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In addition to your down payment and the prepaid property tax and homeowners insurance premiums, you'll also be responsible for expenses known as closing costs. Both buyes and sellers are responsible for some closing costs. So it's important to know which costs you will be paying.
Some closing costs, such as money for credit checks and appraisals, you'll pay when you apply for a loan. This money is non-refundable, even if you do not eventually receive the loan.
When evaluation your financial situation, don't forget to include the closing costs. These may include, but are not limited to:
- Title insurance fee
- Survey charge
- Loan origination fee
- Attorney fees or escrow fees
- Document preparation fee
- Garbage or trash collection fees
- Points - up-front interest paid in return for a lower interest rate. Each
point is one percent of the loan amount. Sometimes you can contract for the seller to pay
your points
NOTE: Consider closing costs when choosing one mortgage plan over another.
Some mortgage plans allow the seller to pay for some, or all of your closing costs; which is a huge help when your cash is limited! Sometimes, closing costs can even be rolled into the amount of the mortgage loan you are receiving.
Figuring Out Your Monthly Income
One of the first questions that the lender will probably ask you is "How much is your income?" Everybody's income that will be owners of the property are taken into account. To make things go smoothly, have all sources of monthly income available for the lender.
Figuring Out Your Monthly Debt
Lenders look at your present monthly payments closely. They want to be sure that you can handle your new monthly payments for the mortgage that you are applying for. Different mortgage plans consider payments on any debt that won't be paid off within, for example, six months, nine months, or a year.
Amount of Your Down Payment
You need to have cash for your down payment. It is not included in the amount of your loan. You will reduce the amount of your loan with a larger down payment, which in return, will reduce your monthly payments. Don't forget, though, you'll also need cash for your closing costs, prepaid property taxes, and homeowners' insurance.
Depending on your mortgage, down payment requirements can vary greatly. VA - Veterans Administration Loan - typically have 0% down. On a FHA - Federal Housing Administration Loan - the typical down payment amount ranges from 3 to 5%. Whereas a conventional loan usually asks for a 20% down payment. First time homebuyers often have special state programs which are usually lower than the conventional financing.
Most lenders will ask for a type of protection when you put down less that 20%. This can be done by carrying private mortgage insurance (PMI). This insurance guarantees the lender that even if you default on the loan, the debt will be paid. PMI adds approximately an extra half a percent onto the loan.
You also need to be aware that FHA mortgages charge for mortgage insurance premiums (MIP), in exchange for their low down payment requirements.
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