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Financial Preparations for Taking home loans in USA

Financial Preparations for USA

Taking home loans in USA

Financial preparation for taking home loans is very essential .One has to be prepared to meet lots of expenses before getting a home loan. Funds have to be saved for down payments, mortgage- insurance, closing costs, brokers commission etc.

Down payment

Saving money for down payment for a home before shopping for one is essential. The saving budget should be well adjusted after carefully scrutinizing the spending habits. Banks donot like that you go for a finance advice for these payments and insist that this should be your own money or at the most borrowed from reliable sources such as parents. Overseas the reaction against the banks is stronger. There is a reason for this. It is argued that in case of a non payment the bank has to recover this loan also apart from the home loan and in case the loan amount is decided to be higher than the value of home how shall this amount be recovered

Down payment is usually expressed as a percentage of the value of home. Earlier it used to be 20 %, but now finance advice is available where you have to give up-to only 3 %. But this will depend upon the credit reports and past repaying records. The Government aided programs give a relief from these payments by asking for 0% or a minimum payment ,but the qualifying red tape is to be thought of and tackled first. FHA (Federal Housing Administration) and VA (Veterans Affairs) are the most popular programs and for the rural people Rural housing service (RHS) does the same thing.

Mortgage Insurance

If the down payment is less than 20% then lender will ask you for PMI (Private Mortgage Insurance ). This protects the lender in case of a default. The insurance premium is to be paid and a certain fees is also needed hence finance is to be arranged for this. However once 20% of the amount has been paid off then this insurance is cancelled after informing the lender. Naturally the monthly payments are also stopped for insurance after that.


Sometimes the lenders allow the money from gifts to be used for down payments. The gift can come from family, friends or other sources but an undertaking is to be given to the lender that the gift is not to be returned. This is known as Gift letter. Even after this the lender will take a small portion of your savings as down payment.

Earnest money

The borrower has to deposit some amount at the time of getting an offer this is known as earnest money. This money is adjusted as the down payments if the deal goes through otherwise it is refunded. The amount depends upon the lender.

Closing costs

At the time of taking loan apart from the down payments one has to pay some amount as fees also which can run into thousands of dollars. Fees associated with buying or selling a home is called the closing cost. Some fees are assigned to the buyer or seller and some other are negotiable and assigned as per custom.

Buyers closing costs

In case a home is being bought the lender has to give an estimate of costs in advance. The

fees varies as per many factors. A typical list of costs to be paid by the buyer are as follows

The down payment

Loan fees (points, application fee, credit report)

Prepaid interest

Inspection fees


Mortgage insurance

Hazard insurance

Title insurance

Documentary stamps on the note

Sellers closing costs

If you are selling the house then the first payment will have to go for any loan that is left behind along with the fees etc. This fee etc is known as the closing cost. The total of these two are conveyed to the escrow officer. After paying off these two the seller finance advice will receive any proceeds from sale.

The seller closing costs can include

Broker's commission

Transfer taxes

Documentary Stamps on the Deed

Title insurance

Property taxes

Normally all these costs are negotiated as per the condition of house. It is however good to record all these negotiations to avoid any trouble later on.

Paying for points

Homebuyers often have an option of choosing a lower interest rate by paying points. A point is equal to 1% of the loan amount. Say if loan is $200000 then a point is $.2000 . AS an example one loan offer was 3.25 points at 7.5% and 0 points at 8.25 % . This means thr normal rate of 8.25 % could be reduced to 7.5% by paying at initial stage an amount equal to 3.25 points . In other words if loan is $200000 then the payment is 3250*2 = $6500 .

So many times one saves lot of money by paying reduced monthly payment due to the reduced rate of interest. If the above loan is taken then one will save $6500 in a short period of say 5 Yrs and then if the finance advice loan is for 30 years all the other saving will be the borrowers. In general the paying of points is beneficial if the borrower plans to stay on in the house for a very long period. However for short periods the interest rate reduction is not very profitable.

In USA the money paid for points is tax free. In Mortgage loan the full amount paid can be deducted in the year loan is taken . For refinancing loans the amount given for points can be deducted in full term of loan . This means that if $6500 is paid as in the example above and the loan is refinancing loan for 15 Yrs. Then an amount 0f $6500/15 ($434) can be deducted every year for the next 15 Years.


Before applying for home loan one has to save enough money to pay of certain charges. There are some amounts that can be estimated after consulting the lender companies. When finally it is decided to go for the loan all these payments should be taken as estimate in writing from the lending company . Loan officers are normally hired for these jobs and they should be able to thrash a good deal right at start.

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