TABLE OF CONTENTS
Part I Getting Started
Part II Finding Your Home
Part III You've Found It
Part IV General Financing
-- Questions:The Basics
Part V First
Part VI Finding
The Right Loan For You
Part VII Closing
Part VIII How Can HUD And The
FHA help Me Become a Homeowner
1. HOW DO I KNOW IF I'M 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 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
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? 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.
But by renting, you lose the chance to build equity, take advantage
of tax benefits, and 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. And 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. But given the freedom,
stability, and security of owning your own home, they are worth
4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT
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. According to
the FHA,monthly mortgage payments should be no more than 29% of
gross income, while the mortgage payment, combined with non-housing
expenses, 4 should total no more than 41% of income. The lender
also considers cash available for down payment and closing costs,
credit history, etc. when determining your maximum loan amount.
5. HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?
Start by asking family and friends if they can recommend
an agent. Compile a list of several agents and talk to each before
choosing one. Look for an agent who listens well and understands
your needs, and whose judgment you trust. The ideal agent knows
the local area well and has resources and contacts to help you in
your search. Overall, you want to choose an agent that makes you
feel comfortable and can provide all the knowledge and services
6. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE
Your home should fit 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? 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
FINDING YOUR HOME
7. 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 in.
8. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN
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
(and 1-800-927-9275 for the hearing impaired).
9. 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 may also be knowledgeable about schools in the area.
10. 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 may also 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.
11. HOW CAN I FIND OUT HOW MUCH 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.
12. 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 off ice. Tax rates
can change from year to year, so these figures may be approximate.
13. 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,
14. 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
15. 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 repaired or replaced? Will the seller
repair or replace the items?
- Imagine the house in good weather and bad, 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.
16. 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
17. 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.
18. 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.
YOU'VE FOUND IT
19. 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 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 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 t 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.
20. 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 I like to purchase and it is a good time
to ask general, maintenance questions.
21. ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem 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.
22. 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 point. 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.
23. 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.
24. 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.
25. 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.
26. WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER'S INSURANCE
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
27. 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. But 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.
28. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY
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.
29. 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 ins-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.
30. 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.
31. 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.
32. WHAT ARE "HOME WARRANTIES", AND SHOULD I
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.
GENERAL FINANCING QUESTIONS:THE BASICS
33. 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.
34. WHAT IS A LOAN TO VALUE (LTV) 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. So, to protect lenders against potential
loss in case of default, higher LTV loans (80% or more) usually
require mortgage insurance policy.
35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE
ADVANTAGES OF EACH?
Fixed Rate Mortgages: Payments remain the same for the the life
of the loan
- Housing cost remains unaffected by interest rate changes and
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 clue 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
- Generally offer lower initial interest rates
- Monthly payments can be lower
- May allow borrower to qualify for a larger loan amount
36. 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
37. 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.
38. 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.
39. 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 a poor credit history, have quite a bit of long-term
debt, or have experienced income irregularities.
40. 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 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
41. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest.
But most lenders also include local real estate taxes, homeowner's
insurance, and mortgage insurance (if applicable).
42. 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.
43. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE
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.
44. 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 2% less than your
current one, refinancing is smart. Refinancing may, however, involve
paying many of the same fees paid at the original closing, plus
origination and application fees.
45. 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 then 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.
46. 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 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.
47. 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
48. 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
49. HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?
Pre-qualification is an informal way to see how much you maybe
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.
50. 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
| Trans Union
51. 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 can also 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
52. WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE
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.
53. 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.
FINDING the RIGHT LOAN for YOU
54. HOW DO I CHOOSE THE BEST LOAN - PROGRAM
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 changeover 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
- 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.
55. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN
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
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 may also be able to suggest a variety
of different lender options to you.
56. ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN
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.
57. 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 and escrow account
practices, and business relationships between closing service providers
and other parties to the transaction.
For more information on RESPA, call 1-800-569-4287 for a local counseling referral.
58. WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP
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.
59. BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL
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).
60. WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING
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
- Be truthful about your credit problems, past and present.
- Be honest about your intention to occupy the house.
- Do not provide false supporting documents.
61. WHAT HAPPENS AFTER I'VE APPLIED FOR
It usually takes a lender between 1-6 weeks to complete the evaluation
of your application. Its 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. And after closing, you'll be able to
move into your new home.
62. 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.
63. WHAT MAKES UP CLOSING COST?
There may be closing cost customary or unique to a certain locality,
but closing cost 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
- Loan Origination fee (covers lenders administrative cost)
- 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
- Paid receipt for homeowner's insurance policy (and fire and
flood insurance if applicable)
- Any documentation preparation fees
64. 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.
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 will then be recorded
in the state Registry of Deeds, and you will be a homeowner.
65. 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
HOW CAN HUD and the FHA HELP ME BECOME a HOMEOWNER
66. 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
67. 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.
68. 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.
69. 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. And
your monthly payments may not be much more than rent.
70. 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.
71. 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.
72. WHAT IS THE FHA LOAN LIMIT?
FHA loan limits vary throughout the country, from $115,200 in low-cost
areas to $208,800 in high-cost areas. 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
73. WHAT ARE THE STEPS INVOLVED IN THE FHA LOAN PROCESS?
With the exception of a few additional forms, the FHA 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. And, 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.
74. HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY FOR AN
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.
75. 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. Income type is not as important
as income steadiness with the FHA.
76. 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. And 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.
77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
The FHA allows you to use 29% of your income towards housing costs
and 41% towards housing expenses and other long-term debt. With
a conventional loan, this qualifying ratio allows only 28% toward
housing and 36% towards housing and other debt
78. CAN I EXCEED THIS RATIO?
You may qualify to exceed if you have:
- a large down payment
- a demonstrated ability to pay more toward your housing expenses
- substantial cash reserves
- net worth enough to repay the mortgage regardless of income
- evidence of acceptable credit history or limited credit use
- less-than-maximum mortgage terms
- funds provided by an organization
- a decrease in monthly housing expenses
79. 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.
80. 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. If you can do certain repairs and improvements
yourself, your labor may be used as part of a down 8 payment (called
-sweat equity"). If you are doing a lease purchase, paying
extra rent to the seller may also be considered the same as accumulating
81. 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
- 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
82. 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.
83. WHAT TYPES OF CLOSING COSTS ARE ASSOCIATED WITH FHA-INSURED
Except for the addition of an FHA mortgage insurance premium, FHA
closing costs are similar to those of a conventional loan outlined
in Question 63. 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- see Question 91). 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%.
84. 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.
85. 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 and no property appraisal
is required. And 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.
86. WHAT SHOULD I DO IF I CAN'T MAKE A PAYMENT ON 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
87. 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
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: Allows refinance debt and/or extend the
term of the 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 maybe able to help you obtain an
interest-free loan from HUD to bring your mortgage current.
- Pre-foreclosure Sale: Allows you to sell your property and pay
off your mortgage loan ,to avoid foreclosure.
- Deed-in lieu of Foreclosure: 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
- 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 coil 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: offer counseling for a fee
when it is often given at no charge.
- Don't sign anything you don't understand.
88. 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
89. HOW DOES MORTGAGE INSURANCE WORK? IS IT LIKE HOME OR
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
90. 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
91. HOW CAN I RECEIVE A DISCOUNT ON THE FHA INITIAL MORTGAGE
Ask your real estate agent or lender for information on the HELP
program from the FHA. HELP - Homebuyer Education Learning Program
- is structured to help people like you begin the homebuying process.
It covers such topics as budgeting, finding a home, getting a loan,
and home maintenance. In most cases, completion of this program
may entitle you to a reduction in the initial FHA mortgage insurance
premium from 2.25% to 1.75% of the purchase price of your new home.
92. 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.
93. WHAT IS A 203(b) LOAN?
This is the most commonly used FHA program. It offers a low down
payment, flexible qualifying guidelines, limited lender's fees,
and a maximum loan amount.
94. WHAT IS A 203(k) LOAN?
This is a loan that enables the homebuyer to finance both the purchase
and rehabilitation of a home through a single mortgage. A portion
of the loan is used to pay off the seller's existing mortgage and
the remainder is placed in an escrow account and released as rehabilitation
is completed. Basic guidelines for 203(k) loans are as follows:
- The home must be at least one year old.
- The cost of rehabilitation must be at least $5,000, but the
total property value - including the cost of repairs - must fall
within the FHA maximum mortgage limit.
- The 203(k) loan must follow many of the 203(b) eligibility requirements.
- Talk to your lender about specific improvement, energy efficiency,
and structural guidelines.
95. WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
The Energy Efficient Mortgage allows a homebuyer to save future
money on utility bills. This is done by financing the cost of adding
energy-efficiency features to a new or existing home as part of
an FHA-insured home purchase. The EEM can be used with both 203(b)
and 203(k) loans. Basic guidelines for EEMs are as follows:
- The cost of improvements must be determined by a Home Energy
Rating System or by an energy consultant. This cost must be less
than the anticipated savings from the improvements.
- One- and two-unit new or existing homes are eligible; condos
- The improvements financed may be 5% of property value or $4,000,
whichever is greater. The total must fall within the FHA loan
97. WHAT IS A TITLE I LOAN?
Given by a Lender and insured by the FHA, a Title I loan is used
to make non-luxury renovations and repairs to a home. It offers
a manageable interest rate and repayment schedule. Loans are limited
to between $5,000 and 20,000. If the loan amount is under 7,500,
no lien is required against your home. Ask your lender for details.
98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES THE FHA OFFER?
The FHA also insures loans for the purchase or rehabilitation of
manufactured housing, condominiums, and cooperatives. It also has
special programs for urban areas, disaster victims, and members
of the armed forces. Insurance for ARMS is also available from the
99. HOW CAN I OBTAIN AN FHA-INSURED LOAN?
Contact an FHA-approved lender such as a participating mortgage
company, bank, savings and loan association, or thrift. For more
information on the FHA and how you can obtain an FHA loan, visit
the HUD web site at http://www.hud.gov
or call a HUD-approved counseling agency at 1-800-569-4287 or TDD:
100. 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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