Since being a realtor, I've learned that there's a little unclarity about the difference between down payment and closing costs. They're not the same thing, but are their own separate entity.
What is a down payment and how does it apply to the purchase of your home?
A down payment is the amount of money you pay towards getting in your house. Usually ranges from 3 to 20% of the sales price of the home you're looking to purchase. The amount of down payment you have to pay for your home depends on the type of mortgage loan you have been approved for. FHA loans have a down payment as low as 3.5% while conventional loans can be up to 20% down.
Unlike closing costs, your down payment goes towards the purchase of your home. For example, the sale price of your home is $399,900 and you're required to make a down payment of 3.5% (which equals $13,996.50). You would take that amount and subtract it from your sales price and that's what your total amount of your loan will be.
The good thing about down payments is sometimes you have the option to get down payment assistance from some federal grants, if your mortgage company is affiliated with them and/or you're approved. Normally your credit score will need to be over 640 in order to get down payment assistance.
What are closing costs and what is it used for?
Closing costs are processing fees you pay to your lender. Closing costs can make up 3-6% of the price of the home. Lenders charge fees in exchange for creating the loan. Remember: closing costs do NOT include your down payment.
Closing costs are paid by both the buyer and the seller, however, the buyer usually pays most of them. Remember: everything is negotiable. You can negotiate with the seller to get them to help with covering some of your closing costs.
What do closing costs include? Closing costs can include, but are not limited to:
Application fee
Closing Attorney fees
Credit report fee
Escrow deposit
Flood Determination and Monitoring Fee
Homeowners insurance
Lead-based Paint Inspection
Title Insurance
Origination Fee
Pest Inspection
Buying Down Points
Prepaid Interest
Private Mortgage Insurance
Property Appraisal Fee
Property Tax
Recording Fee
Survey Fee
Title Search Fee
Transfer Tax Fee
Underwriting Fee
I hope this helps you understand more about the difference between down payment and closing costs.
As always, happy house hunting.
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