1. HOW DO I KNOW IF I'M READY TO BUY A HOME?
You can find out by asking yourself some questions:
- Do I have a steady source of income (usually a job)?
Have I been employed on a regular basis for the last 2-3
years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few outstanding long-term debts, like car
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month,
plus additional costs?
If you can answer "yes" to these questions, you
are probably ready to buy your own home.
2. HOW DO I BEGIN THE PROCESS OF BUYING A HOME?
Start by thinking about your situation. Are you ready to
buy a home? 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
3. HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
The two don't really compare at all. The one advantage of
renting is being generally free of most maintenance
responsibilities. But by renting, you lose the chance to
build equity, take advantage of tax benefits, and protect
yourself against rent increases. Also, you may not be free to
decorate without permission and may be at the mercy of the
landlord for housing.
Owning a home has many benefits. When you make a mortgage
payment, you are building equity. And that's an investment.
Owning a home also qualifies you for tax breaks that assist
you in dealing with your new financial responsibilities- like
estate taxes, and upkeep- which can be substantial. But
given the freedom, stability, and security of owning your own
home, they are worth it.
4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT
I CAN AFFORD?
The lender considers your debt-to-income ratio, which is a
comparison of your gross (pre-tax) income to housing and
non-housing expenses. Non-housing expenses include such
long-term debts as car 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
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
Your home should fit the 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.
Gross Annual Income
Gross Monthly Income
29% Available for Housing
II. FINDING YOUR HOME
7. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?
Select a community that will allow you to best live your
daily life. Many people choose communities based on schools.
Do you want access to shopping and public transportation? Is
access to local facilities like libraries and museums
important to you? Or do you prefer the peace and quiet of a
rural community? When you find places that you like, talk to
people that live there. They know the most about the area and
will be your future neighbors. More than anything, you want a
neighborhood where you feel comfortable.
8. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN
Immediately contact the U.S. Department of Housing and
Urban Development (HUD) if you ever feel excluded from a
neighborhood or particular house. Also, contact HUD if you
believe you are being discriminated against on the basis of
race, color, religion, sex, nationality, familial status, or
disability. HUD's Office of Fair Housing has a hotline for
reporting incidents of discrimination: 1-800-669-9777 (and
1-800-927-9275 for the hearing impaired).
9. HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?
You can get information about school systems by contacting
the city or county school board or the local schools. Your
real estate agent may also be knowledgeable about schools in
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
The total amount of the previous year's property taxes is
usually included in the listing information. If it's not, ask
the seller for a tax receipt or contact the local assessor's
office. Tax rates can change from year to year, so these
figures maybe approximate.
13. WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?
Keep in mind that your mortgage interest and real estate
taxes will be deductible. A qualified real estate
professional can give you more details on other tax benefits
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?
In addition to comparing the home to your minimum
requirement and wish lists, use the HUD Home Scorecard and
consider the following: Is there enough room for both the
present and the future? Are there enough bedrooms and
bathrooms? Is the house structurally sound? Do the mechanical
systems and appliances work? Is the yard big enough? Do you
like the floor plan? Will your furniture fit in the space? Is
there enough storage space? (Bring a tape measure to better
answer these questions.)
- 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
- Does anything need to be repaired or replaced? Will the
seller repair or replace the items?
- Imagine the house in good weather and bad, and in each
season. Will you be happy with it year 'round?
Take your time and think carefully about each house you
see. Ask your real estate agent to point out the pros and
cons of each home from a professional standpoint. Using the
HUD Home Scorecard to keep track of the homes you see is a
great way to keep organized. (Refer to the HUD Home Scorecard
on tbe following two pages.)
16. WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
Many of your questions should focus on potential problems
and maintenance issues. Does anything need to be replaced?
What things require ongoing maintenance (e.g., paint, roof,
HVAC, appliances, carpet)? Also ask about the house and
neighborhood, focusing on quality of life issues. Be sure the
seller's or real estate agent's answers are clear and
complete. Ask questions until you understand all of the
information they've given. Making a list of questions ahead
of time will help you organize your thoughts and arrange all
of the information you receive. The HUD Home Scorecard can
help you develop your question list.
17. HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?
If possible, take photographs of each house: the outside,
the major rooms, the yard, and extra features that you like
or ones you see as potential problems. And don't hesitate to
return for a second look. Use the HUD 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.
PART III. YOU'VE FOUND IT
19. WHAT DOES A HOME INSPECTOR DO AND HOW DOES AN INSPECTION
FIGURE INTO THE PURCHASE OF A HOME?
An inspector checks the safety of your potential new home. Home
inspectors focus especially on the structure, construction, and
mechanical systems of the house and will make you aware of any
repairs that are needed.
The inspector does not evaluate whether or not you're getting
good value for your money. Generally, an inspector checks (and
gives prices for repairs on): the electrical system, plumbing and
waste disposal, the water heater, insulation and ventilation, the
HVAC system, water source and quality, the potential presence of
pests, the foundation, doors, windows, ceilings, walls, floors,
and roof. Be sure to hire a home inspector that is qualified and
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 house.
20. DO I NEED TO BE THERE FOR THE INSPECTION?
It's not required, but it's a good idea. Following the
inspection, the home inspector will be able to answer questions
about the report and any problem areas. This is also an
opportunity to hear an objective opinion on the home you'd like
to purchase and it is a good time to ask general maintenance
21. ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem, another
more specific inspection may be recommended. It's a good idea to
consider having your home inspected for the presence of a variety
of health-related risks like radon gas, asbestos, or possible
problems with the water or waste disposal system.
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 paint. It's important to know that lead
flakes from paint can be present in both the home and in the soil
surrounding the house. The problem can be fixed temporarily by
repairing damaged paint surfaces or planting grass over effected
soil. Hiring a lead abatement contractor to remove paint chips
and seal damaged areas will fix the problem permanently.
23. ARE POWER LINES A HEALTH HAZARD?
There are no definitive research findings that indicate
exposure to power Iines results in greater instances of disease
24. DO I NEED A LAWYER TO BUY A HOME?
Laws vary by state. Some states require a lawyer to assist in
several aspects of the home buying process while other states do
not, as long as a qualified real estate professional is involved.
Even if your state doesn't require one, you may want to hire a
lawyer to help with the complex paperwork and legal contracts. A
lawyer can review contracts, make you aware of special
considerations, and assist you with the closing process. Your
real estate agent may be able to recommend a lawyer. If not, shop
around. Find out what services are provided for what fee, and
whether the attorney is experienced at representing homebuyers.
25. DO I REALLY NEED HOMEOWNER'S INSURANCE?
Yes. A paid homeowner's insurance policy (or a paid receipt for
one) is required at closing, so arrangements will have to be made
prior to that day. Plus, involving the insurance agent early in
the home buying process can save you money. Insurance agents are
a great resource for information on home safety and they can give
tips on how to keep insurance premiums low.
26. WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER'S INSURANCE
Be sure to shop around among several insurance companies. Also,
consider the cost of insurance when you look at homes. Newer
homes and homes constructed with materials like brick tend to
have lower premiums. Think about avoiding areas prone to natural
disasters, like flooding. Choose a home with a fire hydrant or a
fire department nearby.
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.
27. IS THE HOME LOCATED IN A FLOODPLAIN?
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?
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.
30. HOW DO I DETERMINE THE INITIAL OFFER?
Unless you have a buyer's agent, remember that the agent works
for the seller. Make a point of asking him or her to keep your
discussions and information confidential. Listen to your real
estate agent's advice, but follow your own instincts on deciding
a fair price. Calculating your offer should involve several
factors: what homes sell for in the area, the home's condition,
how long it's been on the market, financing terms, and the
seller's situation. By the time you're ready to make an offer,
you should have a good idea of what the home is worth and what
you can afford. And, be prepared for give-and-take negotiation,
which is very common when buying a home. The buyer and seller may
often go back and forth until they can agree on a price.
31. WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?
Earnest money is money put down to demonstrate your seriousness
about buying a home. It must be substantial enough to demonstrate
good faith and is usually between 1-5% of the purchase price
(though the amount can vary with local customs and conditions).
If your offer is accepted, the earnest money becomes part of your
down payment or closing costs. If the offer is rejected, your
money is returned to you. If you back out of a deal, you must
forfeit the entire amount.
32. WHAT ARE "HOME WARRANTIES," AND SHOULD I CONSIDER
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
PART IV. GENERAL FINANCING
QUESTIONS: THE BASICS
33. WHAT IS A MORTGAGE?
Generally speaking, a mortgage is a loan obtained to purchase
real estate. The "mortgage" itself is a lien (a legal
claim) on the home or property that secures the promise to pay
the debt. All mortgages have two features in common: principal
34. WHAT IS A LOAN-TO-VALUE (LTV) RATIO? HOW DOES IT DETERMINE
THE SIZE OF THE LOAN?
The LTV 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 ratio, 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 a 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 life of the loan
- Housing cost remains unaffected by interest rate changes
Adjustable Rate Mortgages (ARMS): Payments increase or decrease
on a regular schedule with changes in interest rates; increases
subject to limits Types
- Balloon Mortgage- Offers very low rates for an initial
period of time (usually 5, 7, or 10 years); when time has
elapsed, the balance is due or refinanced (though not
- Two-Step Mortgage- Interest rate adjusts only once and
remains the same for the life of the loan
- ARMS linked to a specific index or margin
- Generally offer lower initial interest rates
- Monthly payments can be lower
- May allow borrower to qualify for a larger loan amount
36. WHEN DO ARMS MAKE SENSE?
An ARM may make sense if you are confident that your income
will increase steadily over the years or if you anticipate a move
in the near future and aren't concerned about potential increases
in interest rates.
37. WHAT ARE THE ADVANTAGES OF 15 - AND 30-YEAR LOAN TERMS?
- In the first 23 years of the loan, more interest is paid
off than principal, meaning larger tax deductions.
- As inflation and costs of living increase, mortgage
payments become a smaller part of overall expenses.
- Loan is usually made at a lower interest rate.
- Equity is built faster because early payments pay more
38. CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Yes. By sending in extra money each month or making an extra
payment at the end of the year, you can accelerate the process of
paying off the loan. When you send extra money, be sure to
indicate that the excess payment is to be applied to the
principal. Most lenders allow loan prepayment, though you may
have to pay a prepayment penalty to do so. Ask your lender for
39. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options,
which can help first-time homebuyers, overcome obstacles that
made purchasing a home difficult in the past. Lenders may now be
able to help borrowers who don't have a lot of money saved for
the down payment and closing costs, have no or a poor credit
history, have quite a bit of long-term debt, or have experienced
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 repayment term and payment schedule will
all affect the size of your mortgage payment.
43. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE
A lower interest rate allows you to borrow more money than a
high rate with the same 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 a mortgage loan by expressing it in terms of a yearly
interest rate. It is higher than the interest rate because it
also includes the cost of points, mortgage and other fees
included in the loan.
44. HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE
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 Ieast 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. 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 taxes or
homeowner's insurance, make sure you are not penalized for late
payments since it is the lender's responsibility to make those
47. WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
The first step in securing a loan is to complete a loan
application. To do so, you'll need the following information:
- Pay stubs for the past 2-3 months
- W-2 forms for the past 2 years
- Information on long-term debts
- Recent bank statements
- Tax returns for the past 2 years
- Proof of any other income
- Address and description of the property you wish to buy
- Sales contract
During the application process, the lender will order a report
on your credit history and a professional appraisal of the
property you want to purchase. The application process typically
takes between 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 may be
able to borrow. You can be "pre-qualified" over the
phone with no paperwork by telling a lender your income, your
long-term debts, and how large a down payment you can afford.
Without any obligation, this helps you arrive at a ballpark
figure of the amount you may have available to spend on a house.
Pre-approval is a lender's actual commitment to lend to you. It
involves assembling the financial records mentioned in Question
47 (without the property description and sales contract) and
going through a preliminary approval process. Pre-approval gives
you a definite idea of what you can afford and shows sellers that
you are serious about buying.
50. HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
There are three major credit reporting companies: Equifax,
Experian, and Trans Union. Obtaining your credit report is as
easy as calling and requesting one. Once you receive the report,
it's important to verify its accuracy. Double-check the "high
credit limit", "total loan," and "past due"
columns. It's a good idea to get copies from all three companies
to assure there are no mistakes since any of the three could be
providing a report to your lender. Fees, ranging from $5-$20, are
usually charged to issue credit reports but some states permit
citizens to acquire a free one. Contact the reporting companies
at the numbers listed for more information.
CREDIT REPORTING COMPANIES
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 can afford.
PART VI. FINDING THE RIGHT LOAN FOR
54. 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
- Are you planning to live in this home for a long period of
- Are you comfortable with the idea of a changing mortgage
- Do you wish to be free of mortgage debt as your children
approach college age or as you prepare for retirement?
Your lender can help you use your answers to questions such as
these to decide which loan best fits your needs.
55. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN 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.
56. ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN
Yes. When you turn in your application, you'll be required to
pay a loan application fee to cover the costs of underwriting the
loan. This fee pays for the home appraisal, a copy of your credit
report, and any additional charges that may be necessary. The
application fee is generally non-refundable.
57. WHAT IS RESPA?
RESPA stands for Real Estate Settlement Procedures Act. It
requires lenders to disclose information to potential customers
throughout the mortgage process. By doing so, it protects
borrowers from abuses by lending institutions. RESPA mandates
that lenders fully inform borrowers about all closing costs,
lender servicing and escrow account practices, and business
relationships between closing service providers and other parties
to the transaction.
For more information on RESPA, visit the web page at
http:/www.hud.gov/fhq/res/respa-hm.htmI or call 1-800-217-6970
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
Lenders are not allowed to discriminate in any way against
potential borrowers. If you believe a lender is refusing to
provide his or her services to you on the basis of race, color,
nationality, religion, sex, familial status, or disability,
contact HUD's Office of Fair Housing at 1-800-669-9777 (or
1-800-927-9275 for the hearing impaired).
60. WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING 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 I about your credit problems, past and present.
- Be honest about your intention to occupy the house.
- Do not provide false supporting documents.
PART VII. CLOSING
61. WHAT HAPPENS AFTER I HAVE APPLIED FOR A LOAN?
It usually takes a lender between 1-6 weeks to complete the
evaluation of your application. It's not unusual for the lender
to ask for more information once the application has been
submitted. The sooner you can provide the information, the faster
your application will be processed. Once all the information has
been verified, the lender will call you to let you know the
outcome of your application. If the loan is approved, a closing
date is set up and the lender will review the closing process
with you. And after closing, you'll be able to move into your new
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
63. WHAT MAKE UP CLOSING COSTS?
There may be closing costs customary or unique to a certain
locality, but closing costs are usually made up of the following:
- Attorney's or escrow fees (yours and your lender's if
- Property taxes (to cover tax period to date)
- Interest (paid from date of closing to 30 days before first
- Loan origination fee (covers lender's administrative costs)
- Recording fees
- Survey fee
- First premium of mortgage insurance (if applicable)
- Title insurance (yours and your lender's)
- Loan discount points
- First payment to escrow 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
64. WHAT CAN I EXPECT TO HAPPEN ON CLOSING DAY?
You'll present your paid homeowner's insurance policy or a
binder and receipt showing that the premium has been paid. The
closing agent will then list the money you owe the seller
(remainder of down payment, prepaid taxes, etc.) and then the
money the seller owes you (unpaid taxes and prepaid rent, if
applicable). The seller will provide proofs of any inspection,
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
65. WHAT DO I GET AT CLOSING?
- Settlement Statement, HUD-1 Form (itemizes services
provided and the fees charged; it is filled out by the closing
agent and must be given to you at or before closing)
- Truth-in-Lending Statement
- Mortgage Note
- Mortgage or Deed of Trust
- Binding Sales Contract (prepared by the seller; your lawyer
should review it)
- Keys to your new home
PART VIII. CAN HUD AND THE FHA HELP
ME BECOME A HOMEOWNER?
66. WHAT IS THE U.S. DEPARTMENT OF HOUING AND URBAN
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.
68. WHAT IS THE FHA?
Now an agency within HUD, the Federal Housing Administration
was established in 1934 to advance opportunities for Americans to
own homes. By providing private lenders with mortgage insurance,
the FHA gives them the security they need to lend to first-time
buyers who might not be able to qualify for conventional loans.
The FHA has helped more than 26 million Americans buy a home.
69. HOW CAN THE FHA ASSIST ME IN BUYING A HOME?
The FHA works to make homeownership a possibility for more
Americans. With the FHA, you don't need perfect credit or a
high-paying job to qualify for a loan. The FHA also makes loans
more accessible by requiring smaller down payments than
conventional loans. In fact, an FHA down payment could be as
little as a few months' rent. And your monthly payments may not
be much more than rent.
70. HOW IS THE FHA FUNDED?
Lender claims paid by the FHA mortgage insurance program are
drawn from the Mutual Mortgage Insurance fund. This fund is made
up of premiums paid by FHA-insured loan borrowers. No tax dollars
are used to fund the program.
71. WHO CAN QUALIFY FOR FHA LOANS?
Anyone who meets the credit requirements, can afford the
mortgage payments and cash investment, and who plans to use the
mortgaged property as a primary residence may apply for an
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 highcost 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
There is no minimum income requirement. But you must prove
steady income for at least three years, and demonstrate that
you've consistently paid your bills on time.
75. WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?
Seasonal pay, child support, retirement pension payments,
unemployment compensation, VA benefits, military pay, Social
Security income, alimony, and rent paid by family all qualify as
income sources. Part-time pay, overtime, and bonus pay also count
as long as they are steady. Special savings plans-such as those
set up by a church or community association - qualify, too.
Income type is not as important as income steadiness with the
76. CAN I CARRY DEBT AND STILL QUALIFY FOR FHA LOANS?
Yes. Short-term debt doesn't count as long as it can be paid
off within 10 months. And some regular expenses, like child care
costs, are not considered debt. Talk to your lender or real
estate agent about meeting the FHA debt-to-Income ratio.
77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
The FHA allows you to use 29% of you income towards housing
costs and 41% towards housing expenses and other long-tem debt.
With a conventional loan, this qualifying ratio allows only 28%
toward housing and 36% towards housing and other debt.
78. CAN I EXCEED THE RATIO?
You may qualify to exceed if you have:
- A large down payment
- A demonstrated ability to pay more toward you housing
- Substantial cash reserves
- Net worth enough to repay the mortgage regardless of income
- Evidence of acceptable credit history or limited credit use
- Less-than-maximum mortgage terms
- Funds provided by an organization
- A decrease in monthly housing expenses
79. HOW LARGE A DOWN PAYMENT DO I NEED WITH AN FHA LOAN?
You must have a down payment of at least 3% of the purchase
price of the home. Most affordable loan programs offered by
private lenders require between a 3% - 5% down payment, with a
minimum of 3% coming directly from the borrower's own funds.
80. WHAT CAN I USE TO PAY THE DOWN PAYMENT AND CLOSING COSTS OF
AN FHA LOAN?
Besides your own funds, you may use cash gifts or money from a
private savings club. If you can do certain repairs and
improvements yourself, your labor may be used as part of a down
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
- all judgments have been paid
- any outstanding tax liens have been satisfied or
appropriate arrangements have been made to establish a
repayment plan with the IRS or state Department of Revenue
- three years have passed since a foreclosure or a
deed-in-lieu has been resolved
82. CAN I QUALIFY FOR AN FHA LOAN WITHOUT A CREDIT HISTORY?
Yes. If you prefer to pay debts in cash or are too young to
have established credit, there are other ways to prove your
eligibility. Talk to your lender for details.
83. WHAT TYPES OF CLOSING COSTS ARE ASSOCIATED WITH FHA-INSURED
Except for the addition of an FHA mortgage insurance premium,
FHA closing costs are similar to those of a conventional loan
outlined in Question 63. The FHA requires a single, 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%.
84. CAN I ROLL CLOSING COSTS INTO MY FHA LOAN?
No. Though you can't roll closing costs into your FHA loan, you
may be able to use the amount you pay for them to help satisfy
the down payment requirement. Ask your lender for details.
85. ARE FHA LOANS ASSUMABLE?
Yes. You can assume an existing FHA-Insured loan, or, if you
are the one deciding to sell, allow a buyer to assume yours.
Assuming a loan can be very beneficial, since the process is
stream lined 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 MY LOAN?
Call or write to your lender as soon as possible. Clearly
explain the situation and be prepared to provide him or her with
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.
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: 1-800-877-8339) and cooperate with the
counselor/lender trying to help you.
- HUD has a number of special loss mitigation programs
available to help you:
- Special Forbearance: Your lender will arrange for a revised
repayment plan which may include temporary reduction or
suspension of payments; you can qualify by having an
involuntary reduction in your income or increase in living
- Mortgage Modification: Allows you to refinance debt and/or
extend the term of the 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 may be able to help you obtain
an interest-free loan from HUD to bring your mortgage current.
- Pre-foreclosure Sale: Allows you to sell your property and
pay off your mortgage loan to avoid foreclosure.
- Deed-in-lieu of Foreclosure: Lets you voluntarily "give
back" your property to the lender; it won't save your
house but will help you avoid the costs, time, and effort of
the foreclosure process.
- If you are having difficulty with an uncooperative lender
or feel your loan servicer is not providing you with the most
effective loss mitigation options, call the FHA Loss Mitigation
Center at 1-888-297-8685 for additional help.
For conventional loans:
- Talk to your lender about specific loss mitigation options.
Work directly with him or her to request a "workout
packet." A secondary lender, like Fannie Mae or Freddie
Mac, may have purchased your loan. Your lender can follow the
appropriate guidelines set by Fannie or Freddie to determine
the best option for your situation.
Fannie Mae does not deal directly with the borrower. They work
with the lender to determine the loss mitigation program that
best fits your needs.
Freddie Mac, like Fannie Mae, will usually only work with the
loan servicer. However, if you encounter problems with your
lender during the loss mitigation process, you can call customer
service for help at 1-800-FREDDIE (1-800-373-3343).
In any loss mitigation situation, it is important to remember a
few helpful hints:
- Explore every reasonable alternative to avoid losing your
home, but beware of scams.
For example, watch out for:
Equity skimming: a buyer offers to repay the mortgage or sell
the property if you sign over the deed and move out.
Phony counseling agencies: offer counseling for a fee when it
is often given at no charge.
- Don't sign anything you don't understand.
PART IX. MORTGAGE INSURANCE
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
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
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
92. WHAT IS PMI?
PMI stands for Private Mortgage insurance or Insurer. These are
privately-owned companies that provide mortgage insurance. They
offer both standard and special affordable programs for
borrowers. These companies provide guidelines to lenders that
detail the types of loans they will insure. Lenders use these
guidelines to determine borrower eligibility. PMI's usually have
stricter qualifying ratios and larger down payment requirements
than the FHA, but their premiums are often lower and they insure
loans that exceed the FHA limit.
PART X. FHA PRODUCTS
93. WHAT IS A 203(b) LOAN?
This is the most commonly used FHA program. It offers a low
down payment, flexible qualifying guidelines, limited lender's
fees, and a maximum loan amount.
94. WHAT IS A 203(k) LOAN?
This is a loan that enables the homebuyer to finance both the
purchase and rehabilitation of a home through a single mortgage.
A portion of the loan is used to pay off the seller's existing
mortgage and the remainder is placed in an escrow account and
released as rehabilitation is completed. Basic guidelines for
203(k) loans are as follows:
- The home must be at least one year old.
- The cost of rehabilitation must be at least $5,000, but the
total property value-including the cost of repairs-must fall
within the FHA maximum mortgage limit.
- The 203(k) loan must follow many of the 203(b) eligibility
- Talk to your lender about specific improvement, energy
efficiency, and structural guidelines.
95. WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
The Energy Efficient Mortgage allows a homebuyer to save future
money on utility bills. This is done by financing the cost of
adding energy-efficiency features to a new or existing home as
part of an FHA-insured home purchase. The EEM can be used with
both 203(b) and 203(k) loans. Basic guidelines for EEMs are as
- 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.
96. WHAT IS THE FHA BRIDAL REGISTRY PROGRAM?
Just as you might register at a department store for wedding
gifts, the Bridal Registry program allows couples to register
with a lender and open up an interest-bearing account. Family and
friends can deposit wedding gifts of cash into this account.
These gifts can then be applied toward a down payment on a home.
Ask your lender for details.
97. WHAT IS A TITLE I LOAN?
Given by a lender and insured by the FHA, a Title I loan is
used to make non-luxury renovations and repairs to a home. It
offers a manageable interest rate and repayment schedule. Loans
are limited to between $5,000 and $20,000. If the loan amount is
under $7,500, no lien is required against your home. Ask your
lender for details.
98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES THE FHA OFFER?
The FHA also insures loans for the purchase or rehabilitation
of manufactured housing, condominiums, and cooperatives. It also
has special programs for urban areas, disaster victims, and
members of the armed forces. Insurance for ARMs is also available
from the FHA.
99. HOW CAN I OBTAIN AN FHA-INSURED LOAN?
Contact any 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
100. HOW CAN I CONTACT HUD?
Visit the web site at http://www.hud.gov
or look in the phone book "blue pages" for a listing of
the HUD office near you.