100 Questions & Answers About
Buying A New Home
Source: Department of Housing and Urban Development
Dear Future Homeowner:
Homeownership is becoming a reality for more and more Americans. During 2000,
the US homeownership rate reached 67.7%, the highest rate ever. Yet many
Americans don't realize that homeownership is within their grasp.
A home is a financial asset and more: it's a place to live and raise
children; it's a plan for the future; it's an investment in your community.
That's why we at the U.S. Department of Housing and Urban Development want all
Americans to have an opportunity to enjoy the benefits of owning a home. And we
are especially proud of our work to help first-time homebuyers: thanks to our
special programs, more than 81% of FHA-insured loans went to first-time
homebuyers during 2000.
Knowledge is said to open doors. This is literally true when it comes to
buying a home. To become a first-time homebuyer, you need to know where and how
to begin the homebuying process. The following questions and answers have been
carefully selected to give you a foundation of basic knowledge. In addition to
helping you begin, this brochure will give you the tools necessary to navigate
the entire process - from deciding whether you're ready to buy, all the way to
that final proud step, getting the keys to your new home.
Calling for this brochure was your first step. Now you can use this
information to determine if you're ready to buy a home. if you are ready,
contact a real estate agent, lender, or a housing counseling agency. They can
help you decide your next step.
HUD's FHA has helped more than 30 million people become homeowners since
1934. We want to help you open the door to your own home. After all, HUD and FHA
are on your side.
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 payments? - Do I have money saved for a down payment? - Do I
have the ability to pay a mortgage every month, plus additional costs?
If you can answer "yes" to these questions, you are probably ready to buy
your own home.
2. HOW DO I BEGIN THE PROCESS OF BUYING A HOME?
Start by thinking about your situation. Are you ready to buy a home? How much
can you afford in a monthly mortgage payment (see Question 4 for help)? How much
space do you need? What areas of town do you like? After you answer these
questions, make a "To Do" list and start doing casual research. Talk to friends
and family, drive through neighborhoods, and look in the "Homes" section of the
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 insurance, real estate taxes, and upkeep- which can be substantial. But
given the freedom, stability, and security of owning your own home, they are
4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT CAN
The lender considers your debt-to-income ratio, which is a comparison of your
gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses
include such long-term debts as car or student loan payments, alimony, or child
support. According to the FHA,monthly mortgage payments should be no more than
29% of gross income, while the mortgage payment, combined with non-housing
expenses, 4 should total no more than 41% of income. The lender also considers
cash available for down payment and closing costs, credit history, etc. when
determining your maximum loan amount.
5. HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?
Start by asking family and friends if they can recommend an agent. Compile a
list of several agents and talk to each before choosing one. Look for an agent
who listens well and understands your needs, and whose judgment you trust. The
ideal agent knows the local area well and has resources and contacts to help you
in your search. Overall, you want to choose an agent that makes you feel
comfortable and can provide all the knowledge and services you need.
6. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
Your home should fit way you live, with spaces and features that appeal to
the whole family. Before you begin looking at homes, make a list of your
priorities - things like location and size. Should the house be close to certain
schools? your job? to public transportation? How large should the house be? What
type of lot do you prefer? What kinds of amenities are you looking for?
Establish a set of minimum requirements and a 'wish list." Minimum requirements
are things that a house must have for you to consider it, while a "wish list"
covers things that you'd like to have but aren't essential.
FINDING YOUR HOME
7. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A
Select a community that will allow you to best live your daily life. Many
people choose communities based on schools. Do you want access to shopping and
public transportation? Is access to local facilities like libraries and museums
important to you? Or do you prefer the peace and quiet of a rural community?
When you find places that you like, talk to people that live there. They know
the most about the area and will be your future neighbors. More than anything,
you want a neighborhood where you feel comfortable in.
8. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN
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 the area.
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 have.
11. HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN
COMMUNITIES AND NEIGHBORHOODS?
Your real estate agent can give you a ballpark figure by showing you
comparable listings. If you are working with a REALTOR, they may have access to
comparable sales maintained on a database.
12. HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?
The total amount of the previous year's property taxes is usually included in
the listing information. If it's not, ask the seller for a tax receipt or
contact the local assessor's off ice. Tax rates can change from year to year, so
these figures may be approximate.
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 and liabilities,
14. IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?
There isn't a definitive answer to this question. You should look at each
home for its individual characteristics. Generally, older homes may be in more
established neighborhoods, offer more ambiance, and have lower property tax
rates. People who buy older homes, however, shouldn't mind maintaining their
home and making some repairs. Newer homes tend to use more modern architecture
and systems, are usually easier to maintain, and may be more energy-efficient.
People who buy new homes often don't want to worry initially about upkeep and
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.) - Does
anything need to repaired or replaced? Will the seller repair or replace the
items? - Imagine the house in good weather and bad, and in each season. Will
you be happy with it year-round?
Take your time and think carefully about each house you see. Ask your real
estate agent to point out the pros and cons of each home from a professional
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
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 Home
Scorecard to organize your photos and notes for each house.
18. HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
There isn't a set number of houses you should see before you decide. Visit as
many as it takes to find the one you want. On average, homebuyers see 15 houses
before choosing one. Just be sure to communicate often with your real estate
agent about everything you're looking for. It will help avoid wasting your time.
YOU'VE FOUND IT
19. WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN
INSPECTION FIGURE IN THE PURCHASE OF A HOME?
An inspector checks the safety of your potential new home. Home Inspectors
focus especially on the structure, construction, and mechanical systems of the
house and will make you aware of only repairs,that are needed.
The Inspector does not evaluate whether or not you're getting good value for
your money. Generally, an inspector checks (and gives prices for repairs on):
the electrical system, plumbing and waste disposal, the water heater, insulation
and Ventilation, the HVAC system, water source and quality, the potential
presence of pests, the foundation, doors, windows, ceilings, walls, floors, and
roof. Be sure to hire a home inspector that is qualified and experienced.
It's a good idea to have an inspection before you sign a written offer since,
once the deal is closed, you've bought the house as is." Or, you may want to
include an inspection clause in the offer when negotiating for a home. An
inspection t clause gives you an 'out" on buying the house if serious problems
are found,or gives you the ability to renegotiate the purchase price if repairs
are needed. An inspection clause can also specify that the seller must fix the
problem(s) before you purchase the house.
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 I 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 a more specific Inspection
may be recommended. It's a good idea to consider having your home inspected for
the presence of a variety of health-related risks like radon gas asbestos, or
possible problems with the water or waste disposal system.
22. HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?
If the house you're considering was built before 1978 and you have children
under the age of seven, you will want to have an inspection for lead-based
point. It's important to know that lead flakes from paint can be present in both
the home and in the soil surrounding the house. The problem can be fixed
temporarily by repairing damaged paint surfaces or planting grass over effected
soil. Hiring a lead abatement contractor to remove paint chips and seal damaged
areas will fix the problem permanently.
23. ARE POWER LINES A HEALTH HAZARD?
There are no definitive research findings that indicate exposure to power
lines results in greater instances of disease or illness.
24. DO I NEED A LAWYER TO BUY A HOME?
Laws vary by state. Some states require a lawyer to assist in several aspects
of the home buying process while other states do not, as long as a qualified
real estate professional is involved. Even if your state doesn't require one,
you may want to hire a lawyer to help with the complex paperwork and legal
contracts. A lawyer can review contracts, make you aware of special
considerations, and assist you with the closing process. Your real estate agent
may be able to recommend a lawyer. If not, shop around. Find out what services
are provided for what fee, and whether the attorney is experienced at
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 COSTS?
Be sure to shop around among several insurance companies. Also, consider the
cost of insurance when you look at homes. Newer homes and homes constructed with
materials like brick tend to have lower premiums. Think about avoiding areas
prone to natural disasters, like flooding. Choose a home with a fire hydrant or
a fire department nearby.
27. IS THE HOME LOCATED IN A FLOOD PLAIN?
Your real estate agent or lender can help you answer this question. If you
live in a flood plain, the lender will require that you have flood insurance
before lending any money to you. But if you live near a flood plain, you may
choose whether or not to get flood insurance coverage for your home. Work with
an insurance agent to construct a policy that fits your needs.
28. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
Always check to see if the house is in a low-lying area, in a high-risk area
for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a
hazardous materials area. Be sure the house meets building codes. Also consider
local zoning laws, which could affect remodeling or making an addition in the
future. Your real estate agent should be able to help you with these questions.
29. HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will include
the following information:
- Complete legal description of the property - Amount of earnest money -
Down payment and financing details - Proposed move-in date - Price you are
offering - Proposed closing date - Length of time the offer is valid -
Details of the deal
Remember that a sale commitment depends on negotiating a satisfactory
contract with the seller, not just Making an offer.
Other ways to lower ins-insurance costs include insuring your home and car(s)
with the same company, increasing home security, and seeking group coverage
through alumni or business associations. Insurance costs are always lowered by
raising your deductibles, but this exposes you to a higher out-of-pocket cost if
you have to file a claim.
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 may forfeit the entire
32. WHAT ARE "HOME WARRANTIES", AND SHOULD I CONSIDER THEM?
Home warranties offer you protection for a specific period of time (e.g., one
year) against potentially costly problems, like unexpected repairs on appliances
or home systems, which are not covered by homeowner's insurance. Warranties are
becoming more popular because they offer protection during the time immediately
following the purchase of a home, a time when many people find themselves
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 and interest.
34. WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF
The loan to value ratio is the amount of money you borrow compared with the
price or appraised value of the home you are purchasing. Each loan has a
specific LTV limit. For example: With a 95% LTV loan on a home priced at
$50,000, you could borrow up to $47,500 (95% of $50,000), and would have to
pay,$2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes.
The higher the LTV the less cash homebuyers are required to pay out of their own
funds. So, to protect lenders against potential loss in case of default, higher
LTV loans (80% or more) usually require mortgage insurance policy.
35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
- 15-year - 30-year
- Predictable - Housing cost remains unaffected by interest rate changes and
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular
schedule with changes in interest rates; increases subject to limits
- Balloon Mortgage- Offers very low rates for an Initial period of time
(usually 5, 7, or 10 years); when time has elapsed, the balance is clue or
refinanced (though not automatically) - Two-Step Mortgage- Interest rate
adjusts only once and remains the same for the life of the loan - ARMS linked
to a specific index or margin
- Generally offer lower initial interest rates - Monthly payments can be
lower - May allow borrower to qualify for a larger loan amount
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 principal.
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 details.
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 income
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
41. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. But most
lenders also include local real estate taxes, homeowner's insurance, and
mortgage insurance (if applicable).
42. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the interest
rate, the length of the repayment term and payment schedule will all affect the
size of your mortgage payment.
43. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
A lower interest rate allows you to borrow more money than a high rate with
the some monthly payment. Interest rates can fluctuate as you shop for a loan,
so ask-lenders if they offer a rate "lock-in"which guarantees a specific
interest rate for a certain period of time. Remember that a lender must disclose
the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a
mortgage loan by expressing it in terms of a yearly interest rate. It is
generally higher than the interest rate because it also includes the cost of
points, mortgage insurance, and other fees included in the loan.
44. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE
If interest rates drop significantly, you may want to investigate
refinancing. Most experts agree that if you plan to be in your house for at
least 18 months and you can get a rate 2% less than your current one,
refinancing is smart. Refinancing may, however, involve paying many of the same
fees paid at the original closing, plus origination and application fees.
45. WHAT ARE DISCOUNT POINTS?
Discount points allow you to lower your interest rate. They are essentially
prepaid interest, With each point equaling 1% of the total loan amount.
Generally, for each point paid on a 30-year mortgage, the interest rate is
reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask
lenders for an interest rate with 0 points and then see how much the rate
decreases With each point paid. Discount points are smart if you plan to stay in
a home for some time since they can lower the monthly loan payment. Points are
tax deductible when you purchase a home and you may be able to negotiate for the
seller to pay for some of them.
46. WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Established by your lender, an escrow account is a place to set aside a
portion of your monthly mortgage payment to cover annual charges for homeowner's
insurance, mortgage insurance (if applicable), and property taxes. Escrow
accounts are a good idea because they assure money will always be available for
these payments. If you use an escrow account to pay property tax or homeowner's
insurance, make sure you are not penalized for late payments since it is the
lender's responsibility to make those payments.
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 maybe able to
borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a
lender your income, your long-term debts, and how large a down payment you can
afford. Without any obligation, this helps you arrive at a ballpark figure of
the amount you may have available to spend on a house.
Pre-approval is a lender's actual commitment to lend to you. It involves
assembling the financial records mentioned in Question 47 (Without the property
description and sales contract) and going through a preliminary approval
process. Pre-approval gives you a definite idea of what you can afford and shows
sellers that you are serious about buying.
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
Company Name Phone Number
Trans Union 1-800-916-8800
51. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?
Simple mistakes are easily corrected by writing to the reporting company,
pointing out the error, and providing proof of the mistake. You can also request
to have your own comments added to explain problems. For example, if you made a
payment late due to illness, explain that for the record. Lenders are usually
understanding about legitimate problems.
52. WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?
A credit bureau score is a number, based upon your credit history, that
represents the possibility that you will be unable to repay a loan. Lenders use
it to determine your ability to qualify for a mortgage loan. The better the
score, the better your chances are of getting a loan. Ask your lender for
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.
FINDING the RIGHT LOAN for YOU
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 years? - Are you
planning to live in this home for a long period of time? - Are you comfortable
with the idea of a changing mortgage payment amount? - Do you wish to be free
of mortgage debt as your children approach college age or as you prepare for
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 ORIGINATION
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, or call
1-800-569-4287 for a local counseling referral.
58. WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
It's an estimate that lists all fees paid before closing, all closing costs,
and any escrow costs you will encounter when purchasing a home. The lender must
supply it within three days of your application so that you can make accurate
judgments when shopping for a loan.
59. BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL
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 about
your credit problems, past and present. - Be honest about your intention to
occupy the house - Do not provide false supporting documents.
61. WHAT HAPPENS AFTER I'VE APPLIED FOR MY LOAN?
It usually takes a lender between 1-6 weeks to complete the evaluation of
your application. Its not unusual for the lender to ask for more information
once the application has been submitted. The sooner you can provide the
information, the faster your application will be processed. Once all the
information has been verified the lender will call you to let you know the
outcome of your application. If the loan is approved, a closing date is set up
and the lender will review the closing with you. And after closing, you'll be
able to move into your new home.
62. WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?
This will likely be the first opportunity to examine the house without
furniture, giving you a clear view of everything. Check the walls and ceilings
carefully, as well as any work the seller agreed to do in response to the
inspection. Any problems discovered previously that you find uncorrected should
be brought up prior to closing. It is the seller's responsibility to fix them.
63. WHAT MAKES UP CLOSING COST?
There may be closing cost customary or unique to a certain locality, but
closing cost are usually made up of the following:
- Attorney's or escrow fees (Yours and your lender's if applicable) -
Property taxes (to cover tax period to date) - Interest (paid from date of
closing to 30 days before first monthly payment) - Loan Origination fee
(covers lenders administrative cost) - Recording fees - Survey fee - First
premium of mortgage Insurance (if applicable) - Title Insurance (yours and
lender's) - Loan discount points - First payment to escrow account for
future real estate taxes and insurance - Paid receipt for homeowner's
insurance policy (and fire and flood insurance if applicable) - Any
documentation preparation fees
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, warranties, etc.
Once you're sure you understand all the documentation, you'll sign the
mortgage, agreeing that if you don't make payments the lender is entitled to
sell your property and apply the sale price against the amount you owe plus
expenses. You'll also sign a mortgage note, promising to repay the loan. The
seller will give you the title to the house in the form of a signed deed.
You'll pay the lender's agent all closing costs and, in turn,he or she will
provide you with a settlement statement of all the items for which you have
paid. The deed and mortgage will then be recorded in the state Registry of
Deeds, and you will be a homeowner.
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
HOW CAN HUD and the FHA HELP ME BECOME a HOMEOWNER
66. WHAT IS THE U.S. DEPARTMENT OF HOUSING 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. HUD also seeks to protect consumers
through education, Fair Housing Laws, and housing rehabilitation initiatives.
68. WHAT IS THE FHA?
Now an agency within HUD, the Federal Housing Administration was established
in 1934 to advance opportunities for Americans to own homes. By providing
private lenders with mortgage insurance, the FHA gives them the security they
need to lend to first-time buyers who might not be able to qualify for
conventional loans. The FHA has helped more than 26 million Americans buy a
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
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 FHA-insured loan.
72. WHAT IS THE FHA LOAN LIMIT?
FHA loan limits vary throughout the country, from $115,200 in low-cost areas
to $208,800 in high-cost areas. The loan maximums for multi-unit homes are
higher than those for single units and also vary by area.
Because these maximums are linked to the conforming loan limit and average
area home prices, FHA loan limits are periodically subject to change. Ask your
lender for details and confirmation of current limits.
73. WHAT ARE THE STEPS INVOLVED IN THE FHA LOAN PROCESS?
With the exception of a few additional forms, the FHA loan application
process is similar to that of a conventional loan (see Question 47). With new
automation measures, FHA loans may be originated more quickly than before. And,
if you don't prefer a face-to-face meeting, you can apply for an FHA loan via
mail, telephone, the Internet, or video conference.
74. HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY FOR AN FHA LOAN?
There is no minimum income requirement. But you must prove steady income for
at least three years, and demonstrate that you've consistently paid your bills
75. WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?
Seasonal pay, child support, retirement pension payments, unemployment
compensation, VA benefits, military pay, Social Security income, alimony, and
rent paid by family all qualify as income sources. Part-time pay, overtime, and
bonus pay also count as long as they are steady. Special savings plans-such as
those set up by a church or community association - qualify, too. Income type is
not as important as income steadiness with the FHA.
76. CAN I CARRY DEBT AND STILL QUALIFY FOR FHA LOANS?
Yes. Short-term debt doesn't count as long as it can be paid off within 10
months. And some regular expenses, like child care costs, are not considered
debt. Talk to your lender or real estate agent about meeting the FHA
77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
The FHA allows you to use 29% of your income towards housing costs and 41%
towards housing expenses and other long-term debt. With a conventional loan,
this qualifying ratio allows only 28% toward housing and 36% towards housing and
78. CAN I EXCEED THIS RATIO?
You may qualify to exceed if you have:
- a large down payment - a demonstrated ability to pay more toward your
housing expenses - substantial cash reserves - net worth enough to repay the
mortgage regardless of income - evidence of acceptable credit history or
limited credit use - less-than-maximum mortgage terms - funds provided by an
organization - a decrease in monthly housing expenses
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
80. WHAT CAN I USE TO PAY THE DOWN PAYMENT AND CLOSING COSTS OF AN
Besides your own funds, you may use cash gifts or money from a private
savings club. If you can do certain repairs and improvements yourself, your
labor may be used as part of a down 8 payment (called -sweat equity"). If you
are doing a lease purchase, paying extra rent to the seller may also be
considered the same as accumulating cash.
81. HOW DOES MY CREDIT HISTORY IMPACT MY ABILITY TO QUALIFY?
The FHA is generally more flexible than conventional lenders in its
qualifying guidelines. In fact, the FHA allows you to re-establish credit if:
- two years have passed since a bankruptcy has been discharged - all
judgments have been paid - any outstanding tax liens have been satisfied or
appropriate arrangements have been made to establish a repayment plan with the
IRS or state Department of Revenue - three years have passed since a
foreclosure or a deed-in-lieu has been resolved
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
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, upfront mortgage insurance premium equal to 2.25% of the
mortgage to be paid at closing (or 1.75% if you complete the HELP program- see
Question 91). This initial premium may be partially refunded if the loan is paid
in full during the first seven years of the loan term. After closing, you will
then be responsible for an annual premium - paid monthly - if your mortgage is
over 15 years or if you have a 15-year loan with an LTV greater than 90%.
84. CAN I ROLL CLOSING COSTS INTO my FHA LOAN?
No. Though you can't roll closing costs into your FHA loan, you may be able
to use the amount you pay for them to help satisfy the down payment requirement.
Ask your lender for details.
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 streamlined and less expensive compared to that
for a new loan. Also, assuming a loan can often result in a lower interest rate.
The application process consists basically of a credit check and no property
appraisal is required. And you must demonstrate that you have enough income to
support the mortgage loan. In this way, qualifying to assume a loan is similar
to the qualification requirements for a new one.
86. WHAT SHOULD I DO IF I CAN'T MAKE A PAYMENT ON LOAN?
Call or, write to your lender as soon as possible. Clearly explain the
situation and be prepared to provide him or her with financial information.
87. ARE THERE ANY OPTIONS IF I FALL BEHIND ON MY LOAN PAYMENTS?
Yes. Talk to your lender or a HUD-approved counseling agency for details.
Listed below are a few options that may help you get back on track.
For FHA loans:
- Keep living in your home to qualify for assistance. - Contact a
HUD-approved housing counseling agency (1-800-569-4287 or TDD: 1-800-483-2209)
and cooperate with the counselor/lender trying to help 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 expenses. -
Mortgage Modification: Allows refinance debt and/or extend the term of the your
mortgage loan which may reduce your monthly payments; you can qualify if you
have recovered from financial problems, but net Income Is less than before. -
Partial Claim: Your lender maybe able to help you obtain an interest-free loan
from HUD to bring your mortgage current. - Pre-foreclosure Sale: Allows you to
sell your property and pay off your mortgage loan ,to avoid foreclosure. -
Deed-in lieu of Foreclosure: Lets you voluntarily "give back" your property to
the lender; it won't save your house but will help you avoid the costs, time,
and effort of the foreclosure process. - If you are having difficulty with
an-uncooperative lender or feel your loan servicer is not providing you with the
most effective loss mitigation options, call the FHA Loss Mitigation Center at
1-888-297-8685 for additional 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
Fannie Mae does not deal directly with the borrower. They work with the
lender to determine the loss mitigation program that best fits your needs.
Freddie Mac, like Fannie Mae, will usually only work with the loan servicer.
However, if you encounter problems with your lender during the loss mitigation
process, you can coil customer service for help at 1-800-FREDDIE
In any loss mitigation situation, it is important to remember a few helpful
- Explore every reasonable alternative to avoid losing your home, but beware
of scams. For example, watch out for:
- Equity skimming: a buyer offers to repay the mortgage or sell the
property if you sign over the deed and move out.
- Phony counseling agencies: offer counseling for a fee when it is often
given at no charge.
- Don't sign anything you don't understand.
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
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
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 requirements. - 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
- The cost of improvements must be determined by a Home Energy Rating System
or by an energy consultant. This cost must be less than the anticipated savings
from the improvements. - One- and two-unit new or existing homes are eligible;
condos are not. - The improvements financed may be 5% of property value or
$4,000, whichever is greater. The total must fall within the FHA loan limit.
97. WHAT IS A TITLE I LOAN?
Given by a Lender and insured by the FHA, a Title I loan is used to make
non-luxury renovations and repairs to a home. It offers a manageable interest
rate and repayment schedule. Loans are limited to between $5,000 and 20,000. If
the loan amount is under 7,500, no lien is required against your home. Ask your
lender for details.
98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES THE FHA OFFER?
The FHA also insures loans for the purchase or rehabilitation of manufactured
housing, condominiums, and cooperatives. It also has special programs for urban
areas, disaster victims, and members of the armed forces. Insurance for ARMS is
also available from the FHA.
99. HOW CAN I OBTAIN AN FHA-INSURED LOAN?
Contact an FHA-approved lender such as a participating mortgage company,
bank, savings and loan association, or thrift. For more information on the FHA
and how you can obtain an FHA loan, visit the HUD web site at
http://www.hud.gov or call a HUD-approved
counseling agency at 1-800-569-4287 or TDD: 1-800-877-8339.
100. HOW CAN I CONTACT HUD?
Visit the web site at http://www.hud.gov or
look in the phone book "blue pages" for a listing of the HUD office near you.