November 20, 2020
The amount of planning and saving time you give yourself ahead of your home loan application is very important. Without enough lead time to save for your up front costs and prepare your credit you may fill out an application without being truly ready. And part of being ready is understanding what costs you may be responsible for up front.
Do you know what to anticipate needing to have saved for your new loan? There are two important areas to begin with–your down payment, and the FHA Up-Front Mortgage Insurance Premium which is part of your closing costs.
Both the down payment and the UFMIP calculations require at least a rough estimate of what the asking price of the home and/or the amount of the mortgage might be; you can ballpark the price of the home and run the calculations to get an estimate of what you are required to save.
In the case of the Up-Front Mortgage Insurance Premium, your cost will be a percentage of the loan amount–1.75% at the time of this writing. But one important feature to remember about the Up-Front Mortgage Insurance Premium is that you do not have to pay it in cash up front at closing time.
Borrowers have the option to include the premium in the loan amount instead. What’s the catch? You must either pay the entire amount in cash on closing day OR finance the entire amount into the mortgage. You can’t pay part in cash and finance the rest.
Some borrowers might choose to finance the premium just to reduce their up front costs, but others may finance it so they can pay for other closing costs in cash such as purchasing discount points to reduce the amount of interest on the mortgage.
The other expense you’ll need to save up for is the down payment, which is 3.5%. You cannot finance the down payment, but some borrowers choose to apply for local down payment assistance programs that can help offset some or all of the down payment cost to the borrower up front.
You can also get down payment gifts from a friend, family member, employer, etc.
These gifts must be given to the borrower in a manner proscribed by the lender–ask your loan officer how down payment gifts must be submitted sourced, and verified. If your gift-givers don’t follow the lender’s requirements you may not be permitted to use the funds for your loan transaction.
The reason for these rules? Down payment money cannot come from certain sources such as credit card cash advances, payday loans, pink slip loans, etc. The lender is required to make sure your down payment does NOT come from any prohibited sources.
Ask a loan officer about these procedures if you aren’t sure how to go about accepting down payment gifts.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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