Okay, more specifically, how much money do you need to qualify for a mortgage? There are different factors involved because there are so many different types of loans available. Even the very same loan program might require more or less cash to close depending upon someone’s personal situation. But this is indeed a very legitimate question and the one most often asked by home buyers.
Your first stop is talking with your loan officer to find out which loan program best suits your needs and qualifications. For instance, if you’re eligible for a VA loan and you want to come to the closing table with as little cash as possible, the VA loan is likely your best choice. There’s no down payment required for a VA loan (although you can make one if you want) and the veteran is restricted from paying certain types of closing costs. If you’re looking at a higher end home and need jumbo financing, you may be asked to make a down payment of at least 20-25% of the sales price of the home.
Your loan officer will provide the proper loan options and both of you will decide on which loan works best for your situation. Once you decide the type of loan you want, you’ll need to ask for a Loan Estimate which provides a breakdown on closing costs that you’ll be responsible for. How much are closing costs? That’s a broad question.
Closing costs will vary based upon the type of loan and where the property is located. But when you make the request for a closing cost estimate, that’s your starting point. You can also ask for a lender credit that can be used at the closing table to offset some or all of your closing costs. This can usually be accomplished with a slight upward adjustment with the interest rate selected for your loan program.
There are one-time fees associated with the loan such as money for an appraisal and credit report and title insurance, attorney and escrow fees in addition to various third-party charges. There are also recurring fees that will happen again and again as long as you own your home. Property taxes, home insurance and mortgage interest fall into this category of recurring fees.
Next, you’ll need to know about your down payment. With a VA loan there are no down payment requirements. There is no down payment needed for a USDA loan. FHA loans ask for a down payment of at least 3.5% of the sales price. For conventional loans, there is a minimum 5.0% down payment. Both Fannie Mae and Freddie Mac offer special programs that ask for a down payment of just 3.0%. Jumbo loans typically ask for a minimum down payment of 20% but there are ways to utilize two mortgages, a first and a second, to finance a jumbo purchase with less than 20% down. Your loan officer will help with that.
So far, we’ve got closing costs, both recurring and non-recurring and down payments. But there’s one more- cash reserves. Cash reserves are funds that will be sitting in your bank account after the closing has taken place. Cash reserves are calculated as the number of months of house payments. If a loan needs six months of reserves and the mortgage payment, including principal and interest, taxes and insurance, is $3,000, there will be $18,000 of reserves identified and verified.