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Part I: Getting Started
Part II: Finding A Home
Part III: You've Found It
Part IV: General Information
Part V: First Steps
Part VI: Finding The Right Loan For You
Part VII: Closing
Part VIII: How Can HUD And The FHA Help
Me Become A Home Owner?
Part IX: Mortgage Insurance
Index of Questions
1. How do I
know if I am ready to buy a home?
You can
find out by asking yourself some questions:
- 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 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?
If you can answer "yes" to
these questions, you are probably ready to buy your
own home
2. How do I begin
the process of buying a home?
Start by
thinking about your situation. Are you ready to buy
a home? Home much can you afford in a monthly mortgage
payment (see the next question 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 the lender
decide the maximum loan amount that I can afford?
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 and/or student
loan payments, alimony, or child support. According
to the FHA, monthly mortgage payments should be no
more that 29% of gross income, while the mortgage
payment, combined with non-housing expenses, should
total no more than 41% of income. The lender also
considers cash available for a down payment and closing
costs, credit history, etc. when determining your
maximum loan amount.
| Quick
Calculation Exercise |
Gross
Annual
Income |
Gross
Monthly
Income |
29%
Available for Housing |
| $15,000 |
$1,250 |
$363 |
| $20,000 |
$1,667 |
$483 |
| $25,000 |
$2,083 |
$604 |
| $30,000 |
$2,500 |
$725 |
| $35,000 |
$2,917 |
$846 |
| $40,000 |
$3,333 |
$967 |
| $45,000 |
$3,750 |
$1,088 |
| $50,000 |
$4,167 |
$1,208 |
|
Top
4. What tax issues
should I take into consideration?
You should
be aware of 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.
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.
5. What should I look
for when walking through a home?
In addition
to comparing the home to your minimum requirements
and wish lists, consider the following:
6. What questions
should I ask when looking at a home?
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.
Top
7. 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 any 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 and waste disposal,
the water heater, insulation and ventilation, the
HVAC system, water source and quality, the potential
presence of pests, the foundation, doors, windows,
ceilings, walls, floors, and roofs. Be sure to hire
a home inspector that is qualified and experienced.
It's a good idea to have an inspection
before you present a written offer since, once the
deal is closed, you've brought 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
gives you the ability to renegotiate the purchase
price if repairs are needed. An inspection clause
can also specify that the seller must fix the problem(s)
before you purchase the house.
8. Do I need to be
there for the inspection?
It is a
good idea for you to be there for the inspection,
though it is not required. Following the inspection,
the home inspector will be able to answer questions
about the report and any problem areas. This is 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.
9. Are other types
of inspections needed?
If your
home inspector discovers a serious problem, another
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.
10. 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 painting grass
over effected soil. Hiring a lead abatement contractor
to remove paint chips and seal damaged areas will
fix the problem permanently.
11. Do I need a lawyer
to buy a home?
Laws vary
from state to 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 contacts, 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.
12. 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 homebuying 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.
13. 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.
14. What other issues
should I consider before buying a home?
Always
check to see if the house is in a low-lying area,
in a high risk area for natural disasters (like earth
quakes, hurricanes, tornados, etc.), or in a hazardous
materials area. Be sure the house meets building codes.
Also consider local zoning laws, which could affect
remodeling or building an addition in the future. Your
real estate agent should be able to help you with
these questions.
15. How do I make
an offer?
Your real
estate agent will assist you in making an offer, which
will include the following information:
16. 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's 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. And, be prepared
for give-and-take negotiation, which is very common
when buying a home. The buyer and seller may often
go back and forth until they can agree on a price.
17. What are "Home
Warrantees," 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.
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18.
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.
19.
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
Types
Advantages
Types
- 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 linked to a specific index
or margin
Advantages
- Generally offer lower initial interest
rates
- Monthly payment can be lower
- May allow borrower to qualify
for a larger loan amount
20. When do ARMS
make sense?
An ARM
makes 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.
21.
What are the advantages of 15- and 30-year loan terms?
30-year:
- 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.
15-year:
- Loan is usually made at a lower interest
rate.
- Equity is built faster because
early payments pay more principal.
22.
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 a 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.
23.
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 may now be able to help borrowers who don't
have a lot of money saved for the down payment and
closing costs, have no or poor credit history, have
quite a bit of long-term debt, or have experienced
income irregularities.
24.
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.
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 a 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.
25.
What is included in a monthly mortgage payment?
The monthly
mortgage payment mainly pays off principal and interest, although most lenders also include local real estate taxes,
homeowner's insurance, and mortgage insurance (if
applicable).
26.
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.
27.
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. Escrow
accounts are a good idea because they assure money
will always be available for these payments. If you
use an escrow account to pay property taxes or homeowner's
insurance, make sure you are not penalized for late
payments since it is the lender's responsibility to
make those payments.
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28.
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
- 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.
29.
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 28
(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.
30.
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.
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 |
| |
Company
Name |
Phone
Number |
| |
Experian |
1-800-682-7654 |
| |
Equifax |
1-800-685-1111 |
| |
Trans Union |
1-800-916-8800 |
|
31. 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.
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32. 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.
33.
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
nonrefundable.
34.
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.
35.
What responsibilities does the lender have?
According
to the Real Estate Settlement Procedures Act (RESPA),
lenders are required 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 and escrow
practices, and business relationships between closing
service providers and other parties to the transaction.
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).
36.
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.
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37.
What happens after I've applied for my loan?
It usually
takes a lender between 1-6 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 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 process
with you. And after closing, you'll be able to move
into your new home.
38. What make up
closing costs?
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 your
lender's)
- Loan discount points
- First payment to escrow 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
39.
What can I expect to happen on closing day?
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.
40.
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
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41.
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 county's communities and enforcing
fair housing laws.
HUD helps people by administering a
variety of programs that develop and support affordable
housing. Specifically, HUD plays a large role in homebuyership
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.
42.
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 a home.
43. 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 make loans more accessible by requiring smaller
down payments than conventional loans. In fact, an
FHA down payment could be as little as a few month's
rent. And your monthly payments may not be much more
than rent.
44.
How much income do I need to have to qualify for an
FHA loan?
There is
no minimum income requirement, but you must prove
steady income for at least three years, and demonstrate
that you've consistently paid your bills on time.
45.
Can I carry debt and still qualify for FHA loans?
Yes. Short-term
debt doesn't count as long as it can be paid off within
10 months. Some regular expenses, like child care
costs, are not considered debt. Talk to your lender
or real estate agent about meeting the FHA debt-to-income
ratio.
46.
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
a borrower's own funds.
47.
Can I qualify for an FHA loan without a credit history?
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.
48.
What types of closing costs are associated with FHA-insured
loans?
Except
for the addition of an FHA mortgage insurance premium,
FHA closing costs are similar to those of a conventional
loan outlined in Question 38. The
FHA requires a single, upfront mortgage insurance
premium equal to 2.25% of the mortgage to be paid
at closing (or 1.75% if you complete the HELP
program. This initial premium may be partially
refunded if the loan is paid in full during the first
seven years of the loan term. After closing, you will
then be responsible for an annual premium - paid monthly
- if your mortgage is over 15 years or if you have
a 15-year loan with an LTV greater than 90%.
49.
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.
50.
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.
There are several options if you fall
behind on your loan payments. Talk to your lender
or HUD-approved counseling agency for details.
51.
How can I contact HUD?
Visit the web site at http://www.hud.gov
or look in the phone book "blue pages" for
a listing of the HUD office near you.
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52. 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%.
53. How does mortgage
insurance work? Is it like home or auto insurance?
Like home
or auto insurance, mortgage insurance requires payments
or 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.
54. 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 total purchase price
of the home. The FHA offers several loan programs
that may meet your needs. Ask your lender for details.
55. 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.
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