Frequently Asked Questions By Home Buyers
Knowledge is said to open doors. This is literally true when it comes
to buying a home. To become a first-time home buyer, you need to know
where and how to begin the home buying process. The following questions
and answers have been carefully selected to give you a foundation of basic
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 costs?
If you can answer "yes" to these questions, you are probably
ready to buy your own home.
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? 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.
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
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.
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. 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, 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.
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 you need.
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.
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FINDING YOUR HOME
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.
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.
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.
HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES
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.
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.
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.
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.
WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
In addition to comparing the home to your minimum requirement 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 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
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.
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.
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, home buyers
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.
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YOU'VE FOUND IT
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
It's a good idea to have an inspection before you sign a written offer
since, once the deal is closed, you've bought the house "as is."
Or, you may want to include an inspection clause in the offer when negotiating
for a home. An inspection clause gives you an "out" on buying
the house if serious problems are found,or 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
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,
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.
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.
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.
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 home buyers
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
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.
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
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.
HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will
include the following information:
Complete legal description of the property
Amount of earnest money
Down payment and financing details
Proposed move-in date
Price you are offering
Proposed closing date
Length of time the offer is valid
Details of the deal
Remember that a sale commitment depends on negotiating a satisfactory
contract with the seller, not just making an offer.
Other ways to lower insurance costs include insuring your home and car(s)
with the same company, increasing home security, and seeking group coverage
through alumni or business associations. Insurance costs are always lowered
by raising your deductibles, but this exposes you to a higher out-of-pocket
cost if you have to file a claim.
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.
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.
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.
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GENERAL FINANCING QUESTIONS:THE BASICS
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.
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 home buyers 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
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
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
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
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.
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.
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
ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options which can
help first-time home buyers 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.
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 decorating.
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).
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.
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.
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.
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.
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
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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
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.
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.
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
Pre-approval is a lender's actual commitment to lend to you. It involves
assembling the financial records mentioned above (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.
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
CREDIT REPORTING COMPANIES
Company Name Phone Number
Trans Union 1-800-916-8800
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.
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
HOW CAN I IMPROVE MY SCORE?
There are no easy ways to improve your credit score, but you can work
to keep it acceptable by maintaining a good credit history. This means
paying your bills on time and not overextending yourself by buying more
than you can afford.
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FINDING the RIGHT LOAN for YOU
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 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 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.
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.
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.
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
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.
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).
WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?
To ensure you won't fall victim to loan fraud, be sure to follow all
of these steps as you apply for a loan:
Be sure to read and understand everything before you sign.
Refuse to sign any blank documents.
Do not buy property for someone else.
Do not overstate your income.
Do not overstate how long you have been employed.
Do not overstate your assets.
Accurately report your debts.
Do not change your income tax returns for any reason. Tell the whole truth
about gifts. Do not list fake co-borrowers on your loan application.
Be truthful about your credit problems, past and present.
Be honest about your intention to occupy the house
Do not provide false supporting documents.
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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. 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.
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.
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)
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
Any documentation preparation fees
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,
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.
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)
Mortgage or Deed of Trust
Binding Sales Contract (prepared by the seller; your lawyer should review
Keys to your new home
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HOW CAN HUD and the FHA HELP ME BECOME a HOMEOWNER
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
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
home ownership 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
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.
HOW CAN THE FHA ASSIST ME IN BUYING A HOME?
The FHA works to make home ownership 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.
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.
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.
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 limits.
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. With new automation
measures, FHA loans may be originated more quickly than before.
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.
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
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
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
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
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.
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.
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
three years have passed since a foreclosure or a deed-in-lieu has been
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
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, up front 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%.
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.
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.
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.
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
HUD has a number of special loss mitigation programs available to help
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
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
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.
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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%.
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.
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.
HOW CAN I RECEIVE A DISCOUNT ON THE FHA INITIAL MORTGAGE INSURANCE PREMIUM?
Ask your real estate agent or lender for information on the HELP program
from the FHA. HELP - Home buyer Education Learning Program - is structured
to help people like you begin the home buying 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.
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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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
WHAT IS A 203(k) LOAN?
This is a loan that enables the home buyer 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
The 203(k) loan must follow many of the 203(b) eligibility requirements.
Talk to your lender about specific improvement, energy efficiency, and
WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
The Energy Efficient Mortgage allows a home buyer 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 are not.
The improvements financed may be 5% of property value or $4,000, whichever
is greater. The total must fall within the FHA loan limit.
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.
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 FHA.
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
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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Provided courtesy of the US
Department of Housing and Urban Development