Now that we've discussed saving up for your first home, let's explore what you'll need to spend. There's the listing price and then there's everything it takes to get there. Let's map it out and break it down. After all, buying a home may be the most significant purchase you ever make.
If you're new to real estate, terms like down payment, escrow, and closing costs may be confusing. If your budget is already lean, it may seem impossible.
You've saved and planned and budgeted and trimmed. You've done the house tours, made an offer, and now want to get down to brass tacks. The list price of a home is informative, and a 30-year mortgage tells you what you'll owe over three decades, but many buyers want a clearer sense of what expenses go into owning a home each month.
To decide how much house you can afford, you'll want to consider your household income, ongoing debts, and what kind of savings you have available.
Most people don't have the total cost of a home — often hundreds of thousands of dollars or more — on hand. Instead of paying in full, buyers take out a mortgage, a loan used to purchase a home. In a mortgage, the property is collateral for the loan. The buyer owns the property outright after the mortgage is paid off, often in 30 years but sometimes in 20 or 15 years.
Discover more about the home purchase loan process
What is a down payment?
A down payment is usually a percentage of the total price. When included with a mortgage loan, the down payment reduces the amount owed to the lender. That reduces the interest paid during the loan's term and can lower the monthly payment amounts.
Just how much do you need for a down payment?
The classic answer from previous generations would be that a downpayment of 20% is required to qualify for a conventional mortgage loan to buy a home. While the cost of houses has undoubtedly risen over time, there have been some changes, including down payments, that can make things easier.
Some conventional mortgages require far less than a 20% down payment. There are also loan programs from the government — including FHA loans, VA loans, and USDA loans, that require low or no down payments if you qualify.
Fremont Bank has low down payment options available with as little as 3% down for first-time homebuyers.
What about monetary gifts? Can I use gift funds for a down payment?
If you've been saving and saving, a generous parent or family member offering a significant amount of money to boost your down payment can be a tremendous help. Typically, monetary gifts over time, say $100 for your birthday, don't need to be disclosed. But gifts exceeding half your household's monthly income (a one-time $2,000 gift if you typically bring in $3,500/month) may require documentation or explanation.
Using a gift? A lender will want to know:
- Who gave you the money? Typically, a gift is required to be from an approved relationship, like a parent, child, aunt, uncle, grandparent, or fiancé.
- Is the money a gift or a loan? Your gift giver will be asked to document that repayment is not expected, and you will need to provide a gift letter.
- Will the property be your primary residence? A downpayment for a vacation home or investment property typically cannot include gift money.
If it's OK to use, the benefits of a gift are manifold. They can help:
- Lower your monthly costs by allowing you to borrow less.
- Make a more expensive home within your budget by helping you hit a needed percentage down payment for the relevant mortgage.
- Get you to your needed down payment faster.
If the funds have been in your account for more than 60 days, they may be considered seasoned eliminating the need for a gift letter or paper trail. Every investor has different rules they follow.
Down payment assistance programs
It's reasonable to wonder how you'll save 20% if you don't want to move to a rural area and don't have a family member who can gift you money. Don't fret; you still have options.
One such option is a down payment assistance program. These programs are designed primarily for first-time homebuyers. DPAs offer loans, grants, and matched savings that homebuyers can use toward the down payment for a house. Some also include help with closing costs. Eligibility is typically determined by household income and credit history.
Most of these programs are provided at the local or state government level. The state of California has down payment assistance options such as CalHFA.
A mortgage loan officer, like the specialists at Fremont Bank, can help you understand the different options and which ones may work for you.
After I've bought a home, what am I paying for each month?
Mortgage payment
- Principal, which references what you owe — both the original amount of the loan and the balance after each payment.
- Interest is set by your mortgage terms; the rate may be fixed or variable.
You may have heard the term amortization. What this means is that, initially, your mortgage payments will cover mainly the interest. Over time, more of the payment goes toward reducing the principal. This calculation is designed to pay off the loan in full at the end of the loan term.
Property taxes
Property taxes are assessed fees based on the value of a property and imposed by state and local government taxing bodies (like schools, counties, districts, etc.) to pay for services used by constituents and projects. Property taxes vary between states and even more locally. Generally, property taxes are assessed on a two-year cycle and factor in value and the tax rate.
A general rule of thumb is to multiply the purchase price by 1.25% to provide a rough estimate of property taxes. However, it can be much more than that in some counties. Researching county effective tax rates is a more foolproof way to estimate. Check the listings of homes you’re considering for recent tax information or talk to your Real Estate Agent.
Homeowners insurance
Most lenders require homeowners insurance, which covers damage from catastrophes and disasters like fires and storms. Some lenders will include homeowners insurance payments in your escrow account.
With surging natural disasters such as flooding and fires, California is seeing insurance premiums go up. Establishing an escrow account helps many homeowners budget for these two costs throughout the year, rather than the annual or biannual installments.
Mortgage insurance
If your down payment was less than 20%, you may need to factor in monthly mortgage insurance payments, which protects the lender against loan default. If your loan is a conventional mortgage, that insurance can be canceled once you've built up enough equity in your home. Other mortgages, like FHA loans, may require mortgage insurance for the duration.
Escrow or impound Account
Property taxes and other fees may be collected and paid by your lender via an escrow or impound account set up through your lender.
In this case, the lender holds the money paid into escrow each month and then pays the property tax bill when it's due. The benefit is you pay a smaller amount each month rather than a single large bill. An escrow account may be required by law or by your lender, or you can also ask for a voluntary one.
Your monthly payment is typically the next largest cost of homeownership after a downpayment. At Fremont Bank, we have flexible payment options such as Interest Only or discounted rates to help soften the cost of homeownership.
Homebuying is exciting. It's also a lot to process! Have more questions? We're experts in the homebuying process and offer local experience navigating the housing market and mortgage process.
Contact a mortgage expert today (877) 528-1481, option 4 to see what you qualify for. We’d be thrilled to help you attain homeownership.
This article is part of a First Time Homebuying series covering everything you’ll need to know before purchasing your new home.
- Saving for homeownership
- The cost of homeownership
- Shopping for a home
- Homeownership eligibility
- Loan options
- The home purchase process:
