Part I. Getting Started

1. How do I know if I am ready to buy a home?

You can find out by asking yourself some questions:

• Do I have a steady source of income (usually a job)? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
• Do I have a record of paying my bills?
• Do I have few outstanding long-term debts, like car payments?
• Do I have money saved for a down payment?
• Do I have the ability to pay a mortgage every month, plus additional costs?

If you can answer "yes" to these questions, you are probably ready to buy your own home

2. How do I begin the process of buying a home?

Start by thinking about your situation. Are you ready to buy a home? Home much can you afford in a monthly mortgage payment (see the next question for help)? How much space do you need? What areas of town do you like? After you answer these questions, make a "To Do" list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the "Homes" section of the newspaper.

3. How does the lender decide the maximum loan amount that I can afford?

The lender considers your debt-to-income-ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car and/or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more that 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for a down payment and closing costs, credit history, etc. when determining your maximum loan amount.

Quick Calculation Exercise Gross Annual Income Gross Monthly Income 29% Available for Housing $15,000 $1,250 $363 $20,000 $1,667 $483 $25,000 $2,083 $604 $30,000 $2,500 $725 $35,000 $2,917 $846 $40,000 $3,333 $967 $45,000 $3,750 $1,088 $50,000 $4,167 $1,208

 

Part II. Finding Your Home

4. What tax issues should I take into consideration?

You should be aware of the property tax liability; the total amount of the previous year's property taxes is usually included in the listing information. If it's not, ask the seller for a tax receipt or contact the local assessor's office. Tax rates can change from year to year, so these figures may be approximate.

Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities.

5. What should I look for when walking through a home?

In addition to comparing the home to your minimum requirements and wish lists, consider the following:

• 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 applications work?
• Is the yard big enough?
• Do you like the floor plan?
• Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions.)
• Does anything need to be repaired or replaced? Will the seller repair or replace these 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.

6. What questions should I ask when looking at a home?

Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller's or real estate agent's answers are clear and complete. Ask questions until you understand all of the information they've given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive.

Part III. You've Found It

7. What does a home inspector do, and how does an inspection figure in the purchase of a home?

An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of any repairs that are needed.

The inspector does not evaluate whether or not you're getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roofs. Be sure to hire a home inspector that is qualified and experienced.

It's a good idea to have an inspection before you present a written offer since, once the deal is closed, you've brought the house "as is." Or, you may want to include an inspection clause in the offer when negotiating for a home. An inspection clause gives you an "out" on buying the house if serious problems are found, or gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.

8. Do I need to be there for the inspection?

It is a good idea for you to be there for the inspection, though it is not required. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is an opportunity to hear an objective opinion on the home you'd like to purchase and it is a good time to ask general maintenance questions.

9. Are other types of inspections needed?

If your home inspector discovers a serious problem, another more specific inspection may be recommended. It's a good idea to consider having your home inspected for the presence of a variety of health-related risks like radon gas, asbestos, or possible problems with the water or waste disposal system.

10. How can I protect my family from lead in the home?

If the house you're considering was built before 1978 and you have children under the age of seven, you will want to have an inspection for lead-based paint. It's important to know that lead flakes from paint can be present in both the home and in the soil surrounding the house. The problem can be fixed temporarily by repairing damaged paint surfaces or painting grass over effected soil. Hiring a lead abatement contractor to remove paint chips and seal damaged areas will fix the problem permanently.

11. Do I need a lawyer to buy a home?

Laws vary from state to state. Some states require a lawyer to assist in several aspects of the home buying process while other states do not, as long as a qualified real estate professional is involved. Even if your state doesn't require one, you may want to hire a lawyer to help with the complex paperwork and legal contracts. A lawyer can review contacts, make you aware of special considerations, and assist you with the closing process. Your real estate agent may be able to recommend a lawyer. If not, shop around. Find out what services are provided for what fee, and whether the attorney is experienced at representing homebuyers.

12. Do I really need homeowner's insurance?

Yes. A paid homeowner's insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to be made prior to that day. Plus, involving the insurance agent early in the homebuying process can save you money. Insurance agents are a great resource for information on home safety and they can give tips on how to keep insurance premiums low.

13. What steps could I take to lower my homeowner's insurance costs?

Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you look at homes. Newer homes and homes constructed with materials like brick tend to have lower premiums. Think about avoiding areas prone to natural disasters, like flooding. Choose a home with a fire hydrant or a fire department nearby.

14. What other issues should I consider before buying a home?

Always check to see if the house is in a low-lying area, in a high risk area for natural disasters (like earth quakes, hurricanes, tornados, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or building an addition in the future. Your real estate agent should be able to help you with these questions.

15. How do I make an offer?

Your real estate agent will assist you in making an offer, which will include the following information:

• 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.

16. How do I determine the initial offer?

Unless you have a buyer's agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent's advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home's condition, how long it's been on the market, financing terms, and the seller's situation. By the time you're ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.

17. What are "Home Warrantees," and should I consider them?

Home warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or home systems, which are not covered by homeowner's insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a home, a time when many people find themselves cash-strapped.

Part IV: General Information

18. What is a mortgage?

Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

19. What types of loans are available and what are the advantages of each?

Fixed rate Mortgages: Payments remain the same for the life of the loan

Types

• 15-year
• 30-year

Advantages

• Predictable
• Housing cost remains unaffected by interest rate changes and inflation

  Adjustable Rate Mortgages (ARMSs): 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 due or refinanced (though not automatically)
• Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan
• ARMs linked to a specific index or margin

  Advantages

• Generally offer lower initial interest rates
• Monthly payment can be lower
• May allow borrower to qualify for a larger loan amount

20. When do ARMS make sense?

An ARM makes sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

21. What are the advantages of 15- and 30-year loan terms?

30-year:

• In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions
• As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

  15-year:

• Loan is usually made at a lower interest rate.
• Equity is built faster because early payments pay more principal.

22. Can I pay off my loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off a loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

23. Are there special mortgages for first-time homebuyers?

Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

24. How large of a down payment do I need?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure a loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly - repairs and decorating.

25. What is included in a monthly mortgage payment?

The monthly mortgage payment mainly pays off principal and interest, although most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).

26. What factors affect mortgage payments?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

27. What is an escrow account? Do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

Part V: First Steps

28. What steps need to be taken to secure a loan?

The first step in securing a loan is to complete a loan application. To do so, you'll need the following information:

• Pay stubs for the past 2-3 months
• W-2 forms for the past 2 years
• Information on long-term debts
• Recent bank statements
• Tax returns for the past 2 years
• Proof of any other income
• Address and description of the property you wish to buy
• Sales contract

During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.

29. How are pre-qualifying and pre-approval different?

Pre-qualification is an informal way to see how much you may be able to borrow. You can be "pre-qualified" over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

Pre-approval is a lender's actual commitment to lend to you. It involves assembling the financial records mentioned in question 28 (without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

30. How can I find out information about my credit history?

There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double check the "high credit limit," "total loan," and "past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.

Credit Reporting Companies   Company Name Phone Number   Experian 1-800-682-7654   Equifax 1-800-685-1111   Trans Union 1-800-916-8800

31. How can I improve my score?

There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.

Part VI: Finding The Right Loan For You

32. How do I choose the best loan program for me?

Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.

• 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.

33. Are there any costs or fees associated with the loan origination process?

Yes. When you turn in your application, you'll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally nonrefundable.

34. What is a Good Faith Estimate, and how does it help me?

It's an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.

35. What responsibilities does the lender have?

According to the Real Estate Settlement Procedures Act (RESPA), lenders are required to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow practices, and business relationships between closing service providers and other parties to the transaction.

Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD's Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).

36. What responsibilities do I have during the lending process?

To ensure you won't fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:

• Be sure to read and understand everything before you sign.
• Refuse to sign any blank documents.
• Do not buy property for someone else.
• Do not overstate your income.
• Do not overstate how long you have been employed.
• Do not overstate your assets.
• Accurately report your debts.
• Do not change your income tax returns for any reason.
• Tell the whole truth about gifts.
• Do not list fake co-borrowers on your loan application.
• Be truthful about your credit problems, past and present.
• Be honest about your intention to occupy the house.
• Do not provide false supporting documents.

Part VII: Closing

37. What happens after I've applied for my loan?

It usually takes a lender between 1-6 weeks to complete the evaluation of your application. It's not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified, the lender will call you you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing process with you. And after closing, you'll be able to move into your new home.

38. What make up closing costs?

There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:

• Attorney's or escrow fees (yours and your lender's if applicable)
• Property taxes (to cover tax period to date)
• Interest (paid from date of closing to 30 days before first monthly payment)
• Loan origination fee (covers lender's administrative costs)
• Recording fees
• Survey fee
• First premium of mortgage insurance (if applicable)
• Title insurance (yours and your lender's)
• Loan discount points
• First payment to escrow for future real estate taxes and insurance
• Paid receipt for homeowner's insurance policy (and fire and flood insurance if applicable)
• Any documentation preparation fees

39. What can I expect to happen on closing day?

You'll present your paid homeowner's insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.

40. What do I get at closing?

• Settlement Statement, HUD-1 Form (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing)
• Truth-in-Lending Statement
• Mortgage Note
• Mortgage or Deed of Trust
• Binding Sales Contract (prepared by the seller; your lawyer should review it)
• Keys to your new home

Part VIII: How Can HUD And The FHA Help Me Become A Home Owner?

41. What is the U.S. Department of Housing and Urban Development?

Also known as HUD, the U.S. Department of Housing and Urban Development was established in 1965 to develop national policies and programs to address housing needs in the U.S. One of HUD's primary missions is to create a suitable living environment for all Americans by developing and improving the county's communities and enforcing fair housing laws.

HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homebuyership by making loans available for lower- and moderate-income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms.

42. What is the FHA?

Now an agency within HUD, the Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.

43. How can the FHA assist me in buying a home?

The FHA works to make homeownership a possibility for more Americans. With the FHA, you don't need perfect credit or a high paying job to qualify for a loan. The FHA also make loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few month's rent. And your monthly payments may not be much more than rent.

44. How much income do I need to have to qualify for an FHA loan?

There is no minimum income requirement, but you must prove steady income for at least three years, and demonstrate that you've consistently paid your bills on time.

45. Can I carry debt and still qualify for FHA loans?

Yes. Short-term debt doesn't count as long as it can be paid off within 10 months. Some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.

46. How large a down payment do I need with an FHA loan?

You must have a down payment of at least 3% of the purchase price of the home. Most affordable loan programs offered by private lenders require between a 3% - 5% down payment, with a minimum of 3% coming directly from a borrower's own funds.

47. Can I qualify for an FHA loan without a credit history?

Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

48. What types of closing costs are associated with FHA-insured loans?

Except for the addition of an FHA mortgage insurance premium, FHA closing costs are similar to those of a conventional loan outlined in Question 38. The FHA requires a single, upfront mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing. This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium - paid monthly - if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.

49. Can I roll closing costs into my FHA loan?

No. Though you can't roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement. Ask your lender for details.

50. What should I do if I can't make a payment on my loan?

Call or write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.

There are several options if you fall behind on your loan payments. Talk to your lender or HUD-approved counseling agency for details.

51. How can I contact HUD?

Visit the web site at http://www.hud.gov or look in the phone book "blue pages" for a listing of the HUD office near you.

Part IX: Mortgage Insurance

52. What is Mortgage Insurance?

Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It's required primarily for borrowers making a down payment of less than 20%.

53. How does mortgage insurance work? Is it like home or auto insurance?

Like home or auto insurance, mortgage insurance requires payments or a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

54. Do I need mortgage insurance? How do I get it?

You need mortgage insurance only if you plan to make a down payment of less than 20% of the total purchase price of the home. The FHA offers several loan programs that may meet your needs. Ask your lender for details.

55. What is PMI?

PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.