Tips for Buyers 100 Questions & Answers About Buying A New Home
The following information is provided by
HUD Housing and Urban Development.
Part I Getting Started
Part II Finding Your Home
Part III You've Found It
Part IV General Financing -- Questions:The Basics
Part V First Steps
Part VI Finding The Right Loan For You
Part VII Closing
Part VIII How Can HUD And The FHA help Me Become a Homeowner
Part IX Mortgage Insurance
Part X FHA Products
GETTING STARTED1. 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?
I have a good record of paying my bills?
- Do I have few outstanding long-term
debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional
If you can
answer "yes" to these questions, you are probably ready to buy your own home.
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.
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.
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, 4 should total no more than 41%
of income. The lender also considers cash available for down payment
and closing costs, credit history, etc. when determining your maximum
5. HOW DO
I SELECT THE RIGHT REAL ESTATE AGENT?Start by asking family
and friends if they can recommend an agent. Compile a list of several
agents and talk to each before choosing one. Look for an agent who
listens well and understands your needs, and whose judgment you trust.
The ideal agent knows the local area well and has resources and contacts
to help you in your search. Overall, you want to choose an agent
that makes you feel comfortable and can provide all the knowledge
and services you need.
6. 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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YOUR HOME The Clerkin Agency will help you with all the following
7. WHAT SHOULD I LOOK FOR WHEN DECIDING
ON A COMMUNITY?Select a community that will allow you
to best live your daily life. Many people choose communities
based on schools. Do you want access to shopping and public transportation?
Is access to local facilities like libraries and museums important
to you? Or do you prefer the peace and quiet of a rural community?
When you find places that you like, talk to people that live
there. They know the most about the area and will be your future
neighbors. More than anything, you want a neighborhood where
you feel comfortable in.
8. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN 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 (and 1-800-927-9275 for the hearing impaired).
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
10. HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?Contact
the local chamber of commerce for promotional literature
or talk to your real estate agent about welcome kits,
maps, and other information. You may also want to visit the local
library. It can be an excellent source for information
on local events and resources, and the librarians will
probably be able to answer many of the questions you
11. HOW CAN I FIND OUT HOW
MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?Your
real estate agent can give you a ballpark figure by
showing you comparable listings. If you are working
with a REALTOR, they may have access to comparable
sales maintained on a database.
12. HOW CAN I FIND INFORMATION ON
THE PROPERTY TAX LIABILITY?The total amount
of the previous year's property taxes is usually included
in the listing information. If it's not, ask the seller
for a tax receipt or contact the local assessor's off
ice. Tax rates can change from year to year, so these
figures may be approximate.
WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?Keep
in mind that your mortgage interest and real estate
taxes will be deductible. A qualified real estate
professional can give you more details on other tax
benefits and liabilities,
14. IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?There
isn't a definitive answer to this question. You
should look at each home for its individual characteristics.
Generally, older homes may be in more established
neighborhoods, offer more ambiance, and have lower
property tax rates. People who buy older homes,
however, shouldn't mind maintaining their home and making
some repairs. Newer homes tend to use more modern
architecture and systems, are usually easier to
maintain, and may be more energy-efficient. People who buy
new homes often don't want to worry initially about
upkeep and repairs.
15. WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
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?
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.
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
HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?If possible, take
photographs of each house: the outside, the major rooms, the yard, and
extra features that you like or ones you see as potential problems. And
don't hesitate to return for a second look. Use the HUD Home Scorecard
to organize your photos and notes for each house.
18. HOW MANY HOMES SHOULD I CONSIDER BEFORE
CHOOSING ONE?There isn't a set number of houses you should
see before you decide. Visit as many as it takes to find the one you
want. On average, homebuyers see 15 houses before choosing one. Just
be sure to communicate often with your real estate agent about everything
you're looking for. It will help avoid wasting your time.
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YOU'VE FOUND IT
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.
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.
OTHER TYPES OF INSPECTIONS REQUIRED?If your home inspector
discovers a serious problem a more specific Inspection may
be recommended. It's a good idea to consider having your home
inspected for the presence of a variety of health-related risks
like radon gas asbestos, or possible problems with the water
or waste disposal system.
22. HOW CAN I PROTECT MY FAMILY
FROM LEAD IN THE HOME?If the house you're considering
was built before 1978 and you have children under the age
of seven, you will want to have an inspection for lead-based
point. It's important to know that lead flakes from paint
can be present in both the home and in the soil surrounding
the house. The problem can be fixed temporarily by repairing
damaged paint surfaces or planting grass over effected soil.
Hiring a lead abatement contractor to remove paint chips
and seal damaged areas will fix the problem permanently.
ARE POWER LINES A HEALTH HAZARD?There are no definitive
research findings that indicate exposure to power lines
results in greater instances of disease or illness.
24. DO I NEED A LAWYER TO BUY A HOME?Laws
vary by state. Some states require a lawyer to assist
in several aspects of the home buying process while other
states do not, as long as a qualified real estate professional
is involved. Even if your state doesn't require one,
you may want to hire a lawyer to help with the complex paperwork
and legal contracts. A lawyer can review contracts, make
you aware of special considerations, and assist you with
the closing process. Your real estate agent may be able
to recommend a lawyer. If not, shop around. Find out
what services are provided for what fee, and whether the attorney
is experienced at representing homebuyers.
25. DO I REALLY NEED HOMEOWNER'S INSURANCE?Yes. A
paid homeowner's insurance policy (or a paid receipt
for one) is required at closing, so arrangements will
have to be made prior to that day. Plus, involving
the insurance agent early in the home buying process can
save you money. Insurance agents are a great resource
for information on home safety and they can give tips
on how to keep insurance premiums low.
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.
27. IS THE HOME LOCATED IN A
FLOOD PLAIN?Your real estate agent or
lender can help you answer this question. If you
live in a flood plain, the lender will require
that you have flood insurance before lending any
money to you. But if you live near a flood plain,
you may choose whether or not to get flood insurance
coverage for your home. Work with an insurance
agent to construct a policy that fits your needs.
28. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE
I BUY MY 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.
29. HOW DO I MAKE AN OFFER?
estate agent will assist you in making an offer, which will include the following
- 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
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.
HOW DO I DETERMINE THE INITIAL OFFER?Unless you have a buyer's
agent, remember that the agent works for the seller. Make a point of asking
him or her to keep your discussions and information confidential. Listen
to your real estate agent's advice, but follow your own instincts on deciding
a fair price. Calculating your offer should involve several factors: what
homes sell for in the area, the home's condition, how long it's been on
the market, financing terms, and the seller's situation. By the time you're
ready to make an offer, you should have a good idea of what the home is
worth and what you can afford. And, be prepared for give-and-take negotiation,
which is very common when buying a home. The buyer and seller may often
go back and forth until they can agree on a price.
31. WHAT IS EARNEST MONEY?
HOW MUCH SHOULD I SET ASIDE?Earnest money is money put down
to demonstrate your seriousness about buying a home. It must be substantial
enough to demonstrate good faith and is usually between 1-5% of the purchase
price (though the amount can vary with local customs and conditions).
If your offer is accepted, the earnest money becomes part of your down
payment or closing costs. If the offer is rejected, your money is returned
to you. If you back out of a deal, you may forfeit the entire amount.
32. WHAT ARE "HOME WARRANTIES",
AND SHOULD I 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
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33. WHAT IS A
MORTGAGE?Generally speaking, a mortgage is a loan obtained
to purchase real estate. The "mortgage" itself is a lien (a legal
claim) on the home or property that secures the promise to pay
the debt. All mortgages have two features in common: principal
34. WHAT IS A LOAN
TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF MY LOAN?The
loan to value ratio is the amount of money you borrow compared
with the price or appraised value of the home you are purchasing.
Each loan has a specific LTV limit. For example: With a 95%
LTV loan on a home priced at $50,000, you could borrow up to
$47,500 (95% of $50,000), and would have to pay,$2,500 as a
down payment.The LTV ratio reflects the amount of equity borrowers
have in their homes. The higher the LTV the less cash homebuyers
are required to pay out of their own funds. So, to protect
lenders against potential loss in case of default, higher LTV
loans (80% or more) usually require mortgage insurance policy.
35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE
THE ADVANTAGES OF EACH?Fixed Rate Mortgages: Payments
remain the same for the the life of the loan
Housing cost remains unaffected by interest
rate changes and inflation.
Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule
with changes in interest rates; increases subject to limits
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
linked to a specific index or margin
Generally offer lower initial interest rates
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.
37. WHAT ARE THE ADVANTAGES OF 15- AND 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.
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 for details.
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
40. HOW LARGE OF A DOWN PAYMENT DO I NEED?There
are mortgage options now available that only require a down payment
of 5% or less of the purchase price. But the larger the down payment, the
less you have to borrow, and the more equity you'll have. Mortgages
with less than a 20% down payment generally require a mortgage insurance
policy to secure the loan. When considering the size of your down payment,
consider that you'll also need money for closing costs, moving expenses,
and - possibly -repairs and decorating.
41. WHAT IS INCLUDED IN A MONTHLY MORTGAGE
PAYMENT?The monthly mortgage payment mainly pays off principal
and interest. But most lenders also include local real estate taxes,
homeowner's insurance, and mortgage insurance (if applicable).
42. WHAT FACTORS
AFFECT MORTGAGE PAYMENTS?The amount of the down payment,
the size of the mortgage loan, the interest rate, the length of
the repayment term and payment schedule will all affect the size
of your mortgage payment.
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.
44. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE
A FIXED RATE LOAN?If interest rates drop significantly,
you may want to investigate refinancing. Most experts agree
that if you plan to be in your house for at least 18 months
and you can get a rate 2% less than your current one, refinancing
is smart. Refinancing may, however, involve paying many of
the same fees paid at the original closing, plus origination
and application fees.
45. WHAT ARE DISCOUNT POINTS?Discount
points allow you to lower your interest rate. They are essentially
prepaid interest, With each point equaling 1% of the total
loan amount. Generally, for each point paid on a 30-year
mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage
point. When shopping for loans, ask lenders for an interest
rate with 0 points and then see how much the rate decreases
With each point paid. Discount points are smart if you plan
to stay in a home for some time since they can lower the
monthly loan payment. Points are tax deductible when you purchase a
home and you may be able to negotiate for the seller to pay
for some of them.
46. WHAT IS AN ESCROW ACCOUNT?
DO I NEED ONE?Established by your lender, an escrow
account is a place to set aside a portion of your monthly
mortgage payment to cover annual charges for homeowner's
insurance, mortgage insurance (if applicable), and property
taxes. Escrow accounts are a good idea because they assure
money will always be available for these payments. If you
use an escrow account to pay property tax or homeowner's
insurance, make sure you are not penalized for late payments
since it is the lender's responsibility to make those payments.
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WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
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
Information on long-term debts
Recent bank statements
tax returns for the past 2 years
Proof of any other
Address and description of the property you wish to buy
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.
48. HOW DO I CHOOSE THE
RIGHT LENDER FOR ME?Choose your lender carefully. Look for financial
stability and a reputation for customer satisfaction. Be sure to choose
a company that gives helpful advice and that makes you feel comfortable.
A lender that has the authority to approve and process your loan locally
is preferable, since it will be easier for you to monitor the status of
your application and ask questions. Plus, it's beneficial when the lender
knows home values and conditions in the local area. Do research and ask
family, friends, and your real estate agent for recommendations.
49. HOW ARE
PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?Pre-qualification
is an informal way to see how much you maybe able to borrow. You can
be 'pre-qualified' over the phone with no paperwork by telling a lender
your income, your long-term debts, and how large a down payment you can
afford. Without any obligation, this helps you arrive at a ballpark figure
of the amount you may have available to spend on a house.Pre-approval
is a lender's actual commitment to lend to you. It involves assembling
the financial records mentioned in Question 47 (Without the property
description and sales contract) and going through a preliminary approval
process. Pre-approval gives you a definite idea of what you can afford
and shows sellers that you are serious about buying.
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.
Company Name Phone Number
Trans Union 1-800-916-8800
51. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?Simple
mistakes are easily corrected by writing to the reporting company, pointing
out the error, and providing proof of the mistake. You can also request
to have your own comments added to explain problems. For example, if you
made a payment late due to illness, explain that for the record. Lenders
are usually understanding about legitimate problems.
52. 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.
53. HOW CAN I IMPROVE MY SCORE?There
are no easy ways to improve your credit score, but you can work to keep
it acceptable by maintaining a good credit history. This means paying
your bills on time and not overextending yourself by buying more than you
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the RIGHT LOAN for YOU
54. HOW DO I CHOOSE THE
BEST LOAN - PROGRAM FOR ME?
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?
can help you use your answers to questions such as these to decide which
loan best fits your needs.
55. WHAT IS THE BEST WAY TO COMPARE LOAN
TERMS BETWEEN 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
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 referral.
58. 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.
59. 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?
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.
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Refuse to sign any blank documents.
Do not buy property for someone else.
Do not overstate your income.
Do not overstate how long you have been employed.
Do not overstate your assets.
Accurately report your debts.
Do not change your income tax returns for any reason.
Tell the whole truth about gifts. Do not list fake co-borrowers on your
Be truthful about your credit problems, past and present.
Be honest about your intention to occupy the house
Do not provide false supporting documents.
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
62. WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?This
will likely be the first opportunity to examine the house without furniture,
giving you a clear view of everything. Check the walls and ceilings
carefully, as well as any work the seller agreed to do in response to the
inspection. Any problems discovered previously that you find uncorrected
should be brought up prior to closing. It is the seller's responsibility
to fix them.
WHAT MAKES UP CLOSING COST?
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 if applicable)
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, 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.
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)
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Mortgage or Deed of Trust
Binding Sales Contract (prepared
by the seller; your lawyer should review it)
Keys to your new home
CAN HUD and the FHA HELP ME BECOME a HOMEOWNER
IS THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT?Also known
as HUD, the U.S. Department of Housing and Urban Development was established
in 1965 to develop national policies and programs to address housing needs
in the U.S. One of HUD's primary missions is to create a suitable living
environment for all Americans by developing and improving the country's
communities and enforcing fair housing laws
67. HOW DOES HUD HELP
HOMEBUYERS AND HOMEOWNERS?HUD helps people by administering
a variety of programs that develop and support affordable housing.
Specifically, HUD plays a large role in homeownership by making loans
available for lower- and moderate-income families through its FHA mortgage
insurance program and its HUD Homes program. HUD owns homes in many
communities throughout the U.S. and offers them for sale at attractive
prices and economical terms. HUD also seeks to protect consumers through
education, Fair Housing Laws, and housing rehabilitation initiatives.
68. WHAT IS THE FHA?Now
an agency within HUD, the Federal Housing Administration was established
in 1934 to advance opportunities for Americans to own homes. By providing
private lenders with mortgage insurance, the FHA gives them the security
they need to lend to first-time buyers who might not be able to qualify
for conventional loans. The FHA has helped more than 26 million Americans
buy a home.
69. HOW CAN THE FHA ASSIST ME IN BUYING A HOME?The
FHA works to make homeownership a possibility for more Americans.
With the FHA, you don't need perfect credit or a high-paying job
to qualify for a loan. The FHA also makes loans more accessible
by requiring smaller down payments than conventional loans. In fact,
an FHA down payment could be as little as a few months rent. And
your monthly payments may not be much more than rent.
70. HOW IS THE FHA FUNDED?Lender
claims paid by the FHA mortgage insurance program are drawn from
the Mutual Mortgage Insurance fund. This fund is made up of premiums
paid by FHA-insured loan borrowers. No tax dollars are used to
fund the program.
CAN QUALIFY FOR FHA LOANSanyone who meets the credit
requirements, can afford the mortgage payments and cash investment,
and who plans to use the mortgaged property as a primary residence
may apply for an FHA-insured loan.
72. WHAT IS THE FHA LOAN LIMIT?FHA
loan limits vary throughout the country, from $115,200 in
low-cost areas to $208,800 in high-cost areas. The loan maximums for
multi-unit homes are higher than those for single units and
also vary by area.Because these maximums are linked to the
conforming loan limit and average area home prices, FHA loan
limits are periodically subject to change. Ask your lender
for details and confirmation of current limits.
73. WHAT ARE THE STEPS INVOLVED
IN THE FHA LOAN PROCESS?With the exception of
a few additional forms, the FHA loan application process
is similar to that of a conventional loan (see Question
47). With new automation measures, FHA loans may be originated
more quickly than before. And, if you don't prefer a face-to-face
meeting, you can apply for an FHA loan via mail, telephone,
the Internet, or video conference.
74. HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY
FOR AN 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
75. WHAT QUALIFIES
AS AN INCOME SOURCE FOR THE FHA?Seasonal pay,
child support, retirement pension payments, unemployment
compensation, VA benefits, military pay, Social Security
income, alimony, and rent paid by family all qualify
as income sources. Part-time pay, overtime, and bonus
pay also count as long as they are steady. Special
savings plans-such as those set up by a church or community
association - qualify, too. Income type is not as important
as income steadiness with the FHA.
76. CAN I CARRY DEBT AND STILL
QUALIFY FOR FHA LOANS?Yes. Short-term debt
doesn't count as long as it can be paid off within
10 months. And some regular expenses, like child
care costs, are not considered debt. Talk to your
lender or real estate agent about meeting the FHA
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
worth enough to repay the mortgage regardless of income
- evidence of
acceptable credit history or limited credit use
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.
81. HOW DOES MY CREDIT
HISTORY IMPACT MY ABILITY TO QUALIFY?
The FHA is
generally more flexible than conventional lenders in its qualifying guidelines.
In fact, the FHA allows you to re-establish 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
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
83. 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%.
84. CAN I ROLL CLOSING COSTS
INTO my FHA LOAN?No. Though you can't roll closing costs into
your FHA loan, you may be able to use the amount you pay for them to
help satisfy the down payment requirement. Ask your lender for details.
ARE FHA LOANS ASSUMABLE?Yes. You can assume an existing
FHA-insured loan, or, if you are the one deciding to sell, allow
a buyer to assume yours. Assuming a loan can be very beneficial,
since the process is streamlined and less expensive compared to that
for a new loan. Also, assuming a loan can often result in a lower
interest rate. The application process consists basically of a credit
check and no property appraisal is required. And you must demonstrate
that you have enough income to support the mortgage loan. In this
way, qualifying to assume a loan is similar to the qualification
requirements for a new one.
86. WHAT SHOULD I DO IF I CAN'T MAKE
A PAYMENT ON LOAN?Call or, write to your lender as soon
as possible. Clearly explain the situation and be prepared to provide
him or her with financial information.
87. ARE THERE ANY OPTIONS IF I FALL BEHIND
ON MY LOAN PAYMENTS?Yes. Talk to your lender or a HUD-approved
counseling agency for details. Listed below are a few options
that may help you get back on track.
Keep living in your home to qualify for assistance.
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.
a number of special loss mitigation programs available to help you:
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
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.
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.
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:
skimming: a buyer offers to repay the mortgage or sell the property if
you sign over the deed and move out.
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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88. WHAT IS MORTGAGE INSURANCE?Mortgage
insurance is a policy that protects lenders against some or most of the
losses that result from defaults on home mortgages. It's required primarily
for borrowers making a down payment of less than 20%.
89. 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.
90. DO I NEED MORTGAGE INSURANCE?
HOW DO I GET IT?You need mortgage insurance only if you
plan to make a down payment of less than 20% of the purchase price
of the home. The FHA offers several loan programs that may meet your
needs. Ask your lender for details.
91. 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 - Homebuyer Education Learning Program - is structured to
help people like you begin the homebuying process. It covers such
topics as budgeting, finding a home, getting a loan, and home maintenance.
In most cases, completion of this program may entitle you to a
reduction in the initial FHA mortgage insurance premium from 2.25%
to 1.75% of the purchase price of your new home.
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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IS A 203(b) LOAN?This is the most commonly used FHA
program. It offers a low down payment, flexible qualifying
guidelines, limited lender's fees, and a maximum loan amount.
94. WHAT IS A 203(k) LOAN?
This is a
loan that enables the homebuyer to finance both the purchase and rehabilitation
of a home through a single mortgage. A portion of the loan is used to pay
off the seller's existing mortgage and the remainder is placed in an escrow
account and released as rehabilitation is completed. Basic guidelines for
203(k) loans are as follows:
The home must be at least one year old.
The cost of rehabilitation
must be at least $5,000, but the total property value - including the cost
of repairs - must fall within the FHA maximum mortgage limit.
203(k) loan must follow many of the 203(b) eligibility requirements.
to your lender about specific improvement, energy efficiency, and structural
WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
Efficient Mortgage allows a homebuyer to save future money on utility bills.
This is done by financing the cost of adding energy-efficiency features to
a new or existing home as part of an FHA-insured home purchase. The EEM can
be used with both 203(b) and 203(k) loans. Basic guidelines for EEMs are
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.
97. WHAT IS A TITLE I LOAN?Given by
a Lender and insured by the FHA, a Title I loan is used to make non-luxury
renovations and repairs to a home. It offers a manageable interest rate
and repayment schedule. Loans are limited to between $5,000 and 20,000.
If the loan amount is under 7,500, no lien is required against your home.
Ask your lender for details.
98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS
DOES THE FHA OFFER?The FHA also insures loans for the purchase
or rehabilitation of manufactured housing, condominiums, and cooperatives.
It also has special programs for urban areas, disaster victims, and
members of the armed forces. Insurance for ARMS is also available from
HOW CAN I OBTAIN AN FHA-INSURED LOAN?Contact an FHA-approved
lender such as a participating mortgage company, bank, savings and
loan association, or thrift. For more information on the FHA and
how you can obtain an FHA loan, visit the HUD web site at http://www.hud.gov or call a HUD-approved counseling
agency at 1-800-569-4287 or TDD: 1-800-877-8339.
100. HOW CAN I
CONTACT HUD?Visit the web site at http://www.hud.gov or
look in the phone book "blue pages" for a listing of the HUD office near