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Down payment:
Saving funds for a down payment should be a part of an overall program to get your finances in order prior to shopping for a new home. This includes rounding up financial records, examining your spending habits and setting a budget you can live with. Remember, too, that the down payment is not the only up-front expense. Allowance for closing costs should be included in your savings budget.
How much is required?:
The down payment is usually expressed as a percentage of the overall purchased price of the home, and varies depending on the lender, the type of financing and the amount of money being lent. In the past, the typical down payment was 20%, but in recent years lenders have been willing to offer conventional financing with as Little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA), or the Federal Housing Administration (FHA), also require minimum down payments.
Private Mortgage Insurance (PMI):
Typically, if your down payment is less than 20% of the purchase price, lenders will require you the carry Private Mortgage Insurance (PMI). This insurance protects the lender in case of default and usually involves an up-front payment at closing of escrow, as well as a monthly premium. However, once you have payed off 20% of the loan, you can request the policy be canceled. Some lenders cancel the premium automatically, while others require you to make a request in writing.
Gifts:
If you are having trouble saving enough money, many lenders will allow you to use gift funds for the Down payment - as well as for the related closing costs. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating that the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your home, ask your lender about their policies regarding gifts.
Earnest money:
Buyers are usually required to deposit earnest money with the seller when they make an offer. If the offer is accepted, the earnest money is then credited towards the down payment. The amount varies widely depending on the seller and local custom, but be prepared from the outset to have funds earmarked for this purpose.
Closing costs
In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, documentary stamps, loan origianation fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs.
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