What do I need in my piggybank to buy my first house?

 

While working on this blogpost, I asked my daughter this question (and posted it to my SnapChat story).  Her answer; $60,000.  WOW! Her answer and the SnapChat responses really got me thinking, there are a lot of misconceptions out there.

 

The real answer is that there isn’t just one answer.  It varies depending on your particular situation and your financial goals. So pull up a chair and let’s sit and talk about money. I know this isn’t always the most comfortable of topics to discuss so, just for a moment, let’s pretend that you and I are sitting on the back porch overlooking the kids playing in the yard and having this conversation over a glass of wine.

 

Many people think that they only money they need to buy a house is the down-payment.  This could not be farther from the truth. If that is all you plan for, you will find that your piggybank is going to run short during the home-buying process. There are three basic categories that your piggybank is going to have to cover during your home purchase:

 

1) upfront items

 

2) cash due at closing, and

 

3) reserves.

 

 OK, you might want to stop reading right here and just pick up the phone and call me.  That would be just fine.  This is one of the more complicated topics in mortgage lending.  I wouldn’t blame you one bit if you said to heck with this blog post …….I must talk to you in person.  Reading this will never do.  That is what I’m here for.  I get to do this hundreds of times a year. I’m here for you.  For you engineering types like my dad, read on and enjoy 🙂

 

Upfront items

 

This category is just what it sounds like.  Things you have to pay for before you even buy your house.  The first item is earnest money.  When you write a sales contract, you give the seller earnest money to show that you are a serious buyer.  This can be anywhere from $1 (though it is highly doubtful that a seller would take you seriously and they would probably have a good laugh before rejecting your offer) to name your price……there really is no limit.  Common practice says that you want the earnest money to be a large enough amount that it shows you are serious.  Your agent is your best guide for determining what amount this should be.  The good news about earnest money is that, in most cases, you get it back as a credit at the closing table.  You put the money up in good faith that you would close based on the terms of the contract.  As long as you close, that money comes back to you as a credit against what you owe at the closing table. If you do a loan where you are putting no money down (like a VA loan or USDA loan) and the seller is paying all closing costs and prepaid items then you might actually get that money back in your pocket, but in most cases it just reduces what you owe at closing.

 

Next, you are going to want to have your home inspected by a professional.  There is a range of costs on this service.  According to Mike Chamberlin of MC2 Home Inspections, “An average price for a 2,000 square foot home nationally is about $350.00-$400.00.” (you can find Mike on Twitter @mc2inspections and online at www.mc2inspectionsdenver.com).  A home inspection covers a myriad of things, but is not the same as an appraisal.

 

Once you bring in your fully executed contract (this means that you and the seller have both signed the contract and agree on all the details, subject to things like the home inspection and repairs), the lender is going to order an appraisal.  Depending on the type of property (condominium, single family residence, investment property, duplex, etc.) and type of loan (conventional, jumbo, FHA, VA, USDA, etc.) the cost of an appraisal will range from $350-$800 with most appraisal being in the $350-$450 range. If you want your appraisal done super-fast/expedited/rushed, you can expect that to add approximately another $100 to the cost. You will have to pay this cost up-front to the lender as they have to pay the appraiser.  You will have to do this even if the seller is going to pay all of your closing costs at the closing table.  This often catches people off guard.  But, because the lender has to pay the appraiser when the work is completed and not when the closing occurs, the money has to be collected before the appraisal can be ordered. The good news is that this money, like your earnest money, does get credited to you back at closing.

 

Cash Due at Closing
The biggest part of cash due at closing is usually your down-payment.  There are a few loans that don’t require a down-payment (the most common no down-payment loans are VA loans and USDA), but most will require at least a 3-5% down payment.  The percentage down is a percentage of the sales price.  For example, if you are buying a $100,000 home and you put down 3% – your down payment is $3,000.
Then there are closing costs.  These are the funds that it actually costs to obtain the loan.  The cost for the appraisal, the closing attorney or title company (depending on the state where you are buying your home), title search, title insurance, transfer taxes, and more. The seller could be paying some, all or none of these costs for you depending on what you negotiated in your sales contract and what your loan program allows.  YES, it is important to note that your loan program may limit what the seller can pay towards your closing costs.  You will want to keep this in mind as you negotiate your sales contract so you don’t leave money on the table.
Then there are the prepaid items. Prepaids are money you pay up front for real estate taxes, home owner’s insurance, flood insurance (if required), and interim interest.  Generally speaking all mortgage payments are due on the first of the month.  Since not everyone closes on the very first day of the month so that their payment comes due on the very first day of the next month, you pay interest from the day you close until the end of the month.  So you might pay a little more at closing, but it will be a little longer until your first payment.
Earlier we talked about you getting money back at closing, or at least being credited with money at closing.  Yes, it’s true.  What you bring to the table at closing is impacted by what you have paid already for earnest money and for your appraisal.
At this point, your head might be spinning a little bit and it’s probably not from the wine. I think a hypothetical example might be in order.  Let’s go back to that $100,000 example and look at an FHA loan with a 3.5% down payment, with $1,000 in earnest money, $425 in appraisal fees paid up-front, and seller paid closing costs/prepaids of $4,000 with a closing date of March 16th and a 1stpayment date of May 1st.
Proposed Loan Information
Purchase Price
 $           100,000.00
Refinance Payoff
 $                               –
Base Loan Amount
 $             96,500.00
Final Loan Amount
 $              98,188.75
Down Payment
 $                3,500.00
Appraised Value
 $           100,000.00
LTV
96.5%
Note Rate
3.500%
APR
3.894%
Loan Type
FHA
Years
30
Tax Area
Savannah
Estimated Annual Property Taxes
$1,763.48
Projected Fees
Amount
Loan Origination Fee
1.00%
$981.89
Loan Discount/Escrow Waiver Fee
0.000%
$0.00
Appraisal Fee
$425.00
Credit Report Fee
$35.00
FMHA Funding Fee
0%
$0.00
VA/FHA Funding Fee (this fee is financed)
1.75%
$1,688.75
Buydown Fee
None
$0.00
Underwriting Fee
$525.00
Document Preparation Fee
$0.00
Loan Administration Fee
$495.00
Tax Service Fee
$0.00
Flood Certification
$10.00
Attorney’s Fee
$795.00
Title Insurance
$420.00
Title Search/Abstract Fee
$0.00
Recording Fee
$80.00
City/County Tax
$0.00
State Tax Stamps
$0.00
Intangible Tax
$294.57
State Transfer Tax
$100.00
Survey
N
$0.00
Pest Inspection
$0.00
Home Warranty
$0.00
Repair/Final Inspection Fee
$0.00
GA Residential Mortgage Fee
$10.00
TOTAL ESTIMATED CLOSING COSTS
$5,860.20
Prepaid Items
Months
Interim Interest (days)
15
$141.23
Mortgage Insurance Premium
$0.00
Hazard Insurance Premium
12
$650.00
Flood Insurance Premium
0
$0.00
Hazard Insurance Escrow
3
$162.50
Mortgage Insurance Escrow
0
$0.00
Property Taxes
3
$440.87
Association Dues
0
$0.00
Flood Insurance Escrow
0
$0.00
TOTAL ESTIMATED PREPAIDS
$1,394.60
TOTAL FEES + PREPAIDS
$7,254.80
Estimated Down Payment
 $                3,500.00
Less Earnest Money & Appraisl Fee Paid
$1,425.00
Less Seller Paid Closing Costs
$4,000.00
TOTAL DUE FROM / TO BORROWER
$3,641.05
In this case, your total out of pocket would have been at least $5,066.05 and the cash due at closing would have been $3,641.05 (because you would have paid $1,000 when you wrote the sales contract and $425 when you did the appraisal).  I said at least, because you probably also paid for a home inspection.
Reserves
This is the last thing needed in your piggybank.  This is also the easiest.  It is money left over after you pay the above.  It’s what you have to pay for moving expenses, repairs, your regular bills and anything that might need to be repaired.
So that’s it.  That is what your piggybank needs to hold in order to buy a house.  $60,000 wasn’t the right answer, but it wasn’t the wrong answer either. There is no one right answer.  Your best bet is really to pick up the phone and talk to me about your individual situation. I look forward to talking to you and making an individual plan that fits your needs.
Join us next time as we explore more in the world of mortgage lending. If you have a burning question or just want to chat — I love to be social……you can reach me on Twitter (@ChrisEllaLoans), Snapchat (ChrisElla2), CyberDust (ChrisElla), emailChristyS@StarkeyMtg.com, at the office at 912.721.9400, and my website at www.LoansWithChristy.com . Find out more about me and more ways we can network (Facebook, Instagram, Twitter) at www.about.me\chrisella
As always, if you liked this article please like, share, or comment…….or all of these things; they are greatly appreciated.

Christy Soukhamneut, Area Manager

NMLSR#810728, GA LIC#32916, FL LIC#LO13828, SC LIC#MLO-810728, NC LIC# I-I 12550

Georgia Residential Mortgage Licensee

www.LoanswithChristy.com

6600 Abercorn St #105, Savannah, GA 31405 NMLSR#827864, GA Lic#58821, NC Lic# L-112550-130, SC Lic# MLB-827864, FL Lic# MLDB2394

 

EQUAL HOUSING LENDER

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