Friday, January 5, 2007

Does 100% financing mean I don't need any cash to buy a home?

Well, yes and no. 100% financing usually means your mortgage covers the total purchase price of your home, and often covers your closing costs as well. However, you will need some cash up front for your earnest money and optional inspection costs.

Let's walk through a typical 100% financing scenario...

Let's say you're buying a house for a purchase price of $193,300 and financing the total amount, including closing costs and prepaids.

Estimated closing costs (financing and closing fees) would be about $5,000 and prepaids (interest, taxes and insurance) would be about $1,700...for a total of $6,700...adding this total amount to the sale price gives a total financed purchase price of $200,000.

The most common amount allowed in financed closing costs is 3% of the purchase price. In this case that would be $6,000...leaving an additional estimated $700 for you to pay out of pocket.

This means that nearly everything is financed at closing, but you still need some cash for earnest money to submit with your offer to purchase the property. Earnest money is usually about 1-2% of the purchase price (about $2,000 in this instance), and is held in escrow for you until closing...it's the money that says you're serious about purchasing this property because this is money the seller would keep if you change your mind and back out of the transaction before closing.

If your purchase agreement is subject to an inspection, you should also budget about $350 for this cost, payable at the time of inspection at the time of the purchase agreement. If you cancel the agreement because of the inspection your earnest money will be refunded to you.

When you finance 100% of your purchase price and closing costs, most of your earnest money should be refunded to you at closing...based on the difference between estimated financed costs and actual costs at closing.

Questions? Want more information? Just let me know...we're here to help!

Everything in this example is used for illustrative purposes only, is based solely on estimates, and is not guaranteed.

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