| How much down payment is needed for a home purchase? |
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With conventional loans, lenders require at least 5% of the sales price as a down payment.
There are some "zero down" programs for buyers who qualify. Under FHA insured loans the down payment is about 2.25%.
Qualifying veterans may purchase homes with zero down payment.
A good mortgage lender will be able to suggest the right loan program for you from the many that are available.
Normally buyers putting less than 20% down are required to buy mortgage insurance. To avoid mortgage insurance, some of our clients get an 80% first lien, 10% second lien, and put 10% down. The second lien is on a shorter term and higher rate.
The "80-10-10" is an excellent program for buyers who have not sold their current home, and plan to pay off the 2nd lien as soon as their home sells. |
| How much earnest money is typical? |
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There is no standard amount of deposit to submit with your offer.
I usually suggest 1% of the offer price.
In multiple offer situations, it would be wise to increase the earnest money.
After acceptance of the offer, this deposit will be delivered to the title company.
The check is cashed and held by them until closing. It is credited back to you on the closing statement. |
| What are discount points? |
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A discount point is interest paid at closing in order to lower the interest rate.
One point is 1% of the loan amount.
Discount points are a deduction on your federal income tax return as part of your home mortgage interest.
If you do not plan to keep your loan for many years, discount points are not a good idea.
If your payment is reduced by $17 by paying $2,000 in discount points, it will take 10 years to recoup the investment.
It takes about 4-5 points to lower your rate by one percentage point. |
| What is an origination fee? |
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An origination fee is also interest paid at closing in order to lower the interest rate.
One point is 1% of the loan amount.
Lenders usually charge one origination point for a new loan.
You may request a loan quote with no origination fee.
The interest rate will be slightly higher because the lender will build the fee into the rate. |
| What is an escrow account? |
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An escrow account may be set up by your lender to collect each month for your homeowners insurance and real estate taxes, which are due annually.
At the end of the year these bills will be paid on your behalf.
With a 20% down payment you are not required to have an escrow account.
In Texas, interest is not paid on escrow accounts.
At closing, about 3 months of taxes and insurance will be collected to place in this account. The reason for this is: (a) you do not make a payment the first month after closing, so these funds need to be collected for that month, and (b) the lender needs a couple of extra months in the account so that the bills can be paid before they are overdue.
At the end of each year, your escrow account is re-evaluated, taking into account any changes in your taxes or insurance, and the monthly payment is then reset for the following year. Any overage in the account will be refunded.
Texas law prohibits lenders from holding excess money in escrow accounts. |
| What is "prepaid interest" paid at closing? |
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Normally, interest is paid after it has accrued. (For example, your January 1 mortgage payment is for the month of December.)
However, at closing, interest is collected in advance from the closing date to the end of the month.
If you close on January 10, interest from January 10 through January 31 will be collected at closing. Your first payment will be due March 1, which will cover the interest accrued during February.
If you close near the end of the month, the interest paid at closing will be less than if you close near the beginning of the month.
People sometimes hear that it "costs more to close early in the month". This is not true. It is just a matter of when you pay the interest, not how much you pay. |
| What is mortgage insurance? |
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If your down payment is less than 20%, lenders normally require mortgage insurance.
Do not confuse this with mortgage life insurance, which you may obtain to pay off the mortgage in the event of your death.
This insurance is provided by private companies for the protection of your lender in the event that you default on the loan.
The premiums are added to your payment, and vary according to the size of your down payment.
If you have mortgage insurance, it would be smart to re-evaluate your loan-to-value ratio each year.
When you have reached an 80% loan-to-value ratio, the insurance can be discontinued. |
What are typical closing cost for buyers?
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Loan Related Fees
| Origination Fee |
1% |
| Discount Points |
1% per point |
| Appraisal |
$350-500 |
| Credit Report |
$85 |
| Tax Service |
$135 |
| Underwriting |
$200 |
| Data Process |
$150 |
| Flood Review |
$50 |
| Document Prep (note, deed of trust) |
$250 |
| Wire Fees |
$35 |
| Deed Restrictions |
$30 |
| Survey (size of lot determines cost) |
$350 -750 |
| Final inspection |
$100
(only on new homes) |
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Title Company Fees
| Title company fee for closing |
$200 |
| Mortgage's Title Policy |
$300
(adds you lender to title policy) |
| Recording |
$60 |
| Courier |
$35 |
| Title Policy Normally paid by seller, but may be paid by buyer |
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Prepaid and Escrows
| Interest from closing to end of month |
TBD |
| 1st Year Insurance |
TBD |
| Insurance Escrow |
(If you have an escrow account) |
| Taxes Escrow |
(If you have an escrow account) |
| HOA Dues |
(If you have HOA dues) |
| Flood Insurance |
(If needed) |
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Items Paid Prior to Closing
| Property Inspection |
$300+ |
| Pest Inspection |
$85 |
| Structural Inspection |
(If needed) |
| Septic Inspection (If needed) |
(If needed) |
| Other Inspections |
(If needed) |
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