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Day 4: Qualifying Income
Day 5: Debt-to-Income
Day 6: Review, Reflect, Relax.
Day 7: Weekly Inspiration
Day 8: Your Character
Today’s Easy Financial Task: Determine how much money you have for a home purchase.
How to rock this task:
- Read the definition of capital.
- Learn the difference between closing costs, down payments, and cash reserves.
- Figure out how much capital you have available for a home.
- Use the SmartAsset Mortgage Calculator to get an idea of how much money you need.
Welcome to the 9th day of the LRC: Homebuying Edition!
Today we’re talkin’ about capital — dollars, dineros, the big bucks.
The capital element of the 5 C’s stands for the liquid assets you use for your home purchase. Liquid assets are assets you can quickly turn into cash and include physical cash, money in deposit accounts, stocks, bonds and CDs. On the other hand, jewelry or property are examples of non-liquid assets.
The capital you have is used for your down payment, closing costs, and cash reserves.
Let’s discuss what these three things are:
Your down payment is the upfront money you give for the real estate transaction. The down payment required for a mortgage depends on the loan. A down payment generally ranges from 3% to 20%. We’ll talk about various loan programs in tomorrow’s task!
Closing costs are necessary to complete a real estate transaction. Closing costs typically cost anywhere from 2% to 6% of the home purchase price. There are several different expenses that are under the “closing costs” umbrella. Some of them are situational. Here’s an overview of the most common expenses:
- Lender origination fees: Fees lenders charge to process your loan.
- Discount points: An extra cost you may pay upfront to lower your interest rate.
- Title search and title insurance fees: Before buying a home, a title search is done to make sure no one else has a claim on the property. Title insurance is coverage for you and the lender in case someone should pop up in the future and say they own your new home.
- Credit report fees: Lenders charge you for the credit report they pull.
- Appraisal fees: An appraisal is done to determine the value of the home to make sure the lender is lending an appropriate amount. We’ll talk more about appraisals next week.
- Inspection fees: Home inspections are an important process that you don’t want to penny pinch on. Inspections are what alert you to problems with the home before you buy it. I learned this the hard way when a house that I was going to buy was FULL of problems. I recommend getting your inspection FIRST, then the appraisal. If the inspection shows something is seriously wrong with the house, you don't want to pay the extra money for an appraisal.
- Transfer taxes: Some states charge transfer and recordation taxes when you transfer ownership of a property from one person to another.
- Upfront mortgage insurance: If you pay less than 20% down on a home, there’s typically some sort of mortgage insurance that may be charged upfront, and then on a monthly basis to cover the lender in case you default. (We’ll discuss this more later.)
- Homeowners insurance: Homeowners insurance is protection for your home. Generally, lenders want to see you have insurance at closing.
- Attorney fees: In some states, an attorney is required. In others, they are not. If you use an attorney, they will represent you in the transaction.
These fees can add up, but there’s a bit of good news. For some mortgages, your seller is allowed to contribute to your closing costs, which is called a seller concession or seller’s assist.
Seller concessions (or seller’s assist) can be negotiated into your deal to relieve you of having to pay all of these costs out of pocket.
Cash reserves is additional cash you have beyond what’s needed for the down payment and closing costs. This is usually several months worth of mortgage payments that you have saved to show lenders you’ll be able to handle the mortgage if you run into financial trouble. The cash reserves you need will depend on your situation. Having good credit and a low debt-to-income ratio can help you here. For example, borrowers with a score of 640+ and debt-to-income below 50% typically don’t need cash reserves.
Why is having capital important?
The more money you have, the better. Yes — there are mortgage programs that may require little money down upfront, but putting more money down has its benefits. Here are a few:
- It can reduce your interest rate. A low-interest rate can save you money over the course of your loan.
- A higher down payment can also decrease your monthly payments. Putting more money down upfront means you owe less money on a loan. This reduces your monthly payment.
- It can eliminate mortgage insurance. We’ll cover what mortgage insurance is in detail next week. For an overview, mortgage insurance is an extra cost you pay if you put less than 20% down on a home.
Today’s task is to run your numbers. Figure out how much capital you have for a down payment, closing costs, and cash reserves.
The SmartAsset Mortgage Calculator here is an AWESOME tool you can use to find out how much home you can afford, given the capital you have. The calculator breaks down estimated costs and how much capital you may need.
DON’T GET DISCOURAGED: The money you need may seem high at first, but there are mortgage products that require less money down. There are also various programs that we’ll cover that may be able to help you cover additional costs.
After reviewing what cash you have and what cash you may need, get excited for tomorrow’s task! Tomorrow we’re going to run through the details of some popular mortgage products.
Any questions? Leave a comment below. Remember to reach out to your partners. Encourage each other throughout the Challenge. Check into the Dream Catchers: LIVE RICHER group as well.
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P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.
P.P.P.S. Don’t forget to get your free Live Richer Challenge: Homebuying Edition Starter Kit. Download it HERE.