Mortgage 101: What’s in a down payment?

Mike Miles from Fountain Mortgage walks you through the mortgage process.

I remember when I purchased my first home 16 years ago. Back then, life was significantly different for me, however the home buying process was nearly the same, just less technology-forward than our industry is now. While that aspect has changed in huge, positive ways, the actual home buying and financing processes have gone mostly unchanged. You find a home you like, make an offer, go to a contract, and close with cash funds or a mortgage loan.

When most people think of a down payment, they think of the amount of money they’ll need to put down to meet loan-to-value requirements when purchasing a residence. So, you might ask yourself what else is included in my down payment? Here is a list of items that are typical costs included in the down payment of almost every purchase transaction, plus when they’re due and payable:

  1. Home inspection (paid at time of inspection – usually after initial contract agreement and before
    closing date)
  2. Home appraisal (paid at time of order – usually after home inspection and any contract re-negotiations are completed)
  3. Equity – a percentage of the home price paid in a lump sum on closing date
  4. Prepaids – prepaid interest, home insurance and tax escrow deposits
  5. Third party costs – underwriting, title insurance, government charges, etc.

Items three through five are paid at closing as part of the entire down payment. What most new buyers aren’t aware of, however, is that the seller is able to pay for some or all of items four (pre-paids) and five (third-party costs) on behalf of the buyer. The trick is that you must be aware of this when you make your initial offer. Unfortunately, you’re not allowed to renegotiate for these to be paid by the seller if you both already agreed to initial contract terms which may have excluded this as a provision. The reason for this is that it could be interpreted as an inducement to buy, something not allowed in today’s lending guidelines. As I mentioned earlier, I bought my first home 16 years ago and at the time I didn’t know this.

On average, most third-party costs total between $1,500 and $2,200 (depending on the loan amount) and prepaids total about $2,000 (depending on the loan amount and home purchase price). I could have used that extra $4,000 after I purchased my home because I totally forgot about furnishings for my new house, some light work I wanted completed, and the purchase of appliances I needed (mainly a washer and dryer). Having a great loan officer on your side is important, and it’s a mistake to think every loan officer or lending company always dutifully prepares home buyers for these types of things. Make sure you’re selecting someone who will willingly itemize your entire down payment for you before you make an offer on a home. Both you and your real estate agent will appreciate it.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268