As you begin to consider purchasing a new home one of the first things you should do is get an idea of what “the numbers” will look like. Ultimately the 2 most important numbers will be (1) the monthly payment and (2) how much money you will need at closing, but there are a lot of other numbers to consider before you get there. The list below encompasses numbers involved with a typical purchase mortgage loan with brief explanations on why they are important.
- Purchase Price – This is the starting point, and there are a few different ways to approach it. You can look online and determine a price range based on the homes that you are interested in, decide on the maximum monthly payment you will be comfortable with and then back into a purchase price from there, or ask your lender what the most you can be pre-approved for is.
- Down Payment – While it is still a commonly held belief that you need to have 20% of the purchase price for a down payment, that is not the case. VA loans and USDA loans allow eligible borrowers to purchase homes with no down payment in some situations, otherwise plan on somewhere between 3% and 5%.
- Earnest Money Deposit – This is a customary deposit you will need to make within a few days of signing a purchase agreement. Typically 1% of the purchase price, this deposit is held by a third party, ostensibly as proof of your serious intent to purchase the property in question. Do not worry though; it is not an additional cost. The full amount of your deposit will be credited towards your required down payment and/or closing costs at closing.
- Interest Rate – While the interest rate for your mortgage loan is an important piece of the puzzle, be wary of placing too much emphasis on it at the expense of the rest of your loan structure. A lower interest rate that comes with higher closing costs or higher private mortgage insurance (PMI) may wind up costing you more money. Speak with a lender to determine what your options are, and which loan is the optimal fit for your unique circumstances.
- HOI – Homeowners Insurance is what protects you (and your mortgage lender) against the risk of damage to your home. Homeowners insurance premiums can vary greatly, so be sure to shop around. The policies last for 12 months, and the first year is due in full at closing. Be sure to shop for this during your due diligence period! If the property is in a flood zone the cost of insurance will be much higher and you will want to know while you can still change our mind and keep your earnest money deposit!
- Property Taxes – Property taxes also vary greatly depending on the location of the home. The rates at which property taxes are calculated are based on the County, and sometimes the city) in which the home is located. To be on the safe side plan on the annual bill being 1% of the purchase price of your home.
- PMI – as we mentioned above, you do not need to have a 20% down payment to buy a home. In those situations, the lender offsets their increased risk by requiring you to pay for some form of “mortgage insurance”. Depending on the loan program, this may be called private mortgage insurance (PMI), a funding fee (VA), guarantee fee (USDA), or simply mortgage insurance (FHA). The cost of each of these can vary, so be sure to ask what your options are and how each of these may affect the cost of your loan.
- Loan Term – The most common length of time for a mortgage loan is 30 years, however most loan programs offer options for shorter terms. 25 year, 20 year, 15 year, and 10 year loans are some alternatives for you to consider, but keep in mind that while a shorter-term will reduce the amount of interest that you pay over the life of the loan, but it will also require a higher monthly payment.
- Title Insurance – The title company will research the history of a property to insure against any complications in the transfer of ownership from the seller to yourself. There will be two separate policies: one for the lender and one for yourself.
- Origination Fees – These are fees charged by your lender for the service of originating your mortgage loan. These fees are common but be sure to take these into consideration when comparing interest rate quotes from lenders. A lower interest rate that comes with significantly higher origination fees may not be the right choice for your loan. Make sure to speak to a lender you trust to weigh the pros and cons.
- Home Inspection – This is not a fee associated with your mortgage loan or charged by your lender, but still something to plan for. You will want to pay a home inspector to inform you on the physical condition of the home you are considering buying.
- Appraisal – This is ordered by your mortgage lender, this fee is typically the only one your lender will have you pay before closing. While the appraiser will make note of any obvious deficiencies in the condition of the home, primarily this report is intended to establish the market value of the home. Your lender will not loan you more than the home is worth, so you want the appraised value of the home to be equal to or greater than the purchase price.
- Closing Attorney – Executing a real estate transaction must be in accordance with state and local law and the closing attorney represents the mortgage lender to make sure all the documentation is in order. They will also oversee the money changing hands and recording the transaction properly with the city and County. Fees vary, and the choice of closing attorney is typically made by either the buyer or seller – not your lender.
- Monthly Payment – In addition to the monthly principal and interest payment on your mortgage loan, you will also need to consider monthly escrow payments towards your annual homeowners’ insurance and property tax bills. You may also have monthly PMI if your down payment was less than 20%. Also keep in mind the property may have a homeowner’s association with mandatory fees. While not part of your mortgage payments your lender will still need to include this in the calculations to determine your loan approval.
- Escrow Account – The monthly escrow payments you make for your annual homeowners’ insurance and property tax bills are kept in an escrow account by your mortgage loan servicer. Rather than the homeowner needing to come up with the total amount of these bills when they come due, each monthly escrow payments made will be set aside in this account for your loan servicer to pay them when the time comes. As it is highly unlikely that the tax Bill will be due exactly 365 days from when you purchase your home, you will need to pre-fund your escrow account at closing to make sure there will be enough money when the time comes.
- Credit Score – This will have a significant impact on not only your interest rate but also the cost of your homeowner’s insurance and in some cases the cost of PMI. Some loans are available with median credit scores as low as 580, but generally speaking a score above 640 will qualify you for additional options and/or significantly better terms. To qualify for the most favorable terms and the broadest range of loan programs, a median score of 740+ is required.
While this list covers all the typical things involved with a purchase mortgage loan it is by no means 100% comprehensive. Mortgage loans for condominiums or properties with Homeowners’ Associations will often involve fees charged by those associations, and there are a few other rare situations that may have minor additional costs involved as well. As always, we recommend you speak with a mortgage professional you trust and get fully pre-approved very early in your home buying journey. They will provide you with a conservative estimate for what to expect and be able to provide legitimate reasons for any additional fees should the need arise.