Before shopping for a home, take the time to clarify what you qualify for, and how much cash you will need for closing. With these questions answered, you'll fee confident in selecting your home. Your lender will supply a mortgage approval letter to submit with your offer. Here are some frequently asked questions:

How much down payment is needed for a home purchase?

• Typically buyers put down about 5% to %20% cash towards the purchase of their home.
• For FHA insured loans the down payment is about 2.25%.
• Zero down loans are available for qualifying veterans.
• Normally, buyers putting less than 20% down are required to buy mortgage insurance to protect the lender.
• To avoid mortgage insurance, buyers may put 10% down, and get a 10% second lien (an 80-10-10 loan). The second lien has a shorter term and higher rate.
• The "80-10-10" may be a good program for buyers who have not sold their current home, and plan to pay off the 2nd lien as soon as their home sells.

How much earnest money is typical?

• While there is no required amount of deposit to submit with your offer, I usually suggest 1% of the offer price.
• In multiple offer situations, you may want to increase the earnest money.
• After acceptance of the offer, the earnest money check will be delivered to the title company.
• The check is cashed and held by the title company until closing. You will receive a credit for it on your closing statement.

What are points, and should you pay them?

• One discount point is equal to 1% of the loan amount.
• A discount point is interest paid at up front, at the beginning of the loan. The effect is to lower the interest rate of the loan.
• Discount points are a deduction on your federal income tax return, since they are home mortgage interest.
• If you do not plan to keep your loan for many years, discount points are not a good idea.
• If your payment is reduced by $17 by paying $2,000 in discount points, it will take 10 years to recoup the investment.
• It usually takes about 4-5 points to lower your rate by one percentage point.

What is an origination fee, and should you pay it?

• An origination fee is also interest paid at closing in order to lower the interest rate.
• One origination point is equal to 1% of the loan amount.
• Lenders usually charge one origination point for a new loan.
• You may request a loan quote with no origination fee. The interest rate will be slightly higher because the lender will build the fee into the rate.

What is an escrow account?

• An escrow account is a little savings account that may be required by your lender.
• Monthly reserves are placed in the account for your homeowners insurance and real estate taxes.
• At the end of the year these bills will be paid on your behalf by the lender.
• With a 20% down payment you may not be required to have an escrow account. You may set aside funds on your own to pay taxes and insurance when they are due.
• In Texas, interest is not paid on escrow accounts. Texas law prohibits lenders from holding excess money in escrow accounts.

More on the escrow account.

• At closing, about 3 months of taxes and insurance will be collected to place in this account.
• This will cover the first month deposit, since you do not make a payment the first month after closing. In addition, the lender needs a couple of extra months in the account so that bills can be paid on time.
• At the end of each year, the escrow account is re-evaluated, reflecting any changes in your taxes and insurance.
• The monthly payment is reset for the following year so that the right amount is collected. Any overage in the account will be refunded.

What is "prepaid interest"?

• With mortgage loans, interest is paid after it has accrued. (Meaning, your January 1 mortgage payment is for the month of December.)
• The exception to this rule is at closing, where interest is collected in advance from the closing date to the end of the month.
• If you close on January 10, interest from January 10 through January 31 will be collected at closing.
• Your first payment will be due March 1, which will cover the interest accrued during February.
• If you close near the end of the month, the interest paid at closing will be less than if you close near the beginning of the month.
• People sometimes think that it "costs more to close early in the month". Not true. It is just a matter of when you pay the interest, not how much you pay.

Wil I need mortgage insurance?

• If your down payment is less than 20%, lenders normally require mortgage insurance.
• Do not confuse this with mortgage life insurance, which you may obtain to pay off the mortgage in the event of your death.
• This insurance is provided by private companies for the protection of the lender if you default on the loan.
• The mortgage insurance premiums are added to your payment, and vary according to the size of your down payment.
• If you have mortgage insurance, it would be smart to re-evaluate your loan-to-value ratio each year.
• When you have reached an 80% loan-to-value ratio, the insurance can be discontinued.

What are typical closing costs for buyers?