed along with the closing costs in some cases, so that a qualified veteran may not need to come up with too much money. But that being said, there are “pre-paid” items such as appraisals, insurance and things like utility deposits that must usually be paid prior to the closing of escrow.
Even when you hear the term “no money down” that does not mean that you won't need any money to purchase a home. The prepaid items mentioned above, appraisals and insurance are items that are required for any home purchase that involves getting a new mortgage. Using loans from established lenders to finance your home purchase means that you will have to pay for any number of items required by the lender. One of these items is a survey. While a new survey will not usually be required for recently built homes in neighborhoods for which there is an existing plat map already on file at the courthouse. But when buying land, or purchasing a home situated on a larger plot of land, a new survey may be required by the lender.
Generally, using a lender to finance you home purchase adds about 3 to 5% to the cost of your home purchase. These costs usually include a loan origination fee of around 3% of the contract price, the appraisal, a survey if required, and other fees and items as deemed necessary by the lender in order to approve your loan. The buyer may be required to pay the attorney's fee as well.
The settlement statement will detail all the specific expenses that a buyer or seller will be required to pay to complete the transaction. It is a federal law that all residential real estate transactions must include a settlement statement, also known as a HUD-1. Most of the items on this statement are known as “closing costs”. These costs are in addition to the contract price of the home. Sometimes the lender will allow a buyer to finance these costs into the loan, and sometimes the buyer will have to pay the closing costs up front. A seller may also agree to play all or part of the closing costs. It is not unusual for a buyer and seller to agree to split the closing costs 50/50. There is no set rule, it's determined by negotiations, and whatever the buyer and seller agree to in the contract.
Avoiding a traditional lender and finding a seller who is willing to do seller financing will allow the buyer to avoid the loan origination fee. This can result in significant savings for a cash-strapped buyer who needs to buy a home with very little up front money. Sellers often will finance when motivated to do so by circumstances.
For example, I once purchased a home from a seller who was getting married and moving to a new city. She allowed me to take over the payments on her existing loan in return for $5000 cash at closing. She was happy because she needed to sell quickly, and we got the home without qualifying for a new loan and we avoided paying a loan origination fee, an appraisal or a survey. We paid our insurance and the attorney's fee to handle the closing.
There are also fees charged by state government known in many states as a “transfer tax”. This fee varies from state to state, but averages about .01 percent of the contract price, so a $100,000 home might have a transfer tax of $100. Generally transfer taxes are paid by the seller. There may be fees charged by local city or county governments as well.
Property taxes are always pro-rated to the day of closing, with the seller paying the portion due for the days prior to the closing date and the buyer paying the taxes for the days remaining in the year after the closing date.
The devil is in the details when it comes to getting a feel for how much it may cost to purchase a specific home using a specific type of financing. Each buyer has their own situation with regard to cash and credit, and each lender has their own rules for qualifying buyers for loans. For government insured loans such as FHA, the government dictates many of the requirements a buyer must meet to qualify for a loan.
Generally, anyone who wishes to buy a home may do so, no matter what your credit score is, or how much cash you have on hand. There are dozens of creative buying techniques that buyers may use to purchase a home with seller financing, and avoid the hassles and expense of traditional home loans.
If you wish to purchase a home using a government insured loan such as FHA or VA, which require much lower down payments, there is detailed information on their websites covering most of the requirements for qualifying for these loans. HUD also provides a lot of information on various home buying programs available in different cities. Some programs may allow qualified buyers such as teachers or police officers to purchase homes in certain areas at special prices that are very, very low.
If you want a home of your own, chances are that there is a way to make it happen. Check out the options and find out which ideas may fit your situation.