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Frequently
Asked Questions
GETTING STARTED
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?
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 it.
4. HOW DOES THE LENDER
DECIDE THE MAXIMUM LOAN AMOUNT THAT 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 or student loan payments, alimony, or child
support. The lender also considers cash available for down payment and
closing costs, 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
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
aren't essential.
FINDING YOUR HOME
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 in.
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 may also 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 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.
10. 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.
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 off ice. 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 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.
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.
YOU'VE FOUND IT
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 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.
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
I 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 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 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.
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. 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.
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
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.
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'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.
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.
GENERAL FINANCING QUESTIONS:THE BASICS
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) 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.
34. 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
Types
15-year
30-year
Advantages
Predictable
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
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 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.
Advantages
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.
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36. 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.
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.
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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 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.
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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. But 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 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.
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. 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.
FIRST STEPS
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 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.
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. 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 1-888-524-3666
Equifax 1-800-685-1111
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 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 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.
FINDING the RIGHT LOAN for YOU
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 may also 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
and 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.
CLOSING
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.
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.
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
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 monthly payment)
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 and insurance
Paid receipt for homeowner's insurance policy (and fire and flood insurance
if applicable)
Any documentation preparation fees
63. 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.
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
HOW CAN HUD and the FHA 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 a home.
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. And 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 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.
73. 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.
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. Income type
is not as important as income steadiness with the FHA.
75. 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.
76. 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, but there are also some zero money down loan programs available.
77. 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 cash.
78. 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
79. 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.
80. 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 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%.
5TOP
81. 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.
82. 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.
83. 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 information.
84. 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: 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 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 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.
MORTGAGE INSURANCE
85. 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%.
86. 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.
87. 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.
88. 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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