1. HOW DO I KNOW IF I'M READY TO BUY A HOME? If you can answer "yes" to these questions, you are probably ready to buy your own home.
- Do I have a steady source of income (usually a job)? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few outstanding long-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
Start by thinking about your situation. Are you ready to buy a home? How much can you afford in a monthly mortgage payment (see Question 4 for help)? How much space do you need? What areas of town do you like? After you answer these questions, make a "To Do" list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the "Homes" section of the newspaper.3. HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
The two don't really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. However, by renting, you lose the opportunities to build equity, to take advantage of tax benefits, and to protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a mortgage payment, you are building equity. That's an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. Given the freedom, stability, and security of owning your own home, they are worth it.
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. The lender also considers cash available for down payment, closing costs, and credit history, etc. when determining your maximum loan amount.5. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
Your home should fit the way you live with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities - things like location and size. Should the house be close to certain schools, to your job, to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a “wish list.” Minimum requirements are things that a house must have for you to consider it, while a "wish list" covers things that you'd like to have but aren't essential.
6. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?
Select a community that will allow you to best live your daily life. Many people choose communities based on schools. Do you want access to shopping and public transportation? Is access to local facilities like libraries and museums important to you? Or do you prefer the peace and quiet of a rural community? When you find places that you like, talk to people that live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighborhood where you feel comfortable.7. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN NEIGHBORHOODS?
Immediately contact the U.S. Department of Housing and Urban Development (HUD) if you ever feel excluded from a neighborhood or particular house. Also, contact HUD if you believe you are being discriminated against on the basis of race, color, religion, sex, nationality, familial status, or disability. HUD's Office of Fair Housing has a hotline for reporting incidents of discrimination: 1-800-669-9777 (and1-800-927-9275 for the hearing impaired).8. HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?
You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent also may be knowledgeable about schools in the area.9. HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?
Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You also may want to visit the local library. It can be an excellent source for information on local events and resources, and the librarians will probably be able to answer many of the questions you have.10. HOW CAN I FIND OUT THE AMOUNTS HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?
Your real estate agent can give you a ballpark figure by showing you comparable listings. If you are working with a REALTOR, they may have access to comparable sales maintained on a database.11. HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?
The total amount of the previous year's property taxes is usually included in the listing information. If it's not, ask the seller for a tax receipt or contact the local assessor's office. Tax rates can change from year to year, so these figures may be approximate.12. WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?
Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities.13. IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?
There isn't a definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older homes, however, shouldn't mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don't want to worry initially about upkeep and repairs.14. WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
In addition to comparing the home to your minimum requirement and wish lists, use the HUD Home Scorecard and consider the following:
- Is there enough room for both the present and the future?
- Are there enough bedrooms and bathrooms?
- Is the house structurally sound?
- Do the mechanical systems and appliances work?
- Is the yard big enough?
- Do you like the floor plan?
- Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions.)
- Does anything need to be repaired or replaced? Will the seller repair or replace the items?
- Imagine the house in good and bad weather and in each season. Will you be happy with it year-round?
Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional standpoint.15. WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller's or real estate agent's answers are clear and complete. Ask questions until you understand all of the information they've given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. The HUD Home Scorecard can help you develop your question list.16. HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?
If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don't hesitate to return for a second look. Use the HUD Home Scorecard to organize your photos and notes for each house.17. HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
There isn't a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you're looking for. It will help avoid wasting your time.
18. WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN INSPECTION FIGURE IN THE PURCHASE OF A HOME?
An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of only repairs that are needed.
The inspector does not evaluate whether or not you're getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing, waste disposal, water heater, insulation and ventilation, HVAC system, water source and quality, potential presence of pests, foundation, doors, windows, ceilings, walls, floors, and roof. Be sure to hire a home inspector that is qualified and experienced.
It's a good idea to have an inspection before you sign a written offer since, once the deal is closed, you've bought the house “as is.” Or, you may want to include an inspection clause in the offer when negotiating for a home. An inspection clause gives you an “out” on buying the house if serious problems are found, or it gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause also can specify that the seller must fix the problem(s) before you purchase the house.19. DO I NEED TO BE THERE FOR THE INSPECTION?
It's not required, but it's a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the home you'd like to purchase, and it is a good time to ask general maintenance questions.20. ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem, then a more specific inspection may be recommended. It's a good idea to consider having your home inspected for the presence of a variety of health-related risks like radon gas, asbestos, or possible problems with the water or waste disposal system.21. HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?
If the house you're considering was built before 1978 and you have children under the age of seven, you will want to have an inspection for lead-based paint. It's important to know that lead flakes from paint can be present in both the home and in the soil surrounding the house. The problem can be fixed temporarily by repairing damaged paint surfaces or planting grass over effected soil. Hiring a lead abatement contractor to remove paint chips and seal damaged areas will fix the problem permanently.22. ARE POWER LINES A HEALTH HAZARD?
There are no definitive research findings that indicate exposure to power lines results in greater instances of disease or illness.23. DO I NEED A LAWYER TO BUY A HOME?
Laws vary by state. Some states require a lawyer to assist in several aspects of the home buying process while other states do not, as long as a qualified real estate professional is involved. Even if your state doesn't require one, you may want to hire a lawyer to help with the complex paperwork and legal contracts. A lawyer can review contracts, make you aware of special considerations, and assist you with the closing process. Your real estate agent may be able to recommend a lawyer. If not, shop around. Find out what services are provided for what fee, and whether the attorney is experienced at representing homebuyers.24. DO I REALLY NEED HOMEOWNER'S INSURANCE?
Yes. A paid homeowner's insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to be made prior to that day. Plus, involving the insurance agent early in the home buying process can save you money. Insurance agents are a great resource for information on home safety, and they can give tips on how to keep insurance premiums low.25. WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER'S INSURANCE COSTS?
Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you look at homes. Newer homes and homes constructed with materials like brick tend to have lower premiums. Think about avoiding areas prone to natural disasters, like flooding. Choose a home with a fire hydrant or a fire department nearby.26. IS THE HOME LOCATED IN A FLOOD PLAIN?
Your real estate agent or lender can help you answer this question. If you live in a flood plain, the lender will require that you have flood insurance before lending any money to you. If you live near a flood plain, you may choose whether or not to get flood insurance coverage for your home. Work with an insurance agent to construct a policy that fits your needs.27. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
Always check to see if the house is in a low-lying area, in a high-risk area for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or making an addition in the future. Your real estate agent should be able to help you with these questions.28. HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will include the following information:
- Complete legal description of the property
- Amount of earnest money
- Down payment and financing details
- Proposed move-in date
- Price you are offering
- Proposed closing date
- Length of time the offer is valid
- Details of the deal
Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer.
Other ways to lower insurance costs include insuring your home and car(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim.29. HOW DO I DETERMINE THE INITIAL OFFER?
Unless you have a buyer's agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent's advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home's condition, how long it has been on the market, financing terms, and the seller's situation. By the time you're ready to make an offer, you should have a good idea of what the home is worth and what you can afford. Be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller often may go back and forth until they can agree on a price.30. WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?
Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.31. WHAT ARE "HOME WARRANTIES," AND SHOULD I CONSIDER THEM?
Home warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or home systems, which are not covered by homeowner's insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a home, a time when many people find themselves cash-strapped.
32. WHAT IS A MORTGAGE?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.33. WHAT IS A LOAN TO VALUE (LTV) AND HOW DOES IT DETERMINE THE SIZE OF MY LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000) and would have to pay $2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV, the less cash homebuyers are required to pay out of their own funds. To protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.34. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed Rate Mortgages:
Payments remain the same for the life of the loan
Housing cost remains unaffected by interest rate changes and inflation.
Adjustable Rate Mortgages (ARMs):
Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
Balloon Mortgage - Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)
Two-Step Mortgage - Interest rate adjusts only once and remains the same for the life of the loan
ARMs are linked to a specific index or margin.
Generally offer lower initial interest rates
Monthly payments can be lower
May allow borrower to qualify for a larger loan amount
35. WHEN DO ARMS MAKE SENSE?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.36. WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
Loan is usually made at a lower interest rate.
Equity is built faster because early payments pay more principal.
37. CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.38. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders now may be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.39. HOW LARGE OF A DOWN PAYMENT DO I NEED?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. Some mortgages don't require a down payment at all. But the larger the down payment, the less you have to borrow and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.40. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. Most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).41. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.42. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.43. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate less than your current one, refinancing is smart-- if you don't pay more in fees than you'll save in the time you'll live in the house.44. WHAT ARE DISCOUNT POINTS?
Discount points allow you to lower your interest rate. They are essentially prepaid interest with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or .125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points, and see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home, and you may be able to negotiate for the seller to pay for some of them.45. WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. An escrow account is a good idea because it assures money will always be available for these payments. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.
46. WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
The first step in securing a loan is to complete a loan application. To do so, you'll need the following information.
- Pay stubs for the past 2-3 months
- W-2 forms for the past 2 years
- Information on long-term debts
- Recent bank statements
- Tax returns for the past 2 years (in some cases)
- Proof of any other income
- Address and description of the property you wish to buy
- Sales contract
During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.47. HOW DO I CHOOSE THE RIGHT LENDER FOR ME?
Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable since it will be easier for you to monitor the status of your application and ask questions. Plus, it's beneficial when the lender knows home values and conditions in the local area. Do research and ask family, friends, and your real estate agent for recommendations.48. HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?
Pre-qualification is an informal way to see how much you may be able to borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender's actual commitment to lend to you. It involves assembling the financial records mentioned in Question 47 (without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.49. HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. You’ll want to double check the "high credit limit," “total loan," and “past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.CREDIT REPORTING COMPANIES:
Trans Union 1-800-916-8800
50. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You also can request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.51. WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?
A credit bureau score is a number based upon your credit history that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.52. HOW CAN I IMPROVE MY SCORE?
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.
53. HOW DO I CHOOSE THE BEST LOAN PROGRAM FOR ME?
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.
- Do you expect your finances to change over the next few years?
- Are you planning to live in this home for a long period of time?
- Are you comfortable with the idea of a changing mortgage payment amount?
- Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?
Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.54. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN LENDERS?
First, devise a checklist for the information from each lending institution. You should include the company's name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.
Speak with companies by phone or in person. Be sure to call every lender on the list the same day, as interest rates can fluctuate daily. In addition to doing your own research, your real estate agent may have access to a database of lender and mortgage options. Though your agent may primarily be affiliated with a particular lending institution, he or she also may be able to suggest a variety of different lender options to you.55. ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
Yes. When you turn in your application, you'll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.56. WHAT IS RESPA?
RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing, escrow account practices, and business relationships between closing service providers and other parties to the transaction.
For more information on RESPA, or call 1-800-569-4287 for a local counseling referral.57. WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
It's an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.58. BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL RESPONSIBILITIES?
Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD's Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).59. WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?
To ensure you won't fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:
- Be sure to read and understand everything before you sign.
- Refuse to sign any blank documents.
- Do not buy property for someone else.
- Do not overstate your income.
- Do not overstate how long you have been employed.
- Do not overstate your assets.
- Accurately report your debts.
- Do not change your income tax returns for any reason.
- Tell the whole truth about gifts.
- Do not list fake co-borrowers on your loan application.
- Be truthful about your credit problems, past and present.
- Be honest about your intention to occupy the house.
- Do not provide false supporting documents.
60. WHAT HAPPENS AFTER I'VE APPLIED FOR MY LOAN?
It usually takes a lender between 1-4 weeks to complete the evaluation of your application. It’s not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified, the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up, and the lender will review the closing with you. After closing, you'll be able to move into your new home.61. WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?
This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller's responsibility to fix them.62. WHAT MAKES UP CLOSING COST?
There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:
- Attorney's or Escrow Fees (Yours and your lender's if applicable)
- Property Taxes (to cover tax period to date)
- Interest (paid from date of closing to 30 days before first monthly payment)
- Loan Origination Fee (covers lender’s administrative costs)
- Recording Fees
- Survey Fee
- First Premium of Mortgage Insurance (if applicable)
- Title Insurance (yours and lender's)
- Loan Discount Points
- First Payment to Escrow Account for Future Real Estate
- Taxes and Insurance
- Paid Receipt for Homeowner's Insurance Policy (and Fire and Flood Insurance if applicable)
- Any Documentation Preparation Fees
You'll present your paid homeowner's insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.
Once you're sure you understand all the documentation, you'll sign the mortgage, agreeing that if you don't make payments, the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You'll also sign a mortgage note promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.
You'll pay the lender's agent all closing costs and, in turn, he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage then will be recorded in the state Registry of Deeds, and you will be a homeowner.64. WHAT DO I GET AT CLOSING?
- Settlement Statement, HUD-1 Form (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing)
- Truth-in-Lending Statement
- Mortgage Note
- Mortgage or Deed of Trust
- Binding Sales Contract (prepared by the seller; your lawyer should review it)
- Keys to Your New Home
HELP ME BECOME A HOMEOWNER?
65. WHAT IS THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT?
Also known as HUD, the U.S. Department of Housing and Urban Development was established in 1965 to develop national policies and programs to address housing needs in the U.S. One of HUD's primary missions is to create a suitable living environment for all Americans by developing and improving the country's communities and enforcing fair housing laws.66. HOW DOES HUD HELP HOMEBUYERS AND HOMEOWNERS?
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower- and moderate-income families through its FHA Mortgage Insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws, and housing rehabilitation initiatives.67. WHAT IS THE FHA?
Now an agency within HUD, the Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy homes.68. HOW CAN THE FHA ASSIST ME IN BUYING A HOME?
The FHA works to make homeownership a possibility for more Americans. With the FHA, you don't need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months rent. Additionally, your monthly payments may not be much more than rent.69. HOW IS THE FHA FUNDED?
Lender claims paid by the FHA Mortgage Insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan borrowers. No tax dollars are used to fund the program.70. WHO CAN QUALIFY FOR FHA LOANS
Anyone who meets the credit requirements, can afford the mortgage payments and cash investment, and who plans to use the mortgaged property as a primary residence may apply for an FHA-insured loan.71. WHAT IS THE FHA LOAN LIMIT?
FHA loan limits vary throughout the country – see www.fhalibrary.com for details. The loan maximums for multi-unit homes are higher than those for single units and also vary by area.
Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.72. WHAT ARE THE STEPS INVOLVED IN THE FHA LOAN PROCESS?
With the exception of a few additional forms, the FH loan application process is similar to that of a conventional loan (see Question 47). With new automation measures, FHA loans may be originated more quickly than before. If you don't prefer a face-to-face meeting, you can apply for an FHA loan via mail, telephone, the Internet, or video conference.73. HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY FOR AN FHA LOAN?
There is no minimum income requirement. However, you must prove steady income for at least three years and demonstrate that you've consistently paid your bills on time.74. WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?
Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family all qualify as income sources. Part-time pay, overtime, and bonus pay also count as long as they are steady. Special savings plans such as those set up by a church or community association qualify too. With the FHA, income type is not as important as income steadiness.75. HOW LARGE A DOWN PAYMENT DO I NEED WITH AN FHA LOAN?
You must have a down payment of at least 3% of the purchase price of the home. Most affordable loan programs offered by private lenders require between a 3%-5% down payment, with a minimum of 3% coming directly from the borrower's own funds.76. WHAT CAN I USE TO PAY THE DOWN PAYMENT AND CLOSING COSTS OF AN FHA LOAN?
Besides your own funds, you may use cash gifts or money from a private savings club.77. HOW DOES MY CREDIT HISTORY IMPACT MY ABILITY TO QUALIFY?
The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:
- two years have passed since a bankruptcy has been discharged
- all judgments have been paid
- any outstanding tax liens have been satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or State Department of Revenue
- three years have passed since a foreclosure or a deed-in-lieu has been resolved
Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.79. CAN I ROLL CLOSING COSTS INTO MY FHA LOAN?
No. Though you can't roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement. Ask your lender for details.80. ARE FHA LOANS ASSUMABLE?
Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check; no property appraisal is required. You must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.81. WHAT SHOULD I DO IF I CAN'T MAKE A PAYMENT ON MY LOAN?
Call or write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.82. ARE THERE ANY OPTIONS IF I FALL BEHIND ON MY LOAN PAYMENTS?
Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you get back on track.
For FHA loans:
- Keep living in your home to qualify for assistance.
- Contact a HUD-approved housing counseling agency (1-800-569-4287 or TDD: 1-800-483-2209) and cooperate with the counselor/lender trying to help you.
- HUD has a number of special loss mitigation programs available to help you:
- Special Forbearance: Your lender will arrange for a revised repayment plan which may include temporary reduction or suspension of payments; you can qualify by having an involuntary reduction in your income or increase in living expenses.
- Mortgage Modification: This allows refinance debt and/or extend the term of your mortgage loan which may reduce your monthly payments; you can qualify if you have recovered from financial problems, but net income is less than before.
- Partial Claim: Your lender may be able to help you obtain an interest-free loan from HUD to bring your mortgage current.
- Pre-foreclosure Sale: This allows you to sell your property and pay off your mortgage loan to avoid foreclosure.
- Deed in lieu of Foreclosure: This lets you voluntarily "give back" your property to the lender; it won't save your house but will help you avoid the costs, time, and effort of the foreclosure process.
- If you are having difficulty with an uncooperative lender or feel your loan servicer is not providing you with the most effective loss mitigation options, call the FHA Loss Mitigation Center at 1-888-297-8685 for additional help.
For Conventional Loans:
Talk to your lender about specific loss mitigation options. Work directly with him or her to request a "workout packet." A secondary lender, like Fannie Mae or Freddie Mac, may have purchased your loan. Your lender can follow the appropriate guidelines set by Fannie or Freddie to determine the best option for your situation.
Fannie Mae does not deal directly with the borrower. They work with the lender to determine the loss mitigation program that best fits your needs.
Freddie Mac, like Fannie Mae, will usually only work with the loan servicer. However, if you encounter problems with your lender during the loss mitigation process, you can call customer service for help at 1-800-FREDDIE (1-800-373-3343).
In any loss mitigation situation, it is important to remember a few helpful hints. Explore every reasonable alternative to avoid losing your home, but beware of scams. For example, watch out for:
- Equity skimming: a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
- Phony counseling agencies: these offer counseling for a fee when it is often given at no charge.
- Don't sign anything you don't understand.
83. WHAT IS MORTGAGE INSURANCE?
Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It's required primarily for borrowers making a down payment of less than 20%.84. HOW DOES MORTGAGE INSURANCE WORK? IS IT LIKE HOME OR AUTO INSURANCE?
Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.85. DO I NEED MORTGAGE INSURANCE? HOW DO I GET IT?
You need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs. Ask your lender for details.86. WHAT IS PMI?
PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower, and they insure loans that exceed the FHA limit.
Q: HOW DO I SELECT THE BEST LENDER?
A: Personal referral. If a friend or family member has recently completed a refinance or home purchase, always ask how their transaction was handled. If they were pleased, you should give extra consideration to their lender.
While Realtors will usually refrain from "recommending" anyone, they can usually tell you which companies have performed well in the past. Because of the large number of lenders they have experience with, they can be an excellent source of referrals.
Go to the lender's office and interview the loan officer or manager. Although we are always busy, it is refreshing when a purchaser or potential client takes an interest in how we handle our business. Your initial impression is usually right.
Be sure you are comfortable with the answers you are receiving to the questions you ask. If you visit with a loan officer on the phone or in person and are confused, it is best to keep interviewing until you find someone who can communicate with you about the details of your transaction.
Be cautious about selecting a lender who has the "lowest rate in town." Most lenders will vary only slightly from day to day in the interest rates they offer. Sometimes you get exactly what you pay for. Take all of the extra time you need to shop for your lender. You will be up-close and personal with these people for quite some time.Q: SHOULD WE BE PRE-QUALIFIED BEFORE OUR HOUSE HUNT?
A: Yes! It is actually easier to buy a home if you know in advance that you will be approved. You can make arrangements with most lenders to be "prequalified" for your purchase. Here's how to do it:
- Make an appointment to see your lender. Take your financial information, such as bank statements and W-2 forms, as well as paycheck stubs.
- The mortgage company will access your credit report and review your documents. At that time, you will be able to discuss different financing options and decide which type of loan is best for you.
- Most lenders will write you a prequalification letter that will let your Realtor, as well as the seller of a property, know that you have been counseled and should be a preferred purchaser. It is a good feeling to have the pressure of worrying about the loan behind you and know that you can concentrate on finding that "dream home."
A: We are finding many borrowers that have rearranged their priorities as well as their spending habits. Many have learned valuable lessons from their bad experiences and have come through their "healing time." They are now ready for home ownership.
It is important to note that there is a big difference between a person who had a bad credit experience in his or her life and a person who is a bad credit risk.
The three main questions in the mind of your lender will be:
- What happened? What was the cause of your particular problem?
- What did you do about it? Did you give every effort to try to work things out?
- Why will it never happen again? Are you back on your feet? Did you make the right changes?
The more difficult credit problems, such as bankruptcy and foreclosure, the more important the explanation and the more healing time that would be necessary. We have all had some pretty tough times at one point or another. Do not be afraid or embarrassed about trying to start again. Everyone deserves a second chance!Q: CAN NON-CITIZENS QUALIFY?
A: Each loan type has different guidelines for citizens of other countries. FHA requires that the home you are buying in this country is your primary residence. You must have a Social Security card as well as all of the other documentation required for FHA buyers.
Fannie Mae requires that you have permanent resident alien status - a green card. If you are a non-permanent resident alien, an additional down payment, as well as permission to work in the United States for extended periods through a work visa, is required, and you must occupy the property.
Freddie Mac underwrites loans for permanent and non-permanent residents alike, with no special requirements for the latter. It is important that you make an appointment with your lender before you select a home so that you will be aware of the financing available for your particular situation. The great news is that home ownership is encouraged for everyone in this country.Q: WHAT ARE SOME QUALIFYING TIPS FOR A RELOCATING BUYER?
A: The number one tip is - do not pack your personal papers! Mortgage loans are very precise and require documentation furnished by the borrower. I suggest keeping your financial records with you until your new loan closes. You may also be prepared by knowing the exact details of your relocation policy. These are a few of the items your lender will want to know:
- Will your company buy your present home or issue an equity advance?
- If your home does not sell, will your company make the payments for you until it does sell?
- Will your company pay your closing costs on your purchase? If so, will they advance the funds or reimburse you after closing?
It is important to keep copies of any advance checks you may receive as well as all documentation on your move. It is much easier to keep all this documentation handy rather than to try to find it when you are trying to close. Good luck with your move!Q: CAN A RECENT COLLEGE GRADUATE BUY A HOME?
A: Most loan types are very interested in financing recent graduates. Many investors will use your college credits in your chosen field to determine your experience. In most cases, they also expect that you have established very little credit. This is acceptable as long as the credit you have established is good.Q: WHAT IS AN 80-10-10?
A: In mortgage slang, it refers to a financing option you could choose to avoid Private Mortgage Insurance (PMI). The “80” refers to an 80 percent first-lien mortgage. The first “10” refers to a 10 percent second-lien mortgage, and the second “10” refers to the required down payment of ten percent.
One of the advantages of using this type of financing is the potential income tax deductibility of the interest on the second lien versus the non-deductible insurance payment of PMI. You also will have the guarantee that the second-lien financing will eventually be gone, and you will have only the first lien to pay monthly.Q: HOW CAN WE BE SURE TO GET THE INTEREST RATE ADVERTISED BY A LENDER?
A: Home loan interest rates change on a daily basis. They can change more than once a day. When you get a quote, it becomes your rate once you lock-in with your selected lender. A lock-in is a promise (in writing) to close your loan at a certain interest rate and points.
You should have a lock-in agreement with clearly defined terms. These terms include expiration date, interest rate, and points paid by buyer and seller, and they usually include the expectations you should have of your lender as well as those they have of you. Be sure you understand all of the rules involved.
It is important that you know about your lender's strength and reputation. The promise offered to you is made more valuable by these two. Once you read this disclosure carefully and agree to the conditions, be sure you have a fully accepted and executed copy for your files. This is your contract with your lender and protects your interest rate.Q: WHY DO MORTGAGE INTEREST RATES GO UP AND DOWN SO DRAMATICALLY?
A: Many years ago, savings and loan institutions made the majority of home mortgage loans. They would often set a rate for new home loans for long periods of time - up to a month or so. As the lending industry has evolved, the buying and selling of mortgages has become very sophisticated, and there are many different investors making new home mortgage loans. The easiest indicator you can follow in watching the direction of interest rates is the bond market.
Although interest rates usually have long periods of decline or increase, there are many days when rates may jump up or down dramatically -just as the bond market can. These are often referred to as "hiccups." When rates begin to go higher for a long term, it will be (as history has proven) a slow, steady increase. It is the trend you will want to follow. Is the overall trend up or down? Don't let those daily "hiccups" alarm you.Q: IS THERE ANYTHING WE SHOULD KNOW ABOUT NEW CONSTRUCTION FINANCING?
A: Your loan will be approved well in advance, and you will want to be prepared as your home progresses and you prepare to close. The following is a list of six helpful hints:
- Be sure you understand and can comply with all of the conditions of your loan approval.
- Let your lender know of any changes to be made to the house, the sales price or any contract changes.
- Do not make any changes to your financial position without consulting your lender. It may not be wise to buy a new car before closing your mortgage loan if it affects your loan approval!
- Save copies of all major paperwork that might influence your loan. For example, save copies of any bonus checks you might receive.
- Notify your lender when you are within 60 days of closing. You will probably be at the building site and in communication with the builder to know this approximate date. It is important to notify your lender so that any updates that are necessary can be accomplished.
- Use extreme caution concerning setting your closing date and time. If you give notice where you are currently living and must be out by a certain date, it will be very uncomfortable if the home is not complete and will not pass final inspection. Many times buyers get approved for their home loan, begin construction and then forget that the lender will require that the file be updated prior to funding into the permanent loan. When the house is finished, the builder will want his money. He or she probably won't appreciate any delays, and your lender will appreciate your advance notice and preparedness.