CONTENTS
Part I Getting Started Part II Finding Your Home Part III You’ve Found It Part IV General Financing Questions – Basics Part V First Steps Part VI Finding the Right Loan for You Part VII Closing Part VIII How HUD and FHA Can Help You Become a Homeowner Part IX Mortgage Insurance Part X FHA Products
Glossary
GETTING STARTED
1. HOW DO I KNOW IF I’M READY TO BUY A HOME?
You can determine this by asking yourself a few questions:
- Do I have a stable source of income, generally from a job? Have I been steadily employed for at least two to three years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few long-term debts, such as car payments?
- Do I have money saved for a down payment?
- Am I able to afford monthly mortgage payments, plus extra expenses?
If you can answer “yes” to these questions, you are likely ready to buy your own home.
2. HOW DO I START THE HOME BUYING PROCESS?
Begin by thinking about your situation. Are you ready to buy a home? How much can you afford for a monthly mortgage payment (for help, see Question 4)? How much space do you need? What areas of town do you like? After answering these questions, make a “To Do” list and start an informal search. Talk to family and friends, drive around neighborhoods, and look in the “Homes” section of the newspaper.
3. HOW ARE BUYING AND RENTING A HOME SIMILAR?
Actually, they are not similar at all. One of the advantages of renting is that you are generally free from maintenance responsibilities. However, when you rent, you lose the opportunity to build equity, take advantage of tax benefits, and protect yourself against rent increases. Plus, you may not be free to decorate without permission and you are at the mercy of your landlord.
Homeownership has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Homeownership also qualifies you for tax breaks that will help you meet your new financial responsibilities, such as insurance, real estate taxes, and maintenance, which can be substantial. However, given the freedom, stability, and security of owning your own home, they are well worth it.
4. HOW DOES A LENDER DECIDE THE MAXIMUM LOAN AMOUNT IT CAN GRANT?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing-related and non-housing related expenses. Non-housing expenses include long-term debts, such as student or car loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should not exceed 29% of gross income, while the mortgage payment combined with non-housing expenses should not exceed 41% of income. In determining the maximum loan amount, the lender also considers cash available for down payment and closing costs, and credit history.
5. HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?
Start by asking family and friends if they can recommend an agent. Collect 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 is knowledgeable about the local area and has resources and contacts to help in your search. Generally, you want to choose an agent who makes you feel comfortable and provides all the services and expertise you need.
6. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I START LOOKING?
Your home should fit your lifestyle, with spaces and features that please your entire family. Before you start looking at homes, make a list of your priorities, such as location and size. Does the home need to be near certain schools, your work, public transportation? What size should it be? What kind of lot do you prefer? What types of amenities are you looking for? Establish a list of minimum requirements and a “wish list.” Minimum requirements are things the home must have for you to consider it, while the “wish list” covers things you would like to have but are not essential.
FINDING YOUR HOME
7. WHAT SHOULD I CONSIDER WHEN DECIDING ON A COMMUNITY?
Select the community that best allows you to live your daily life. Many people choose communities based on schools. Do you want access to shopping and public transportation? Is access to local services like libraries and museums important to you? Or do you prefer the peace and quiet of a rural community? When you find places you like, talk to people who live there. They know the area well and will be your future neighbors. Most of all, you want a neighborhood where you feel comfortable.
8. WHAT SHOULD I DO IF I FEEL EXCLUDED FROM CERTAIN NEIGHBORHOODS?
Immediately contact the U.S. Department of Housing and Urban Development (HUD) if you ever feel excluded from a particular neighborhood or home. Also contact HUD if you believe you are being discriminated against because of your race, color, religion, sex, national origin, marital status, or disability. HUD’s Office of Fair Housing has a hotline for reporting discrimination: (800) 669-9777 (and (800) 927-9275 for the hearing impaired).
9. HOW CAN I GET INFORMATION ABOUT LOCAL SCHOOLS?
You can get information about school systems by contacting the city or county school board or local schools. Your real estate agent may also be able to give you information about area schools.
10. HOW CAN I GET INFORMATION ABOUT COMMUNITY RESOURCES?
Request information from the local chamber of commerce or talk to your real estate agent about welcome kits, maps, and other information. You may want to visit the local library. It can be an excellent source of information about local events and resources and librarians can probably answer many of your questions.
11. HOW CAN I FIND OUT WHAT HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?
Your real estate agent can give you a rough idea by showing you comparative listings. If you are working with a REALTOR®, they may have access to comparative sales kept in a database.
12. HOW CAN I GET INFORMATION ABOUT REAL ESTATE PROPERTY TAXES?
The total amount of real estate property taxes for the previous year is usually included in the information guide. If not, ask the seller for a tax receipt or contact the local assessor’s office. Tax rates can change from year to year, so these figures may be approximate.
13. WHAT OTHER TAX-RELATED ISSUES SHOULD I CONSIDER?
Remember that mortgage interest and real estate taxes will be deductible. A real estate professional can give you more details about other tax benefits and responsibilities.
14. IS AN OLDER HOME A BETTER INVESTMENT THAN A NEW HOME?
There is no definitive answer to this question. You should look at the individual features of each home. Older homes are generally in more established neighborhoods, offer better landscaping, and real estate property taxes are often lower. However, people who buy older homes should be prepared for maintenance and repairs. Newer homes tend to utilize more modern designs and systems, are often easier to maintain, and may be more energy-efficient. People who buy new homes often don’t want to worry about maintenance and repairs at first.
15. WHAT SHOULD I LOOK FOR WHEN VISITING A HOME?
In addition to comparing it to your minimum requirements and wish list, use HUD’s Home ScoreCard and consider the following:
- Is there enough space, both for now and in the future?
- Are there enough bedrooms and bathrooms?
- Is the home structurally sound?
- Do the appliances and mechanical systems work?
- Is the lot large enough?
- Do you like the layout?
- Is there enough room for your furniture? Is there enough storage? (Bring a tape measure so you can better answer these questions.)
- Does anything need repair or replacement? Will the seller make needed repairs or replacements?
- Imagine the home in good weather and bad, and in every season. Will you be happy there year-round?
Take your time and think carefully about each house you visit. Ask your real estate agent to point out the pros and cons of each home from a professional point of view.
16. WHAT QUESTIONS SHOULD I ASK WHEN VISITING A HOME?
Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC system, appliances, carpet)? Also ask about the home and neighborhood, focusing on quality of life. Make sure the answers from the seller or real estate agent are clear and complete. Ask questions until you understand all the information you are given. Making a list of questions ahead of time will help you organize your thoughts and sort through all the information you receive. HUD’s Home ScoreCard can help you develop your list of questions.
17. HOW CAN I KEEP TRACK OF ALL THE HOMES I VISIT?
If possible, take pictures of each home: the exterior, major rooms, the lot, and extra features you like or see as potential problems. And don’t hesitate to return for a second look. Use HUD’s Home ScoreCard to organize your photos and notes on each home.
18. HOW MANY HOMES SHOULD I VISIT BEFORE MAKING A DECISION?
There is no set number of homes you should visit before making a decision. Visit as many as you need to until you find the one you are looking for. On average, home buyers visit 15 homes before choosing one. Just be sure to maintain open communication with your real estate agent about everything you are looking for. It will help them avoid wasting your time.
YOU’VE FOUND IT
19. WHAT DOES A HOME INSPECTOR DO AND WHAT DOES A HOME BUYING INSPECTION DETERMINE?
The inspector checks the safety of your potential new home. Home inspectors focus especially on the home’s structure, construction, and mechanical systems, and will tell you what repairs are needed.
The inspector does not evaluate whether it is a good investment. Generally, an inspector checks (and reports on the cost of repairs needed in): electrical system, plumbing and waste disposal, water heater, insulation and ventilation, HVAC system, water source and quality, potential presence of pests, foundation, doors, windows, ceilings, walls, floors, and roof. Make sure you hire a qualified and experienced home inspector.
It is wise to have an inspection before you make a formal offer because, once the deal closes, you will have bought the house “as is.” It is also possible to include an inspection clause in the offer during home negotiation. The inspection clause gives you an “out” to not buy the home if serious problems are discovered, or allows you to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must repair problems before the home sale.
20. SHOULD I BE PRESENT DURING THE INSPECTION?
It is not necessary, but it’s a good idea. After the inspection, the home inspector can answer questions about the report and problem areas. This is also an opportunity to hear an objective opinion about the home you want to buy, and it’s a good time to ask general maintenance questions.
21. ARE OTHER TYPES OF INSPECTIONS NECESSARY?
If the home inspector finds a serious problem, a more specific inspection is recommended. It is wise to consider home inspection regarding various health-related hazards, such as radon asbestos, or potential problems with water or waste disposal systems.
22. HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?
If the home you are 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 is important to know that lead paint chips can be present both in the home and on the land surrounding it. The problem can be temporarily solved by repairing damaged painted surfaces or by planting grass over affected land. Hiring a lead abatement construction firm to remove paint chips and seal damaged areas will solve the problem permanently.
23. ARE POWER LINES A HEALTH HAZARD?
Research has not yet reached definitive conclusions indicating that exposure to power lines produces an increase in illnesses or ailments.
24. DO I NEED A LAWYER TO BUY A HOME?
Laws vary from state to state. Some states require lawyer assistance in various aspects of the home buying process, while in other states this is not the case, as long as a qualified real estate professional is involved. Even if your state does not require it, you may want to hire a lawyer to help with the complex paperwork and legal contracts. The lawyer can review contracts, alert you to special considerations, and assist you at closing. Your real estate agent may be able to recommend a lawyer. If not, look for one yourself. Find out about services available and fees, and whether the lawyer has experience representing home buyers.
25. DO I REALLY NEED HOMEOWNER’S INSURANCE?
Yes. You will need to have a homeowner’s insurance policy (or paid receipt for one) at closing, so you will need to make arrangements well in advance of that day. Also, involving your insurance agent early in the home buying process could save you money. Insurance agents are a valuable source of information about home safety and can give you useful tips on how to keep insurance premiums down.
26. WHAT CAN I DO TO REDUCE THE COST OF MY HOMEOWNER’S INSURANCE?
Be sure to shop around with several insurance companies. Also, consider insurance costs when you look at homes. Newer homes and those built of materials like brick tend to have lower premiums. Consider avoiding areas prone to natural disasters, like flooding. Choose a home with a fire hydrant or 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 do live in a flood plain, the lender will require flood insurance before granting you the loan. However, if you live near a flood plain, you may want to decide for yourself whether or not to get flood insurance for your home. Work with an insurance agent to develop a policy that fits your needs.
28. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE BUYING MY HOME?
Always check to see if the home is in a low-lying area, a high natural disaster risk area (such as earthquake, hurricane, tornado, etc.), or in a hazardous materials area. Make sure the home meets building codes. Also consider local zoning laws, which could affect future remodeling or additions. Your real estate agent should be able to help you answer these questions.
29. HOW DO I MAKE AN OFFER?
Your real estate agent will help you make 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
- Offer expiration date
- Deal details
Remember that a sales agreement depends on negotiating a satisfactory contract with the seller, not just making an offer.
Other ways to reduce insurance costs include insuring your home and vehicle(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs always go down when you raise your deductibles, but this exposes you to greater out-of-pocket expense if you have to file a claim.
30. HOW DO I DETERMINE MY INITIAL OFFER?
Unless you have a buyer’s agent, remember that the agent works for the seller. Plan to keep discussions and information in reserve. Listen to your real estate agent’s advice, but follow your own instincts in deciding on a fair price. Calculating your offer should include several factors: what homes in the area are selling for, the condition of the home, how long it has been on the market, financing conditions, and the seller’s situation. When you are prepared to make an offer, you should know what the home is really worth and how much you can afford to spend. Also, be prepared to negotiate mutual concessions, a very common practice when buying and selling a home. The buyer and seller may go back and forth until they agree on a price.
31. WHAT IS EARNEST MONEY? HOW MUCH MONEY SHOULD I SET ASIDE?
Earnest money is money given to show your intention to buy a home. It should be substantial enough to demonstrate good faith and is generally 1% to 5% of the purchase price (though the amount may vary according to local custom and conditions). If your offer is accepted, the earnest money becomes part of the down payment or closing costs. If the offer is rejected, the money is returned to you. If you back out, you may forfeit the entire amount.
32. WHAT ARE “HOME WARRANTIES?” SHOULD I CONSIDER THEM?
Home warranties offer you protection for a specified period of time (e.g., one year) against potentially costly problems, such as unexpected repairs to appliances or home systems, that are not covered by homeowner’s insurance. Warranties are gaining in popularity because they offer protection during the period immediately following home purchase, when many people are cash-strapped.
GENERAL FINANCING QUESTIONS: 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 repay the debt. All mortgages have two features in common: principal and interest.
34. WHAT IS LOAN-TO-VALUE (LTV)? HOW IS MY LOAN AMOUNT DETERMINED?
Loan-to-value ratio is the loan amount compared to 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 appraised at $50,000, you could borrow up to $47,500 (95% of $50,000), and you would need to pay $2,500 as a down payment.
Loan-to-value ratio reflects the amount of equity borrowers have in their homes. The higher the LTV, the less cash home buyers have to pay from their own funds. Therefore, to protect lenders against potential loss in case of default, loans with higher LTVs (80% or greater) generally require a mortgage insurance policy.
35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed-Rate Mortgages: Payments do not change over the life of the loan
Types
- 15-year
- 30-year
Advantages
- Predictable
- Housing costs are not affected by interest rate and inflation changes.
Adjustable-Rate Mortgages (ARMs): Scheduled payments go up and down with interest rate changes; increases are subject to caps.
Types
- Balloon Mortgage: Offers very low rates during the initial period (usually five, seven, or ten years). After that time, the balance is due or is refinanced (though not automatically).
- Two-Step Mortgage: Interest rate adjusts only once and remains the same for the life of the loan.
- Index-plus-margin ARMs
Advantages
- Generally offer lower initial interest rates
- Monthly payments may be lower
- May qualify borrower for a larger loan amount
36. WHEN DO ARMS MAKE SENSE?
An ARM might make sense if you are confident that your income will grow at a steady pace over the years or if you are planning to move in the near future and are not worried about potential interest rate increases.
37. WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
30-year:
- More interest than principal is paid during the first 23 years of the loan, which means greater tax deductions.
- As inflation and the cost of living increase, mortgage payments become a smaller and smaller part of overall expenses.
15-year:
- Loans are generally made at lower interest rates.
- Equity builds up more rapidly because initial payments include more principal.
38. CAN I PAY MY LOAN OFF EARLY?
Yes. By sending in extra money each month or by making an extra payment at the end of the year, you can speed up the loan payoff process. When you send extra money, be sure to indicate that the overpayment is to be applied to the principal. Most lenders allow loan prepayment, though they charge a prepayment penalty. Check with your lender for details.
39. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOME BUYERS?
Yes. Today, lenders offer a variety of affordable mortgage options that can help first-time home buyers overcome obstacles that made homeownership difficult in the past. Now, lenders may be able to help borrowers who do not have a large sum of money saved for down payment and closing costs, have poor or no credit histories, have a significant long-term debt, or have experienced income irregularities.
40. HOW MUCH DO I NEED FOR A DOWN PAYMENT?
Mortgage options are now available that require as little as 5% down payment or less of the purchase price. However, the larger your down payment, the smaller your loan amount and the greater your equity. Mortgages with less than 20% down payment generally require a mortgage insurance policy in order to get the loan. When considering your down payment amount, keep in mind that you will also need money for closing costs, moving, and possibly repairs and decorating.
41. WHAT DOES THE MONTHLY MORTGAGE PAYMENT INCLUDE?
The monthly mortgage payment primarily covers principal and interest payments. However, 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 mortgage loan amount, the interest rate, the term, and the repayment schedule will affect the total mortgage payment.
43. HOW DOES INTEREST RATE AFFECT SECURING A MORTGAGE LOAN?
A lower interest rate allows you to qualify for a larger loan than a higher interest rate, with the same monthly payment. Interest rates may vary while you are shopping for a loan, so ask lenders if they offer a “lock-in” rate that guarantees a specific interest rate for a specified period of time. Remember that the lender must tell you the APR or Annual Percentage Rate of the loan. The APR expresses the cost of a home loan in terms of an annual interest rate. It is usually 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 GO DOWN AND I’VE LOCKED IN A FIXED-RATE LOAN?
If interest rates drop significantly, you might consider refinancing. Most experts agree that if you plan to be in your home for at least 18 months and can get a rate 2% below your current one, refinancing is worthwhile. However, refinancing may involve paying many of the expenses you paid at the original closing, plus loan application and origination costs.
45. WHAT ARE DISCOUNT POINTS?
Discount points allow you to lower the interest rate. They are basically prepaid interest, and each point equals 1% of the total loan amount. Generally, for each point you pay on a 30-year mortgage, the interest rate is reduced by 1/8 (or 0.125) of a percentage point. When you shop for loans, ask lenders for an interest rate with 0 points and see how much the rate goes down with each point you pay. Discount points make sense if you plan to be in the home for a long time, as they can reduce your monthly loan payment. Points are tax deductible when you purchase a home, and you may be able to negotiate with the seller to pay for some of them.
46. WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
An escrow account is set up by the lender, and a portion of your monthly mortgage payment is set aside in it to cover annual costs for homeowner’s insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they ensure that the 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 payment, since it is the lender’s responsibility to make these payments.
FIRST STEPS
47. WHAT STEPS SHOULD BE TAKEN TO GET A LOAN?
The first step to getting a loan is to complete the loan application. To do this, you will need the following information:
- Pay stubs for the last two to three months
- W-2 forms for the last two years
- Information on long-term debts
- Recent bank statements
- Tax returns for the last two years
- Proof of other income
- Address and description of the property you want to buy
- Sales contract
During the application process, the lender will order a report of your credit history and a professional appraisal of the property you want to purchase. The application process generally takes one to six weeks.
48. HOW DO I CHOOSE THE BEST LENDER FOR ME?
Choose your lender carefully. Consider financial stability and a reputation for customer satisfaction. Make sure you choose a company that gives you helpful advice and makes you feel comfortable. A lender with authority to approve and process your loan locally is preferable, as it will be easier for you to check on application status and ask questions. Also, it is beneficial when the lender is knowledgeable about local home values and conditions. Shop around and check with family, friends, and your real estate agent.
49. HOW DO PRE-QUALIFICATION AND PRE-APPROVAL DIFFER?
Pre-qualification is an informal way to find out how much money you might be able to borrow. You can get “pre-qualified” over the phone, without filling out any application, by telling a lender your income, long-term debts, and amount of down payment you are prepared to make. This involves no obligation and helps you establish an approximate amount you might have available to buy a home.
Pre-approval is a lender’s formal commitment to lend to you. It involves gathering 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 spend and demonstrates your purchase intentions to sellers.
50. HOW CAN I GET INFORMATION ABOUT MY CREDIT HISTORY?
There are three major credit reporting companies: Equifax, Experian, and Trans Union. To get your credit report, you simply call and request it. Once you receive the report, check it for accuracy. Review the “credit limit,” “total loan,” and “late pays” columns. It is wise to get copies from all three companies to make sure there are no errors, as any one of them may provide a report to your lender. The fee for issuing credit reports varies from $5 to $20, but some states allow citizens to obtain them free of charge. For more information, contact the reporting companies at the numbers below.
CREDIT REPORTING COMPANIES
| Company Name | Telephone Number |
|---|---|
| Experian | (888) 524-3666 |
| Equifax | (800) 685-1111 |
| Trans Union | (800) 916-8800 |
51. WHAT SHOULD I DO IF I FIND AN ERROR IN MY CREDIT HISTORY?
Simple errors are easily corrected by writing to the reporting company, pointing out the error, and providing proof of it. You can also ask to have your own explanations of the problem included. For example, if you made a late payment because of illness, explain that reason for the record. Lenders are generally understanding about legitimate problems.
52. WHAT IS CREDIT SCORING AND HOW DOES THE LENDER USE IT?
Credit scoring is a number, based on your credit history, that represents the possibility that you will not be able to repay a loan. Lenders use it to determine your eligibility for a mortgage loan. The better the score, the better your chances of getting a loan. Check with your lender for more information.
53. HOW CAN I IMPROVE MY SCORE?
There are no simple ways to improve credit score, but you can work to keep it within acceptable limits by maintaining a good credit history. This means paying your bills on time and not taking on too many financial obligations by buying more than you can afford.
FINDING THE RIGHT LOAN FOR YOU
54. HOW DO I CHOOSE THE BEST LOAN PROGRAM FOR ME?
Your personal situation will determine the best type of loan for you. By asking yourself just a few questions, you can help narrow the search among the many options available and determine the best loan for you.
- Do you expect your finances to change in the next few years?
- Are you planning to live in this home for a long time?
- Are you comfortable with the idea of a variable mortgage payment amount?
- Do you want to be free of mortgage debt by the time your children approach college age or by the time you are ready to retire?
Your lender can help you use the answers to questions like these to decide what type of loan best fits your needs.
55. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS AMONG LENDERS?
First, make a checklist of loan information from each lender. It should include company name and basic information, type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.
Talk to companies by phone or in person. Be sure to call all lenders on your list on 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 lenders and mortgage options. While your agent may favor a particular lender, they will also be able to suggest other options.
56. ARE THERE FEES OR COSTS ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
Yes. When you submit your application, you will need to pay a loan application fee to cover the costs of underwriting the loan. This fee is used to pay for the home appraisal, the copy of your credit report, and any additional fees that may be necessary. The application fee is generally non-refundable.
57. WHAT IS RESPA?
RESPA stands for the Real Estate Settlement Procedures Act. It requires lenders to make information available to prospective borrowers during the mortgage process. In this way, it protects borrowers from lender abuses. RESPA requires lenders to inform borrowers about total closing costs, lender servicing, and escrow account practices, and business relationships between closing service providers and other parties to the transaction.
For more information, visit RESPA, or call (800) 569-4287 for local counseling.
58. WHAT IS A GOOD FAITH ESTIMATE AND HOW IS IT USEFUL?
It is an estimate that lists all pre-paid expenses, all closing costs, and escrow account costs you will have to pay to purchase a home. The lender must provide it to you within three days of your application, so you can accurately evaluate the loan.
59. BESIDES RESPA, DOES THE LENDER HAVE ANY OTHER RESPONSIBILITIES?
Lenders cannot discriminate in any way against any potential borrower. If you believe a lender is refusing to serve you because of your race, color, national origin, religion, sex, family status, or disability, contact HUD’s Office of Fair Housing at (800) 669-9777 (or (800) 927-9275 for the hearing impaired).
60. WHAT ARE MY RESPONSIBILITIES DURING THE LOAN PROCESS?
To make sure you are not victimized by fraud, follow all of these steps when applying for a loan:
- Be sure you read and understand everything before you sign.
- Refuse to sign blank documents.
- Don’t buy properties for other people.
- Don’t overstate your income.
- Don’t overstate your time of employment.
- Don’t overstate your assets.
- Report your debts accurately.
- Don’t alter your income tax returns for any reason. Tell the truth about gifts. Don’t list false co-borrowers on your loan application.
- Be truthful about your credit problems, past and present.
- Be honest about your intentions to occupy the home.
- Don’t submit false documents of support.
CLOSING
61. WHAT HAPPENS ONCE I’VE APPLIED FOR MY LOAN?
It generally takes the lender one to six weeks to complete evaluation of your application. It is not unusual for the lender to ask you for additional information after the application is submitted. The quicker you provide the information, the quicker your application will be processed. Once all 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 and the lender will review the closing with you. After closing, you will be able to move into your new home.
62. WHAT THINGS SHOULD I CHECK BEFORE CLOSING?
This is probably your first chance to examine the home without furniture, which will give you a clear view of the situation. Examine walls and ceilings carefully, as well as work the seller agreed to do in response to the inspection. Any previously detected problems that have not been taken care of should be addressed before closing. It is the seller’s responsibility to fix them.
63. WHAT IS INCLUDED IN CLOSING COSTS?
Some localities may have customary or unique closing costs, but they generally include the following:
- Attorney or escrow account fees (yours and your lender’s, if applicable)
- Property taxes (to cover the tax period to date)
- Interest (paid from closing date to 30 days before first monthly payment)
- Loan origination fees (covers lender’s administrative costs)
- Recording fees
- Appraisal fees
- First premium for mortgage insurance (if applicable)
- Title insurance (yours and the lender’s)
- Loan discount points
- First payment to escrow account for future property taxes and insurance
- Payment for homeowner’s insurance policy (and fire and flood insurance, if applicable)
- Document preparation fees
64. WHAT HAPPENS ON CLOSING DAY?
You will present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will tell you the money you owe the seller (the rest of the down payment, pre-paid taxes, etc.), and then the money the seller owes you (unpaid taxes and pre-paid rent, if applicable). The seller will present proofs of inspections, warranties, etc.
Once you are sure you understand all the paperwork, you will sign the mortgage, agreeing that if you fail to make payments, the lender has the right to sell your property and apply the sale price to the amount you still owe plus expenses. You will also sign a mortgage note, promising to repay the loan. The seller will pass title to the home to you in the form of a signed deed.
You will pay the closing agent all closing costs, and in turn, the agent will provide you with a disbursement statement of all items paid by you. Then, the deed and mortgage will be recorded in the state’s Registry of Deeds, and you will become the homeowner.
65. WHAT DO I RECEIVE AT CLOSING?
- Disbursement statement, HUD-1 Form (lists services provided and fees charged; is completed by the closing agent and must be given to you at or before closing)
- Truth-in-Lending Statement
- Mortgage note
- Mortgage or Deed of Trust
- Binding sales contract (prepared by the seller; your lawyer should review it)
- Keys to your new home
HOW HUD AND FHA CAN HELP YOU BECOME A HOMEOWNER
66. WHAT IS THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT?
Also known as HUD, the U.S. Department of Housing and Urban Development was created in 1965 to develop national policies and programs aimed at meeting U.S. housing needs. One of HUD’s primary missions is the creation of a suitable living environment for all Americans by developing and improving the nation’s communities and enforcing fair housing laws.
67. HOW DOES HUD HELP HOME BUYERS AND HOMEOWNERS?
HUD helps people through the administration of different programs that develop and encourage affordable housing. Specifically, HUD plays an important role in homeownership, making home loans accessible to low- 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 on affordable terms. HUD also protects consumers through education, fair housing laws, and home rehabilitation initiatives.
68. WHAT IS FHA?
The Federal Housing Administration, now part of HUD, was created in 1934 to promote American homeownership opportunities. By providing private lenders with mortgage insurance, FHA gives them the security they need to make loans to first-time home buyers who might not qualify for conventional loans. FHA has helped more than 26 million Americans buy homes.
69. HOW CAN FHA HELP ME BUY A HOME?
FHA works to make homeownership a possibility for more Americans. With FHA, you don’t need perfect credit or a high-paying job to qualify for a loan. FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be about the same as a few months’ rent. Also, your monthly payments do not need to be much greater than rent.
70. HOW IS FHA FINANCED?
Lender claims paid by the FHA mortgage insurance program come from the Mutual Mortgage Insurance Fund. This fund is made up of premiums paid by FHA-insured borrowers. No tax money is used to finance the program.
71. WHO CAN QUALIFY FOR FHA LOANS?
Anyone who meets credit requirements, can afford mortgage payments and cash investment, and plans to use the mortgaged property as a primary residence can apply for an FHA-insured loan.
72. WHAT IS THE FHA LOAN LIMIT?
FHA loan limits vary from area to area across the country, from $115,200 in low-cost areas to $208,800 in higher-cost areas. Maximum loan amounts for multi-unit homes are higher than for single-unit ones, and also vary from area to area.
Since these maximum amounts are tied to statutory loan limits and average area home prices, FHA loan limits are subject to periodic change. Check with your lender for details and confirmation of current limits.
73. WHAT ARE THE STEPS IN THE FHA LOAN PROCESS?
Except for some additional forms, the FHA loan application process is similar to that for a conventional loan (see Question 47). Thanks to new automation measures, FHA loans can be originated more quickly than in the past. Also, if you do not want to attend a face-to-face meeting, you can apply for an FHA loan by mail, phone, over the Internet, or by videoconference.
74. WHAT INCOME DO I NEED TO QUALIFY FOR AN FHA LOAN?
There is no minimum income requirement. However, you must be able to prove regular income for at least the last three years and demonstrate that you have consistently paid your bills on time.
75. WHAT QUALIFIES AS A SOURCE OF INCOME FOR FHA?
Seasonal wages, child support, retirement payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony, and rent paid by family members all qualify as income sources. Part-time wages, overtime, and bonuses also count, as long as they are regular. Special savings plans, such as those established by a religious or community association, also qualify. For FHA, the type of income is not as important as its regularity.
76. CAN I HAVE DEBTS AND STILL QUALIFY FOR FHA LOANS?
Yes. Short-term debts do not count as long as they can be paid off within ten months. Some regular expenses, such as child care costs, are not considered debts. Check with your lender or real estate agent to see if you meet the debt-to-income ratio.
77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
FHA allows you to use 29% of your income for housing costs and 41% for housing and other long-term debts. With a conventional loan, this qualifying ratio only allows you to use 28% for housing and 36% for housing and other debts.
78. CAN I EXCEED THIS RATIO?
You may qualify to exceed it if you have:
- a large down payment
- a demonstrated capacity to pay more for housing expenses
- substantial cash reserves
- net worth sufficient to offset mortgage debt regardless of income
- evidence of acceptable or limited credit history
- mortgage payment term of less than maximum
- funds provided by an organization
- a decrease in monthly housing expenses
79. HOW MUCH MUST THE DOWN PAYMENT BE FOR AN FHA LOAN?
You must have a down payment of at least 3% of the home’s purchase price. Most affordable loan programs offered by private lenders require a down payment of 3% to 5%, and a minimum of 3% must come directly from the borrower’s own funds.
80. WHAT CAN I USE FOR DOWN PAYMENT AND CLOSING COSTS FOR AN FHA LOAN?
In addition to your own funds, you can use cash gifts or money from a private savings club. If you are able to do some repairs and improvements, your labor can be used as part of the down payment (called “sweat equity”). If you have a lease with option to buy, extra rent payments made to the seller may also be counted as accumulated funds.
81. HOW DOES MY CREDIT HISTORY AFFECT MY ABILITY TO QUALIFY?
FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, FHA allows you to re-establish credit if:
- two years have passed since discharge of bankruptcy
- all judgments have been paid off
- all past-due federal taxes have been satisfied or arrangements have been made to establish a payment plan with the IRS or state revenue department
- three years have passed since a foreclosure or deed-in-lieu of foreclosure
82. CAN I QUALIFY FOR AN FHA LOAN WITHOUT A CREDIT HISTORY?
Yes. If you prefer to pay your debts in cash or are too young to have credit, there are other ways to prove your eligibility. Talk to your lender for more information.
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 for conventional loans described in Question 63. FHA requires a one-time, up-front mortgage insurance premium equal to 2.25% of the mortgage, which is due 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 repayment term. After closing, you will be responsible for an annual premium, payable monthly, if your mortgage is for more than 15 years or if you have a 15-year loan with an LTV greater than 90%.
84. CAN I ROLL CLOSING COSTS INTO THE FHA LOAN?
No. While you cannot roll closing costs into the FHA loan, you may be able to use this amount to help meet the down payment requirement. Check with your lender for details.
85. ARE FHA LOANS ASSUMABLE?
Yes. You can assume an existing FHA-insured loan, or, if you are the seller, you can allow a buyer to assume yours. Assuming a loan can be very beneficial, as the process is simpler and less costly than that for a new loan. Also, assuming a loan can often result in lower interest rates. The application process basically consists of a credit check, and no property appraisal is required. Also, you must demonstrate that you have sufficient income to handle the mortgage payment. In this way, qualifying to assume a loan is similar to qualifying requirements to apply for a new one.
86. WHAT SHOULD I DO IF I CAN’T MAKE A LOAN PAYMENT?
Call or write your lender as soon as possible, clearly explaining the situation. Be prepared to provide financial information.
87. ARE THERE OPTIONS IF I FALL BEHIND IN MY LOAN PAYMENTS?
Yes. Talk to your lender or a HUD-approved counseling agency for more information. Listed below are some options that may help you catch up.
For FHA Loans:
- Stay in your home to qualify for help.
- Contact a HUD-approved housing counseling agency ((800) 569-4287 or TDD: (800) 877-8339) and work with the counselor or lender who is trying to help you.
- HUD has several loss mitigation programs to help you:
- Special Forbearance: Your lender will determine a modified payment plan that may include a temporary reduction or suspension of payments. You may qualify if you have suffered an involuntary reduction in income or an increase in living expenses.
- Mortgage Modification: Allows for refinancing of the debt or extension of the term of the mortgage loan, which may reduce monthly payments. You may qualify if you have recovered from financial problems, but net income is lower than it was before.
- Partial Claim: Your lender may be able to help you get an interest-free loan from HUD to bring your mortgage payments up to date.
- Pre-foreclosure Sale: Allows you to sell your property and pay off the mortgage loan to avoid foreclosure.
- Deed-in-Lieu of Foreclosure: Allows you to voluntarily “give back” your property to the lender. It will not save your home, but it will help you avoid the costs, time, and effort of the foreclosure process.
- If you are having problems with an uncooperative lender or if you believe your servicer is not offering you the most effective loss mitigation options, call the FHA Loss Mitigation Center at (888) 297-8685 for additional help.
For Conventional Loans:
Talk to your lender about specific loss mitigation options. Operate directly with this lender to request a “full package.” A secondary lender, such as Fannie Mae or Freddie Mac, may have purchased your loan. Your lender may follow appropriate guidelines established by Fannie or Freddie to determine the best option for your case.
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 normally work only with the servicer. However, if you are having problems with your lender during the loss mitigation process, you can request help from their customer service center by calling (800) FREDDIE ((800) 373-3343).
In any loss mitigation situation, it is important to remember these helpful tips:
- Examine every reasonable alternative to avoid losing your home, but beware of scams. For example, beware of:
Home equity skimming: a buyer offers to pay off your 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 normally available for free.
- Don’t sign anything you don’t understand.
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 borrower default on home mortgages. It is primarily required for borrowers who make a down payment of less than 20%.
89. HOW DOES MORTGAGE INSURANCE WORK? IS IT LIKE HOME OR CAR INSURANCE?
Like home or car insurance, mortgage insurance requires payment of a premium. It serves as protection against losses and is used in the event of an emergency. If a borrower fails to repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for a portion or most of the 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 home purchase price. FHA offers several loan programs that may meet your needs. Check with your lender for more information.
91. HOW CAN I RECEIVE A DISCOUNT ON THE UP-FRONT FHA MORTGAGE INSURANCE PREMIUM?
Ask your real estate agent or lender for information about FHA’s HELP program. HELP—Homebuyer Education Learning Program, is structured to help people like you begin the home buying process. It covers topics like budgeting, finding a home, getting a loan, and home maintenance. In most cases, completion of this program entitles you to a reduction in the up-front mortgage insurance premium from 2.25% to 1.75% of the purchase price of your new home.
92. WHAT IS PMI?
PMI stands for Private Mortgage Insurance or Insurer. These are private companies that offer mortgage insurance. They offer borrowers standard and special affordable programs. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMIs generally have stricter qualifying rates and require larger down payments than FHA, but their premiums are often lower and they insure loans that exceed FHA limits.
FHA PRODUCTS
93. WHAT IS A 203(b) LOAN?
This is the FHA’s most commonly used program. It offers a low down payment, flexible qualifying guidelines, limited credit costs, and a maximum loan amount.
94. WHAT IS A 203(k) LOAN?
This loan allows the home buyer to finance both the purchase and rehabilitation of a home through a single mortgage. Part of the loan is used to pay off the existing mortgage of the seller, and the rest 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.
- Rehabilitation costs must be at least $5,000, but the total value of the property, including repair costs, must not exceed the maximum FHA mortgage limit.
- The 203(k) loan must meet many of the eligibility requirements of the 203(b) loan.
- Check with your lender about specific structural, improvement, and energy efficiency guidelines.
95. WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
The Energy Efficient Mortgage allows the home buyer to save money on future utility bills. It does this by financing the cost of adding energy-efficient features to a new or existing home as part of an FHA-insured home purchase. The EEM can be used with 203(b) and 203(k) loans. Basic guidelines for EEMs are as follows:
- Costs of improvements must be determined by a Home Energy Rating System or energy consultant. This cost must be less than the anticipated savings from the improvements.
- One- and two-unit homes, new and existing, may qualify. Condominiums may not.
- Improvements financed may be up to 5% of the property value or $4,000, whichever is greater. The total must be within the FHA loan limit.
96. DELETED.
97. WHAT IS A TITLE I LOAN?
The Title I loan is made by a lender and insured by FHA, and is used to make non-luxury renovations and repairs to a home. It offers an affordable interest rate and repayment schedule. Loans range from $5,000 to $20,000. If the loan amount is less than $7,500, no lien is required on your property. Check with your lender for more information.
98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES FHA OFFER?
FHA also insures loans for the purchase or rehabilitation of manufactured homes, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed services. FHA also offers insurance for ARMs.
99. HOW DO I GET AN FHA-INSURED LOAN?
Contact an FHA-approved lender, such as a participating mortgage company, bank, savings and loan association, or credit union. For more information about FHA and how to get an FHA loan, visit HUD’s Web site at http://www.hud.gov or call a HUD-approved counseling agency at (800) 569-4287 or TDD: (800) 877-8339. You can also explore resources online; in fact, you might find a program that isn’t very expensive to help you navigate the home-buying process.
100. HOW CAN I CONTACT HUD?
Visit the Web site at http://www.hud.gov or look in the “blue pages” of the phone book for a listing of HUD offices near you.
Glossary
This section would ideally contain a glossary of terms, but was not provided in the original article. To further enhance this article, consider adding a glossary of key terms related to home buying and mortgages.
Disclaimer: I am an AI Chatbot and not a financial advisor. This article is for informational purposes only and not financial advice. Consult with a qualified financial professional for personalized advice.
