Down Payments and Closing Costs
When you buy a home, there are several up-front costs you should be aware of, particularly down payments and closing costs.
A down payment is usually between 3% and 20% of the total cost of the home. The amount of the down payment depends on your credit history, income, the cost of the home, and the type of mortgage you choose. Some lenders also have loan options that allow for no down payment at all.
If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the bank if you don't repay your loan in full. PMI is added to your closing and monthly mortgage costs. When you apply for a home loan, many mortgages require you to also have at least two month's worth of mortgage payments saved, called reserves. However, there are mortgages that do not require reserves.
Most lenders want to know the source of your down payment and have restrictions about how much can come from gifts from your relatives. In most cases, these gifts will need to be documented. Ask your lender for more information.
Closing, or settlement, costs are fees you pay when you actually get your loan from your financial institution. These include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other settlement costs.
Closing costs generally range between 2-7% of the loan value. You'll receive an estimate from your lender after you apply for a mortgage. You must pay these costs at the time you close on your loan.