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.
Good Luck!
TABLE OF CONTENTS
Introduction
Part I Getting Started
Part II Finding Your Home
Part III You've Found It
Part IV General Financing
-- Questions:The Basics
Part V First Steps
Part VI Finding The Right
Loan For You
Part VII Closing
Part VIII How Can HUD And
The FHA help Me Become a
Homeowner
Part IX Mortgage
Insurance
Part X FHA Products
Glossary
GETTING STARTED
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
newspaper.
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 worth it.
4. HOW DOES THE LENDER
DECIDE THE MAXIMUM LOAN
AMOUNT THAT CAN AFFORD?
The lender considers your
debt-to-income ratio, which
is a comparison of your
gross (pre-tax) income to
housing and non-housing
expenses. Non-housing
expenses include such
long-term debts as car or
student loan payments,
alimony, or child support.
According to the FHA,monthly
mortgage payments should be
no more than 29% of gross
income, while the mortgage
payment, combined with
non-housing expenses, 4
should total no more than
41% of income. The lender
also considers cash
available for down payment
and closing costs, credit
history, etc. when
determining your maximum
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
COMMUNITY?
Select a community that
will allow you to best live
your daily life. Many people
choose communities based on
schools. Do you want access
to shopping and public
transportation? Is access to
local facilities like
libraries and museums
important to you? Or do you
prefer the peace and quiet
of a rural community? When
you find places that you
like, talk to people that
live there. They know the
most about the area and will
be your future neighbors.
More than anything, you want
a neighborhood where you
feel comfortable in.
8. WHAT SHOULD I DO IF
I'M FEELING EXCLUDED FROM
CERTAIN NEIGHBORHOODS?
Immediately contact the
U.S. Department of Housing
and Urban Development (HUD)
if you ever feel excluded
from a neighborhood or
particular house. Also,
contact HUD if you believe
you are being discriminated
against on the basis of
race, color, religion, sex,
nationality, familial
status, or disability. HUD's
Office of Fair Housing has a
hotline for reporting
incidents of discrimination:
1-800-669-9777 (and
1-800-927-9275 for the
hearing impaired).
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 real
estate professional, 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 repairs.
15. WHAT SHOULD I LOOK
FOR WHEN WALKING THROUGH A
HOME?
In addition to comparing
the home to your minimum
requirement and wish lists,
use the HUD Home Scorecard
and consider the following:
Is there enough room for
both the present and the
future?
Are there enough bedrooms
and bathrooms?
Is the house structurally
sound?
Do the mechanical systems
and appliances work?
Is the yard big enough?
Do you like the floor
plan?
Will your furniture fit
in the space? Is there
enough storage space? (Bring
a tape measure to better
answer these questions.)
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
standpoint.
16. WHAT QUESTIONS SHOULD
I ASK WHEN LOOKING AT HOMES?
Many of your questions
should focus on potential
problems and maintenance
issues. Does anything need
to be replaced? What things
require ongoing maintenance
(e.g., paint, roof, HVAC,
appliances, carpet)? Also
ask about the house and
neighborhood, focusing on
quality of life issues. Be
sure the seller's or real
estate agent's answers are
clear and complete. Ask
questions until you
understand all of the
information they've given.
Making a list of questions
ahead of time will help you
organize your thoughts and
arrange all of the
information you receive. The
HUD Home Scorecard can help
you develop your question
list.
17. HOW CAN I KEEP TRACK
OF ALL THE HOMES I SEE?
If possible, take
photographs of each house:
the outside, the major
rooms, the yard, and extra
features that you like or
ones you see as potential
problems. And don't hesitate
to return for a second look.
Use the HUD 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 questions.
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
representing homebuyers.
25. DO I REALLY NEED
HOMEOWNER'S INSURANCE?
Yes. A paid homeowner's
insurance policy (or a paid
receipt for one) is required
at closing, so arrangements
will have to be made prior
to that day. Plus, involving
the insurance agent early in
the home buying process can
save you money. Insurance
agents are a great resource
for information on home
safety and they can give
tips on how to keep
insurance premiums low.
26. WHAT STEPS COULD I
TAKE TO LOWER MY HOMEOWNER'S
INSURANCE 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 amount.
32. WHAT ARE "HOME
WARRANTIES", AND SHOULD I
CONSIDER THEM?
Home warranties offer you
protection for a specific
period of time (e.g., one
year) against potentially
costly problems, like
unexpected repairs on
appliances or home systems,
which are not covered by
homeowner's insurance.
Warranties are becoming more
popular because they offer
protection during the time
immediately following the
purchase of a home, a time
when many people find
themselves cash-strapped.
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 MY
LOAN?
The loan to value ratio
is the amount of money you
borrow compared with the
price or appraised value of
the home you are purchasing.
Each loan has a specific LTV
limit. For example: With a
95% LTV loan on a home
priced at $50,000, you could
borrow up to $47,500 (95% of
$50,000), and would have to
pay,$2,500 as a down
payment.
The LTV ratio reflects
the amount of equity
borrowers have in their
homes. The higher the LTV
the less cash homebuyers are
required to pay out of their
own funds. So, to protect
lenders against potential
loss in case of default,
higher LTV loans (80% or
more) usually require
mortgage insurance policy.
35. WHAT TYPES OF LOANS
ARE AVAILABLE AND WHAT ARE
THE ADVANTAGES OF EACH?
Fixed Rate Mortgages:
Payments remain the same for
the the life of the loan
Types
15-year
30-year
Advantages
Predictable
Housing cost remains
unaffected by interest rate
changes and inflation.
Adjustable Rate Mortgages
(ARMS): Payments increase or
decrease on a regular
schedule with changes in
interest rates; increases
subject to limits
Types
Balloon Mortgage- Offers
very low rates for an
Initial period of time
(usually 5, 7, or 10 years);
when time has elapsed, the
balance is 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
Advantages
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?
30-Year:
In the first 23 years of
the loan, more interest is
paid off than principal,
meaning larger tax
deductions.
As inflation and costs of
living increase, mortgage
payments become a smaller
part of overall expenses.
15-year:
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
irregularities.
40. HOW LARGE OF A DOWN
PAYMENT DO I NEED?
There are mortgage
options now available that
only require a down payment
of 5% or less of the
purchase price. But the
larger the down payment, the
less you have to borrow, and
the more equity you'll have.
Mortgages with less than a
20% down payment generally
require a mortgage insurance
policy to secure the loan.
When considering the size of
your down payment, consider
that you'll also need money
for closing costs, moving
expenses, and - possibly
-repairs and decorating.
41. WHAT IS INCLUDED IN A
MONTHLY MORTGAGE PAYMENT?
The monthly mortgage
payment mainly pays off
principal and interest. But
most lenders also include
local real estate taxes,
homeowner's insurance, and
mortgage insurance (if
applicable).
42. WHAT FACTORS AFFECT
MORTGAGE PAYMENTS?
The amount of the down
payment, the size of the
mortgage loan, the interest
rate, the length of the
repayment term and payment
schedule will all affect the
size of your mortgage
payment.
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 LOAN?
If interest rates drop
significantly, you may want
to investigate refinancing.
Most experts agree that if
you plan to be in your house
for at least 18 months and
you can get a rate 2% less
than your current one,
refinancing is smart.
Refinancing may, however,
involve paying many of the
same fees paid at the
original closing, plus
origination and application
fees.
45. WHAT ARE DISCOUNT
POINTS?
Discount points allow you
to lower your interest rate.
They are essentially prepaid
interest, With each point
equaling 1% of the total
loan amount. Generally, for
each point paid on a 30-year
mortgage, the interest rate
is reduced by 1/8 (or.125)
of a percentage point. When
shopping for loans, ask
lenders for an interest rate
with 0 points and then see
how much the rate decreases
With each point paid.
Discount points are smart if
you plan to stay in a home
for some time since they can
lower the monthly loan
payment. Points are tax
deductible when you purchase
a home and you may be able
to negotiate for the seller
to pay for some of them.
46. WHAT IS AN ESCROW
ACCOUNT? DO I NEED ONE?
Established by your
lender, an escrow account is
a place to set aside a
portion of your monthly
mortgage payment to cover
annual charges for
homeowner's insurance,
mortgage insurance (if
applicable), and property
taxes. Escrow accounts are a
good idea because they
assure money will always be
available for these
payments. If you use an
escrow account to pay
property tax or homeowner's
insurance, make sure you are
not penalized for late
payments since it is the
lender's responsibility to
make those payments.
FIRST STEPS
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
Experian 1-888-397-3742
Equifax 1-800-685-1111
Trans Union
1-800-916-8800
51. WHAT IF I FIND A
MISTAKE IN MY CREDIT
HISTORY?
Simple mistakes are
easily corrected by writing
to the reporting company,
pointing out the error, and
providing proof of the
mistake. You can also
request to have your own
comments added to explain
problems. For example, if
you made a payment late due
to illness, explain that for
the record. Lenders are
usually understanding about
legitimate problems.
52. WHAT IS A CREDIT
BUREAU SCORE AND HOW DO
LENDERS USE THEM?
A credit bureau score is
a number, based upon your
credit history, that
represents the possibility
that you will be unable to
repay a loan. Lenders use it
to determine your ability to
qualify for a mortgage loan.
The better the score, the
better your chances are of
getting a loan. Ask your
lender for details.
53. HOW CAN I IMPROVE MY
SCORE?
There are no easy ways to
improve your credit score,
but you can work to keep it
acceptable by maintaining a
good credit history. This
means paying your bills on
time and not overextending
yourself by buying more than
you 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
retirement?
Your lender can help you
use your answers to
questions such as these to
decide which loan best fits
your needs.
55. WHAT IS THE BEST WAY
TO COMPARE LOAN TERMS
BETWEEN LENDERS?
First, devise a checklist
for the information from
each lending institution.
You should include the
company's name and basic
information, the type of
mortgage, minimum down
payment required, interest
rate and points, closing
costs, loan processing time,
and whether prepayment is
allowed.
Speak with companies by
phone or in person. Be sure
to call every lender on the
list the same day, as
interest rates can fluctuate
daily. In addition to doing
your own research, your real
estate agent may have access
to a database of lender and
mortgage options. Though
your agent may primarily be
affiliated with a particular
lending institution, he or
she may also be able to
suggest a variety of
different lender options to
you.
56. ARE THERE ANY COSTS
OR FEES ASSOCIATED WITH THE
LOAN ORIGINATION PROCESS?
Yes. When you turn in
your application, you'll be
required to pay a loan
application fee to cover the
costs of underwriting the
loan. This fee pays for the
home appraisal, a copy of
your credit report, and any
additional charges that may
be necessary. The
application fee is generally
non-refundable.
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 RESPONSIBILITIES?
Lenders are not allowed
to discriminate in any way
against potential borrowers.
If you believe a lender is
refusing to provide his or
her services to you on the
basis of race, color,
nationality, religion, sex,
familial status, or
disability, contact HUD's
Office of Fair Housing at
1-800-669-9777 (or
1-800-927-9275 for the
hearing impaired).
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.
CLOSING
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 DEVELOPMENT?
Also known as HUD, the
U.S. Department of Housing
and Urban Development was
established in 1965 to
develop national policies
and programs to address
housing needs in the U.S.
One of HUD's primary
missions is to create a
suitable living environment
for all Americans by
developing and improving the
country's communities and
enforcing fair housing laws
67. HOW DOES HUD HELP
HOMEBUYERS AND HOMEOWNERS?
HUD helps people by
administering a variety of
programs that develop and
support affordable housing.
Specifically, HUD plays a
large role in homeownership
by making loans available
for lower- and
moderate-income families
through its FHA mortgage
insurance program and its
HUD Homes program. HUD owns
homes in many communities
throughout the U.S. and
offers them for sale at
attractive prices and
economical terms. HUD also
seeks to protect consumers
through education, Fair
Housing Laws, and housing
rehabilitation initiatives.
68. WHAT IS THE FHA?
Now an agency within HUD,
the Federal Housing
Administration was
established in 1934 to
advance opportunities for
Americans to own homes. By
providing private lenders
with mortgage insurance, the
FHA gives them the security
they need to lend to
first-time buyers who might
not be able to qualify for
conventional loans. The FHA
has helped more than 26
million Americans buy a
home.
69. HOW CAN THE FHA
ASSIST ME IN BUYING A HOME?
The FHA works to make
homeownership a possibility
for more Americans. With the
FHA, you don't need perfect
credit or a high-paying job
to qualify for a loan. The
FHA also makes loans more
accessible by requiring
smaller down payments than
conventional loans. In fact,
an FHA down payment could be
as little as a few months
rent. And your monthly
payments may not be much
more than rent.
70. HOW IS THE FHA
FUNDED?
Lender claims paid by the
FHA mortgage insurance
program are drawn from the
Mutual Mortgage Insurance
fund. This fund is made up
of premiums paid by
FHA-insured loan borrowers.
No tax dollars are used to
fund the program.
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
on time.
75. WHAT QUALIFIES AS AN
INCOME SOURCE FOR THE FHA?
Seasonal pay, child
support, retirement pension
payments, unemployment
compensation, VA benefits,
military pay, Social
Security income, alimony,
and rent paid by family all
qualify as income sources.
Part-time pay, overtime, and
bonus pay also count as long
as they are steady. Special
savings plans-such as those
set up by a church or
community association -
qualify, too. Income type is
not as important as income
steadiness with the 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
debt-to-income ratio.
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 other
debt
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 funds.
80. WHAT CAN I USE TO PAY
THE DOWN PAYMENT AND CLOSING
COSTS OF AN FHA LOAN?
Besides your own funds,
you may use cash gifts or
money from a private savings
club. If you can do certain
repairs and improvements
yourself, your labor may be
used as part of a down 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
details.
83. WHAT TYPES OF CLOSING
COSTS ARE ASSOCIATED WITH
FHA-INSURED LOANS?
Except for the addition
of an FHA mortgage insurance
premium, FHA closing costs
are similar to those of a
conventional loan outlined
in Question 63. The FHA
requires a single, upfront
mortgage insurance premium
equal to 2.25% of the
mortgage to be paid at
closing (or 1.75% if you
complete the HELP program-
see Question 91). This
initial premium may be
partially refunded if the
loan is paid in full during
the first seven years of the
loan term. After closing,
you will then be responsible
for an annual premium - paid
monthly - if your mortgage
is over 15 years or if you
have a 15-year loan with an
LTV greater than 90%.
84. CAN I ROLL CLOSING
COSTS INTO my FHA LOAN?
No. Though you can't roll
closing costs into your FHA
loan, you may be able to use
the amount you pay for them
to help satisfy the down
payment requirement. Ask
your lender for details.
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 your situation.
Fannie Mae does not deal
directly with the borrower.
They work with the lender to
determine the loss
mitigation program that best
fits your needs.
Freddie Mac, like Fannie
Mae, will usually only work
with the loan servicer.
However, if you encounter
problems with your lender
during the loss mitigation
process, you can coil
customer service for help at
1-800-FREDDIE
(1-800-373-3343).
In any loss mitigation
situation, it is important
to remember a few helpful
hints:
Explore every reasonable
alternative to avoid losing
your home, but beware of
scams. For example, watch
out for:
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.
MORTGAGE INSURANCE
88. WHAT IS MORTGAGE
INSURANCE?
Mortgage insurance is a
policy that protects lenders
against some or most of the
losses that result from
defaults on home mortgages.
It's required primarily for
borrowers making a down
payment of less than 20%.
89. HOW DOES MORTGAGE
INSURANCE WORK? IS IT LIKE
HOME OR AUTO INSURANCE?
Like home or auto
insurance, mortgage
insurance requires payment
of a premium, is for
protection against loss, and
is used in the event of an
emergency. If a borrower
can't repay an insured
mortgage loan as agreed, the
lender may foreclose on the
property and file a claim
with the mortgage insurer
for some or most of the
total losses.
90. DO I NEED MORTGAGE
INSURANCE? HOW DO I GET IT?
You need mortgage
insurance only if you plan
to make a down payment of
less than 20% of the
purchase price of the home.
The FHA offers several loan
programs that may meet your
needs. Ask your lender for
details.
91. HOW CAN I RECEIVE A
DISCOUNT ON THE FHA INITIAL
MORTGAGE INSURANCE PREMIUM?
Ask your real estate
agent or lender for
information on the HELP
program from the FHA. HELP -
Homebuyer Education Learning
Program - is structured to
help people like you begin
the homebuying process. It
covers such topics as
budgeting, finding a home,
getting a loan, and home
maintenance. In most cases,
completion of this program
may entitle you to a
reduction in the initial FHA
mortgage insurance premium
from 2.25% to 1.75% of the
purchase price of your new
home.
92. WHAT IS PMI?
PMI stands for Private
Mortgage Insurance or
Insurer. These are
privately-owned companies
that provide mortgage
insurance. They offer both
standard and special
affordable programs for
borrowers. These companies
provide guidelines to
lenders that detail the
types of loans they will
insure. Lenders use these
guidelines to determine
borrower eligibility. PMI's
usually have stricter
qualifying ratios and larger
down payment requirements
than the FHA, but their
premiums are often lower and
they insure loans that
exceed the FHA limit.
FHA PRODUCTS
93. WHAT IS A 203(b)
LOAN?
This is the most commonly
used FHA program. It offers
a low down payment, flexible
qualifying guidelines,
limited lender's fees, and a
maximum loan amount.
94. WHAT IS A 203(k)
LOAN?
This is a loan that
enables the homebuyer to
finance both the purchase
and rehabilitation of a home
through a single mortgage. A
portion of the loan is used
to pay off the seller's
existing mortgage and the
remainder is placed in an
escrow account and released
as rehabilitation is
completed. Basic guidelines
for 203(k) loans are as
follows:
The home must be at least
one year old.
The cost of
rehabilitation must be at
least $5,000, but the total
property value - including
the cost of repairs - must
fall within the FHA maximum
mortgage limit.
The 203(k) loan must
follow many of the 203(b)
eligibility 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 as follows:
The cost of improvements
must be determined by a Home
Energy Rating System or by
an energy consultant. This
cost must be less than the
anticipated savings from the
improvements.
One- and two-unit new or
existing homes are eligible;
condos are not.
The improvements financed
may be 5% of property value
or $4,000, whichever is
greater. The total must fall
within the FHA loan limit.
96. DELETED.
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.
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FOIA Privacy Web Policies
and Important Links Home
U.S. Department of
Housing and Urban
Development
451 7th Street S.W.,
Washington, DC 20410
Telephone: (202) 708-1112
TTY: (202) 708-1455
Find the address of a HUD
office near you
