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
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
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.
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.
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.
HOW DO I KNOW IF I'M READY TO BUY A HOME?
can find out by asking yourself some questions:
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
I have a good record of paying my bills?
I have few outstanding long-term debts, like car payments?
I have money saved for a down payment?
I have the ability to pay a mortgage every month, plus additional
you can answer "yes" to these questions, you are probably
ready to buy your own home.
HOW DO I BEGIN THE PROCESS OF BUYING A HOME?
by thinking about your situation. Are you ready to buy a home? How
much can you afford in a monthly mortgage payment (see Question
4 for help)? How much space do you need? What areas of town do you
like? After you answer these questions, make a "To Do"
list and start doing casual research. Talk to friends and family,
drive through neighborhoods, and look in the "Homes" section
of the newspaper.
HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
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.
a home has many benefits. When you make a mortgage payment, you
are building equity. And that's an investment. Owning a home also
qualifies you for tax breaks that assist you in dealing with your
new financial responsibilities- like insurance, real estate taxes,
and upkeep- which can be substantial. But given the freedom, stability,
and security of owning your own home, they are worth it.
HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT CAN AFFORD?
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.
HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?
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.
HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
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.
WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?
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.
WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN NEIGHBORHOODS?
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).
HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?
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.
HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?
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.
HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES
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.
HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?
total amount of the previous year's property taxes is usually included
in the listing information. If it's not, ask the seller for a tax
receipt or contact the local assessor's off ice. Tax rates can change
from year to year, so these figures may be approximate.
WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?
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,
IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?
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
WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
addition to comparing the home to your minimum requirement and wish
lists, use the HUD Home Scorecard and consider the following:
there enough room for both the present and the future?
there enough bedrooms and bathrooms?
the house structurally sound?
the mechanical systems and appliances work?
the yard big enough?
you like the floor plan?
your furniture fit in the space? Is there enough storage space?
(Bring a tape measure to better answer these questions.)
anything need to repaired or replaced? Will the seller repair
or replace the items?
the house in good weather and bad, and in each season. Will you
be happy with it year-round?
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.
WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
of your questions should focus on potential problems and maintenance
issues. Does anything need to be replaced? What things require ongoing
maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also
ask about the house and neighborhood, focusing on quality of life
issues. Be sure the seller's or real estate agent's answers are
clear and complete. Ask questions until you understand all of the
information they've given. Making a list of questions ahead of time
will help you organize your thoughts and arrange all of the information
you receive. The HUD Home Scorecard can help you develop your question
HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?
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.
HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
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.
WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN INSPECTION
FIGURE IN THE PURCHASE OF A HOME?
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
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.
a good idea to have an inspection before you sign a written offer
since, once the deal is closed, you've bought the house as is."
Or, you may want to include an inspection clause in the offer when
negotiating for a home. An inspection t clause gives you an 'out"
on buying the house if serious problems are found,or gives you the
ability to renegotiate the purchase price if repairs are needed.
An inspection clause can also specify that the seller must fix the
problem(s) before you purchase the house.
DO I NEED TO BE THERE FOR THE INSPECTION?
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.
ARE OTHER TYPES OF INSPECTIONS REQUIRED?
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.
HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?
the house you're considering was built before 1978 and you have
children under the age of seven, you will want to have an inspection
for lead-based point. It's important to know that lead flakes from
paint can be present in both the home and in the soil surrounding
the house. The problem can be fixed temporarily by repairing damaged
paint surfaces or planting grass over effected soil. Hiring a lead
abatement contractor to remove paint chips and seal damaged areas
will fix the problem permanently.
ARE POWER LINES A HEALTH HAZARD?
are no definitive research findings that indicate exposure to power
lines results in greater instances of disease or illness.
DO I NEED A LAWYER TO BUY A HOME?
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.
DO I REALLY NEED HOMEOWNER'S INSURANCE?
A paid homeowner's insurance policy (or a paid receipt for one)
is required at closing, so arrangements will have to be made prior
to that day. Plus, involving the insurance agent early in the home
buying process can save you money. Insurance agents are a great
resource for information on home safety and they can give tips on
how to keep insurance premiums low.
WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER'S INSURANCE COSTS?
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.
IS THE HOME LOCATED IN A FLOOD PLAIN?
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.
WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
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.
HOW DO I MAKE AN OFFER?
real estate agent will assist you in making an offer, which will
include the following information:
legal description of the property
of earnest money
payment and financing details
you are offering
of time the offer is valid
of the deal
that a sale commitment depends on negotiating a satisfactory contract
with the seller, not just Making an offer.
ways to lower ins-insurance costs include insuring your home and
car(s) with the same company, increasing home security, and seeking
group coverage through alumni or business associations. Insurance
costs are always lowered by raising your deductibles, but this exposes
you to a higher out-of-pocket cost if you have to file a claim.
HOW DO I DETERMINE THE INITIAL OFFER?
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.
WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?
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.
WHAT ARE "HOME WARRANTIES", AND SHOULD I CONSIDER THEM?
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.
FINANCING QUESTIONS:THE BASICS
WHAT IS A MORTGAGE?
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.
WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF
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.
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.
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF
Rate Mortgages: Payments remain the same for the the life of the
cost remains unaffected by interest rate changes and inflation.
Rate Mortgages (ARMS): Payments increase or decrease on a regular
schedule with changes in interest rates; increases subject to limits
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)
Mortgage- Interest rate adjusts only once and remains the same
for the life of the loan
linked to a specific index or margin
offer lower initial interest rates
payments can be lower
allow borrower to qualify for a larger loan amount
WHEN DO ARMS MAKE SENSE?
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
WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
the first 23 years of the loan, more interest is paid off than
principal, meaning larger tax deductions.
inflation and costs of living increase, mortgage payments become
a smaller part of overall expenses.
is usually made at a lower interest rate.
is built faster because early payments pay more principal.
CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
By sending in extra money each month or making an extra payment
at the end of the year, you can accelerate the process of paying
off the loan. When you send extra money, be sure to indicate that
the excess payment is to be applied to the principal. Most lenders
allow loan prepayment, though you may have to pay a prepayment penalty
to do so. Ask your lender for details.
ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
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.
HOW LARGE OF A DOWN PAYMENT DO I NEED?
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.
WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
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).
WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
amount of the down payment, the size of the mortgage loan, the interest
rate, the length of the repayment term and payment schedule will
all affect the size of your mortgage payment.
HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
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.
WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE
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.
WHAT ARE DISCOUNT POINTS?
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.
WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
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.
WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
first step in securing a loan is to complete a loan application.
To do so, you'll need the following information.
stubs for the past 2-3 months
forms for the past 2 years
on long-term debts
returns for the past 2 years
of any other income
and description of the property you wish to buy
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
HOW DO I CHOOSE THE RIGHT LENDER FOR ME?
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.
HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?
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.
is a lender's actual commitment to lend to you. It involves assembling
the financial records mentioned in Question 47 (Without the property
description and sales contract) and going through a preliminary
approval process. Pre-approval gives you a definite idea of what
you can afford and shows sellers that you are serious about buying.
HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
are three major credit reporting companies: Equifax, Experian, and
Trans Union. Obtaining your credit report is as easy as calling
and requesting one. Once you receive the report, it's important
to verify its accuracy. Double check the "high credit limit,"'total
loan," and 'past due" columns. It's a good idea to get
copies from all three companies to assure there are no mistakes
since any of the three could be providing a report to your lender.
Fees, ranging from $5-$20, are usually charged to issue credit reports
but some states permit citizens to acquire a free one. Contact the
reporting companies at the numbers listed for more information.
| Company Name
|| Phone Number
| Trans Union
WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?
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
WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?
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.
HOW CAN I IMPROVE MY SCORE?
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.
the RIGHT LOAN for YOU
HOW DO I CHOOSE THE BEST LOAN - PROGRAM FOR ME?
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
you expect your finances to changeover the next few years?
you planning to live in this home for a long period of time?
you comfortable with the idea of a changing mortgage payment amount?
you wish to be free of mortgage debt as your children approach
college age or as you prepare for retirement?
lender can help you use your answers to questions such as these
to decide which loan best fits your needs.
WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN LENDERS?
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
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.
ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION
When you turn in your application, you'll be required to pay a loan
application fee to cover the costs of underwriting the loan. This
fee pays for the home appraisal, a copy of your credit report, and
any additional charges that may be necessary. The application fee
is generally non-refundable.
WHAT IS RESPA?
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.
more information on RESPA,
or call 1-800-569-4287 for a local counseling referral.
WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
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.
BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL RESPONSIBILITIES?
are not allowed to discriminate in any way against potential borrowers.
If you believe a lender is refusing to provide his or her services
to you on the basis of race, color, nationality, religion, sex,
familial status, or disability, contact HUD's Office of Fair Housing
at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).
WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?
ensure you won't fall victim to loan fraud, be sure to follow all
of these steps as you apply for a loan:
sure to read and understand everything before you sign.
to sign any blank documents.
not buy property for someone else.
not overstate your income.
not overstate how long you have been employed.
not overstate your assets.
report your debts.
not change your income tax returns for any reason. Tell the whole
truth about gifts. Do not list fake co-borrowers on your loan
truthful about your credit problems, past and present.
honest about your intention to occupy the house
not provide false supporting documents.
WHAT HAPPENS AFTER I'VE APPLIED FOR MY LOAN?
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.
WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?
will likely be the first opportunity to examine the house without
furniture, giving you a clear view of everything. Check the walls
and ceilings carefully, as well as any work the seller agreed to
do in response to the inspection. Any problems discovered previously
that you find uncorrected should be brought up prior to closing.
It is the seller's responsibility to fix them.
WHAT MAKES UP CLOSING COST?
may be closing cost customary or unique to a certain locality, but
closing cost are usually made up of the following:
or escrow fees (Yours and your lender's if applicable)
taxes (to cover tax period to date)
(paid from date of closing to 30 days before first monthly payment)
Origination fee (covers lenders administrative cost)
premium of mortgage Insurance (if applicable)
Insurance (yours and lender's)
payment to escrow account for future real estate taxes and insurance
receipt for homeowner's insurance policy (and fire and flood insurance
documentation preparation fees
WHAT CAN I EXPECT TO HAPPEN ON CLOSING DAY?
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.
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.
pay the lender's agent all closing costs and, in turn,he or she
will provide you with a settlement statement of all the items for
which you have paid. The deed and mortgage will then be recorded
in the state Registry of Deeds, and you will be a homeowner.
WHAT DO I GET AT CLOSING?
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)
or Deed of Trust
Sales Contract (prepared by the seller; your lawyer should review
to your new home
CAN HUD and the FHA HELP ME BECOME a HOMEOWNER
WHAT IS THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT?
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
HOW DOES HUD HELP HOMEBUYERS AND HOMEOWNERS?
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.
WHAT IS THE FHA?
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.
HOW CAN THE FHA ASSIST ME IN BUYING A HOME?
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.
HOW IS THE FHA FUNDED?
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
WHO CAN QUALIFY FOR FHA LOANS
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.
WHAT IS THE FHA LOAN LIMIT?
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.
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.
WHAT ARE THE STEPS INVOLVED IN THE FHA LOAN PROCESS?
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.
HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY FOR AN FHA LOAN?
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.
WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?
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.
CAN I CARRY DEBT AND STILL QUALIFY FOR FHA LOANS?
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.
WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
FHA allows you to use 29% of your income towards housing costs and
41% towards housing expenses and other long-term debt. With a conventional
loan, this qualifying ratio allows only 28% toward housing and 36%
towards housing and other debt
CAN I EXCEED THIS RATIO?
may qualify to exceed if you have:
large down payment
demonstrated ability to pay more toward your housing expenses
worth enough to repay the mortgage regardless of income
of acceptable credit history or limited credit use
provided by an organization
decrease in monthly housing expenses
HOW LARGE A DOWN PAYMENT DO I NEED WITH AN FHA LOAN?
must have a down payment of at least 3% of the purchase price of
the home. Most affordable loan programs offered by private lenders
require between a 3%-5% down payment, with a minimum of 3% coming
directly from the borrower's own funds.
WHAT CAN I USE TO PAY THE DOWN PAYMENT AND CLOSING COSTS OF AN FHA
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.
HOW DOES MY CREDIT HISTORY IMPACT MY ABILITY TO QUALIFY?
FHA is generally more flexible than conventional lenders in its
qualifying guidelines. In fact, the FHA allows you to re-establish
years have passed since a bankruptcy has been discharged
judgments have been paid
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
years have passed since a foreclosure or a deed-in-lieu has been
CAN I QUALIFY FOR AN FHA LOAN WITHOUT A CREDIT HISTORY?
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.
WHAT TYPES OF CLOSING COSTS ARE ASSOCIATED WITH FHA-INSURED LOANS?
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
CAN I ROLL CLOSING COSTS INTO my FHA LOAN?
Though you can't roll closing costs into your FHA loan, you may
be able to use the amount you pay for them to help satisfy the down
payment requirement. Ask your lender for details.
ARE FHA LOANS ASSUMABLE?
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.
WHAT SHOULD I DO IF I CAN'T MAKE A PAYMENT ON LOAN?
or, write to your lender as soon as possible. Clearly explain the
situation and be prepared to provide him or her with financial information.
ARE THERE ANY OPTIONS IF I FALL BEHIND ON MY LOAN PAYMENTS?
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.
living in your home to qualify for assistance.
a HUD-approved housing counseling agency (1-800-569-4287 or TDD:
1-800-483-2209) and cooperate with the counselor/lender trying
to help you.
has a number of special loss mitigation programs available to
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.
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.
Claim: Your lender maybe able to help you obtain an interest-free
loan from HUD to bring your mortgage current.
Sale: Allows you to sell your property and pay off your mortgage
loan ,to avoid foreclosure.
lieu of Foreclosure: Lets you voluntarily "give back"
your property to the lender; it won't save your house but will
help you avoid the costs, time, and effort of the foreclosure
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
(877) 622-8525 for additional help.
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.
Mae does not deal directly with the borrower. They work with the
lender to determine the loss mitigation program that best fits your
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
any loss mitigation situation, it is important to remember a few
every reasonable alternative to avoid losing your home, but beware
of scams. For example, watch out for:
skimming: a buyer offers to repay the mortgage or sell the property
if you sign over the deed and move out.
counseling agencies: offer counseling for a fee when it is often
given at no charge.
sign anything you don't understand.
WHAT IS MORTGAGE INSURANCE?
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
HOW DOES MORTGAGE INSURANCE WORK? IS IT LIKE HOME OR AUTO INSURANCE?
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.
DO I NEED MORTGAGE INSURANCE? HOW DO I GET IT?
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
HOW CAN I RECEIVE A DISCOUNT ON THE FHA INITIAL MORTGAGE INSURANCE
your real estate agent or lender for information on the HELP program
from the FHA. HELP - Homebuyer Education Learning Program - is structured
to help people like you begin the homebuying process. It covers
such topics as budgeting, finding a home, getting a loan, and home
maintenance. In most cases, completion of this program may entitle
you to a reduction in the initial FHA mortgage insurance premium
from 2.25% to 1.75% of the purchase price of your new home.
WHAT IS PMI?
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.
WHAT IS A 203(b) LOAN?
is the most commonly used FHA program. It offers a low down payment,
flexible qualifying guidelines, limited lender's fees, and a maximum
WHAT IS A 203(k) LOAN?
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:
home must be at least one year old.
cost of rehabilitation must be at least $5,000, but the total
property value - including the cost of repairs - must fall within
the FHA maximum mortgage limit.
203(k) loan must follow many of the 203(b) eligibility requirements.
to your lender about specific improvement, energy efficiency,
and structural guidelines.
WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?
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:
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.
and two-unit new or existing homes are eligible; condos are not.
improvements financed may be 5% of property value or $4,000, whichever
is greater. The total must fall within the FHA loan limit.
WHAT IS A TITLE I LOAN?
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.
WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES THE FHA OFFER?
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.
HOW CAN I OBTAIN AN FHA-INSURED LOAN?
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:
HOW CAN I CONTACT HUD?
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.