Today in this video, we’re going to talk about your down payment versus your closing costs. What the difference is and why you need to have both in cash money in today’s market. Check it out.
Down Payment vs Closing Costs
Hi, I’m Rhonda Burgess and I’m a real estate broker and mortgage underwriter here in the Nashville Tennessee area. And my firm is Southern living Realty partners. Okay. Today, we’re going to talk about your down payment vs closing costs because a lot of people think they’re the same thing or they get them confused or they don’t understand what we’d be saying.
When we talk about, you know, cash is king and you need money in this market, in this real estate market, if you’re gonna you know, if you want to buy a house, you, you gonna have to have some money and you need the money for your own down payment and your own closing costs.
Okay. So first let’s talk about down payment is just like a down payment on a car. It’s just like the down payment on your layaway. Do they still do layaway?
So, but anyway, down payment, if you are not getting a 100% loan, 100% financing, then you have to make a down payment in order to get your mortgage in order to buy your house. Okay. So if you’re getting a 95% loan, you’ve got to put 5% down. That’s the only most of your conventionals. If you’re going FHA, you’re using an FHA loan is normally 97.5%. So you’re going to need three and a half percent down.
When I say three and a half percent, I mean, three and a half percent of your purchase price, 5% of the purchase price, 10%, 20%, whatever the down payment is, is a percentage of the cost of the house. So let me use an even number $300,000.
If you’ve got to put down 5% on a $300,000 property, that’s $15,000. That’s down payment that goes down on the loan. Your down payment reduces the risk for the lender.
Just remember this all mortgage underwriting is based on risk. Okay? All credit is based on risk is how, how risky are you? Do I feel that you’re going to default on this loan, meaning you’re not going to pay it. You’re going to stop paying it. You’re going to quit. For some reason, if I feel you’re more of a risk or you don’t qualify for a percent program, then you have to put money down.
That same example, $300,000, 10% down is $30,000. 20% down is $60,000. The more you put down the lesser, the risk to the lender, to the bank, to the mortgage company. So some loans will require or a down payment because they want you to have some skin in the game. So if you don’t qualify for a hundred percent loan, just know that the down payment is going to lower your risk.
Not to say that you’re still not going to have to pay private mortgage, which insures the lender. If you default, they’re going to get their money back. If you skip out on this mortgage, if you don’t pay this mortgage, the PMI company, the private mortgage company will pay your lender back. You may have to put down a down payment and still have mortgage insurance. Okay?
That’s how it goes on FHA. Even if you put down your three and a half percent minimum, there is still mortgage insurance in there. Okay? A lot of the hundred percent programs have some type of guaranteed fee or PMI is just maybe a different way of saying it. It may be a little, well, some may be a lower cost than others, but believe me, you still have PMI in that loan.
The only way to buy a house and get around having PMI is if you’re putting down 20% or more on the house or you’re paying cash, there’s just really no other way around.
Please consider subscribing to the channel. If you find this information helpful and share the video with someone and it may help them too. Thank you.
Okay. Now let’s talk about closing costs. There are closing costs on every loan. Every loan let’s get this straight. Everybody gets paid in the transaction when you buy a house, okay. I’ve told y’all before, right?
And we was talking about insurance and why you cannot have no judgements and stuff because the title company, the title company, the, or the attorney, whoever is closing your loan, they’re going to do a search on you to make sure that you don’t have any other judgements. You know, whatever bankruptcy is, anything like this, they’re going to do a check on you.
Also, they get paid for that. They’re the title company, the attorney, they’re the people who handle all the paperwork. They make sure that there’s no leans left on the seller side of the transaction. You know, they could have tax liens. They could have mechanics lanes. It’s a whole lot of stuff that goes into buying a house and being able to actually close on the house.
Okay. So the title attorney does all of that work. The title company does all of that work. Their underwriter is underwriting you once they do the search, they’re underwriting the property. Once they get the search back on the sellers, there’s a lot of moving parts in there.
Not only that they handled, they get the paperwork and the money from your lender, the title attorney does. Okay. So then they’re the ones who dole out the money. Make sure this gets paid out, that gets paid out and make sure that you can get a clear title.
So your title company, there’s title insurance that needs to be paid for. There’s a search fee that needs to be paid for there’s the actual closing or settlement fee way. Everybody gets together at the table. Sign all their little papers you paying for all of that. Okay. That then a part of your mortgage, there’s some other services just besides the underwriting fee, your lender’s gonna gonna pay for gonna charge you for the tax service fee, the tax service.
Just make sure that all the taxes and everything that I do on that property have been paid up because they will not land on a property that has tax liens and everything on it. Anything that’ll get in front of your lender, having the first position. I just talked about second mortgages. I’m talking about now, your first mortgage of your main position is your first mortgage.
So anything that would get in front of that mortgage company being in the first position, meaning if they got a foreclose on you, they got deals. They the first one in line, they going to get any money. They going to get the house, they going to get whatever. Okay. So anything that prevents you are more, you just coming from being in the first position. That’s a no-no. Okay.
So you’re going to have a tax service fee. You’re going to have a flood cert fee. I know the flood certification. You may be on a Hill and it may take Jesus coming back for that house to flood, but you know what, they going to double check and make sure it’s not in a flood zone and that you do not have to have flood insurance. Okay.
And then if you do have flood insurance, they’re going to make sure that the coverage that show insurance may man rights will cover their interest in that house. So the flood insurance has got to be enough to pay for you know, replacing that house if it, if it floods. So you got an underwriting fee to underwrite, it gotta get paid to process. It got to get paid. Everybody got to get paid in here. Okay. And then you got your flood cert and you got your tax certification. There’s a lot of fees in here.
Okay. Then if you have an escrow on your account, meaning you have an account, they set up a savings account to pay for your taxes and insurance every month. And you’re paying into that escrow account every month, right? So initially they’ve got to put money in there. That’s your money? That’s part of your closing costs.
So normally they got to put like three months worth of homeowners plus pay a year’s worth of homeowners insurance upfront. So normally when you close, you got 15 months worth for homeowners insurance in there, you got to pay for that. They’re going to put like another six, seven months worth of property taxes, city and County. If you have them in your escrow account, you got to pay for that. Okay?
So once we get through underwriting fees and processing fees, and let’s say, you, you want the buy down your rate. And there was a discount point that you had to pay, which is normally 1% of the loan, or maybe you had to pay a half upon a discount to get that, to get the interest rate down to where you would qualify.
Sometimes, you know, this is a common misconception. A lot of times when you pay in a discount fee, maybe you’re paying a half, a point, a point, a point and a half, two points, whatever. A lot of times you got to pay that fee to get the interest rate down, to make your DTI work.
Sometimes it’s not a choice where people said, well, I don’t want to pay nothing. You know, interest rate. You know, I look on bank rate and the interest rate today was three. Well that’s for somebody that maybe it’s putting 20% down with a 750 credit score. That’s not necessarily your rate.
And to get you to a rate where your numbers work, sometimes they have to, you have to pay a discount. They have to pay to bring your interest rate down. So you need to be prepared for this. So that’s part of your closing costs, your discount fees, underwriting fees, setting up that escrow. Then your title attorney got to get paid for everything that they do okay.
With paying a whole year’s worth of homeowners upfront plus another three months. So that’s 15 months worth of homeowners insurance.
So let me give you an example. If your, if your homeowners insurance is $1,500 a year, you got that’s part of your closing costs. Okay? So you paying that upfront too. So when you come to closing, you may have to pay yoke your down payment, plus your closing costs. There’s, you know, you’re going to have to bring this money to the table.
I’m just, there’s just no other way around it. You’re going to have to bring this money to the table. It may can be a gift. It may can be a grant. It may be something, but just know that you’re going to have closing costs regardless of what your down payment is.
And the two are separate. One has nothing to do with the other because the down payment is required for you to even get the loan. The down the closing cost is whatever. Everybody pays on a loan to close it.
And then finally, on the closing costs, you going to have to pay your state tax stamps. I call it like sales tax. Anytime you buy a house, you gotta pay the government. You, it may be just state and County or whatever. However y’all do. Y’all stay tax stamps. You know, here in Tennessee, it’ll be listed as state and County.
You know, most of the time they both say County, but one state one’s County and you’re going to have to pay sales tax. When you buy a house, just like when you buy a car, you got to pay sales tax, you got to do sales tax here.
And then there’s other little miscellaneous stuff that could be in your clothes and cops like maybe you’re, you’re buying a one-year home warranty on the house, you know, nobody’s paying for it, but you, you going to have to pay for that.
So normally your closing costs, I would, I would just budget me personally, anywhere from 3.5% to 6%, because it depends what time of the year you close. And you may have to put more or less money in that escrow account, depending on how many months is left before the tax bill is due. There’s a lot of moving, moving figures here. Okay.
So that’s one thing that you need to just account for and know that your closing costs don’t have nothing to do with your down payment. And again, your closing costs could be anywhere from three and a half to 6% of the purchase price.
Everything is based on the purchase price, your down payment amount, plus your closing costs.
Again, my name is Rhonda Burgess and I’m a real estate broker and mortgage underwriter here in the Nashville Tennessee area.
Please consider subscribing to the channel and give the video a thumbs up. If any of this has helped you and share it with others who may need the help when it comes to buying their first house.
Thank you. And as always have a blessed day.