|In this month’s blog series, August-The Financial Process explained, we talk about the documents you will need to fill out when buying or selling a home. Finances are never fun, but they’re essential to a smooth home sale. Let us walk you through the process!|
LOCAL MARKET UPDATE
In Berkeley County both new listings and closed sales are up since this time last year, and sales prices are up significantly from this time last year as well. In Charleston County new listings are up from this time last year, but closed homes are down and average sales price is down slightly. Overall the market is still hot. Buyers are still plenty and inventory is needed to keep up in the median price range. Median priced homes are lacking nationwide and in some parts of Charleston, causing higher priced homes to sit longer on the market and buyers who are seeking modest housing looking for longer than in the last several months.
NATIONAL MARKET UPDATE
“The slowing of inventory gains first appeared in 2019 with a decline from 6.4% growth in January to 5.8% in February,” Realtor.com writes. “It continued throughout the spring with 4.4% growth in both March and April 2.9% in May and now 2.8% in June.” -NAR Market Report
If you were asked what the most dreaded part of the home buying ( or selling ) process is, and answered the financial portion, you wouldn’t be alone. Not only are the large figures of money to be paid hard to swallow, but the paperwork too may be daunting. But they don’t have to be! Understanding the paperwork and jargon can lend peace to the process. Let’s look at the financial terms together.
The Down Payment
This is the most often associated cash payment in the home-buying process. Depending on the type of loan, the percentage of your down payment of the final home cost could range anywhere from 3-20%. For example, if the purchase price is $250,000, and you’re required to make a 5 percent down payment, you’ll have to pay $12,500.
Closing costs vary, and are determined by mortgage stamps, appraisals, attorney costs and title insurance. Closing costs can also vary from lender to lender. In addition to fees, lenders often charge points. Closing costs can be negotiated. Sometimes the buyer can negotiate with the seller to cover the closing costs or with the lender to cover closing costs by agreeing to pay a higher interest rate on your mortgage.
These expenses may include a portion of real estate taxes and homeowners insurance. With most mortgages, the lender will put real estate taxes and homeowner’s insurance in escrow. This means that those charges will be included in your monthly payment, and paid by the lender when due.
In order for taxes and insurance to be included in your monthly mortgage payment, the lender needs to collect a certain amount initially to be able to pay these fees when due. Depending on your state of residence, the lender may have to put anywhere between two and twelve months of real estate taxes in escrow.
Generally, homeowner’s insurance policies require you to pay one year in advance. The lender may also require two months worth of insurance fees to place in escrow along with the taxes.
Utility costs, or adjustments, make up a small portion of your closing costs. These costs include utility payments the seller has made in advance, that you are essentially reimbursing to them. Water, sewer and HOA fees can be examples of utility adjustments.
Lenders require buyers to have a cash reserve. This equates to two months worth of mortgage payments- principal, interest, taxes and insurance. You can keep these funds in a personal savings account, but must be able to verify their presence to the lender.
The most typical cash reserve requirement is two months. That means that you must have sufficient reserves to cover your first two months of mortgage payments. So if your principal, interest, taxes, and insurance (PITI) come to $1,500 per month, the reserve requirement will be $3,000.
IMPORTANT FINANCIAL TERMS:
Cash reserves – two months worth of mortgage payments placed in a savings account or checking account by the buyer, as required by the lender, in order to ensure they can make payments on their new home.
Closing costs – In addition to the final price of a home, there are also closing costs, which will typically make up about two to five percent of the purchase price, not including the down payment. Examples of closings costs include loan processing costs, title insurance, and excise tax.
Equity – In homeownership, equity refers to how much of your home you actually own—meaning how much of the principal you’ve paid off. The more equity you have, the more financial flexibility you have, as you can refinance against whatever equity you’ve built. Put another way, equity is the difference between the fair market value of the home and the unpaid balance of the mortgage. If you have a $200,000 home, and you still owe $150,000 on it, you have $50,000 in equity.
Escrow – an account that the lender sets up that receives monthly payments from the buyer.
Interest – the cost of borrowing money for a home. Interest is combined with principal to determine monthly mortgage payments. Interest can either be paid monthly or tacked on at the end as a “balloon payment”.
Principal – the amount of money borrowed to purchase a home. The mortgage payment is the principal combined with interest.
Private mortgage insurance – (PMI) is an insurance premium that the buyer pays to the lender in order to protect the lender from default on a mortgage. These insurance payments typically end once the buyer builds up 20% equity in a home.
Title insurance – often required as part of the closing costs. This cost overs research into public records to ensure that the title is free and clear, and ready for sale. This is helpful should you find later on the home you purchased has liens or other clouds on the title.
Mortgage stamps – government taxes collected based on a percentage of your mortgage loan amount.
If you have any questions about the above terms or financial processes, contact us for more information!
Looking for a lender? Call James Sineath at Sweetgrass Capital to help get you started in the home buying process. The Sweetgrass Capital team is ready to help you on your new journey today. Contact James at Sweetgrass Capital