Home Buyer FAQs
1. How much of a down payment do I need to buy a home?
To buy a home, you may not need a down payment at all. There are various mortgage programs, such as the VA Home Loan Guaranty program and the USDA Rural Housing Loan, which allow for 100% financing. Additionally, U.S. municipalities often offer down payment “grants” to first-time home buyers, which can make it possible to purchase a home with no money down. Absent these programs, buyers should expect to make a minimum three percent down payment for a conventional loan; and 3.5% for an FHA-backed loan.
2. Can I use gift funds for my down payment on a mortgage?
Yes, you can use gift funds for a down payment on a mortgage. In order to use a cash gift for down payment, however, a paper trail must show the gift funds leaving the giftor’s account, and being deposited into the home buyer’s account. The cash gift should also be accompanied by a “gift letter” which states the parties involved and their relationship; the amount of the cash gift for down payment; and a statement that the gift is not actually a loan. There is no limit to the amount of monies that can be gifted to a home buyer.
3. Are there any fees when a home buyer works with a real estate agent?
No, real estate agents are “free” for home buyers; their sales commission is paid by the home seller. Furthermore, because of conflicts of interest. there are almost no situations in which it makes sense for a home buyer to employ the same real estate agent as the home seller.
4. What is Private Mortgage Insurance or PMI?
Private Mortgage Insurance (PMI) is an insurance policy which makes homeownership possible for home buyers who don’t want to make a twenty percent down payment. PMI is paid by mortgage borrowers, protecting mortgage lenders against default and foreclosure. Should a homeowner fail to repay its mortgage, the lender can “cash in” the homeowner’s PMI policy to recover its lost monies. PMI is required with conventional mortgages only, when the home buyer makes a down payment of less than 20 percent. PMI later self-cancels when the homeowner’s home equity reaches twenty percent (i.e. 80% loan-to-value). The most common form of PMI is paid monthly, bundled into the homeowner’s mortgage payment.
5. What are points? How do I know if I should buy them or not?
Points, which are formally known as Discount Points, are an optional, one-time payment which give mortgage borrowers access to “discounted” mortgage rates as compared to today’s current rates. One discount point comes at a cost of one percent of the borrowed loan amount, and typically lowers a mortgage lender’s quoted interest rate by 25 basis points (0.25%). Deciding whether to pay points is a personal decision. Home buyers with plans to sell or refinance within a few years should usually not pay discount points. For many home buyers, discount points are 100% tax-deductible in the year in which they are paid.
6. Credit score range breakdown: Fair, Good, Excellent
Mortgage credit scores are assigned by the three major credit bureaus – Experian, Equifax, and TransUnion – and scores range from 300-850. Your median credit score (i.e. the middle score) is the credit score used for your mortgage approval. If you only have two published credit scores, which is common among first-time home buyers, your credit score is the lower of your two available scores. Credit scores of 720 or higher are considered to be “Excellent”. Credit scores between 680-719 are considered to be “Good”. Credit scores between 620-679 are considered to be “Fair”. You can get a mortgage approval with credit scores of 500 or higher.