The Home Buying Process

Figure out how much you can afford
Shop for a home
Make an offer
Get a home inspection
Shop for a loan
Applying for your FHA loan
Sign papers
Figure out how much money you need at settlement

The process of buying a home may seem complicated when you've never done it before. You might think it will be even more complicated when you get involved with a government agency. Well, buying a home with an FHA loan is really no different than buying a home with any other loan-except--you have more protection against foreclosure with FHA, it is easier to qualify, you don't have to have perfect credit and it can cost you less each month. Let's get started...

Figure out how much you can afford - (Top)

What you can afford depends on your income, credit rating, current monthly expenses, down payment and the interest rate. There are some online tools you can use, and some tools that your real estate agent can help you with, but it's best to visit an FHA-approved lender to find out for sure.

You should remember that prequalification (an informal estimate of how much you might borrow) is just to give you a preliminary idea of what you can afford, and to identify any major problems that you will want to fix. It's not a guarantee that you will be approved for a loan-but you will want to get pre-qualified to avoid any surprises.

Shop for a home - (Top)

You may already have a general idea of where you'd like to live based on where you're living now, where you grew up, where you have friends or family or where you work. A local real estate agent can help you find homes in that area. If you're not sure, or you need help in comparing the homes you see, here are some checklists that may help.

Wish list - what features do you want?

Home shopping checklist - take this list with you when comparing homes.

Make an offer - (Top)

Discuss the process with your real estate agent. If the seller does not accept your offer and makes a counter offer (rejects all or part of your offer), you may need to bargain until you both agree to the terms of the sale. When you plan to finance the purchase of your home with an FHA loan, your sales contract will include the FHA amendatory clause. This clause states that if the appraisal (the estimate of the property's fair market value) comes in at a price below the sales price, you can decide not to proceed with the purchase.

Get a home inspection - (Top)

Buying a home is one of the most important purchases you will make in your life, so protect yourself by making sure that the home you want to buy is in good condition. A home inspection is an evaluation of a home's condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and fair look at the property you plan to buy. The inspector will:

• Evaluate the physical condition: the structure, construction and mechanical systems
• Find and list items that should be repaired or replaced
• Estimate the remaining useful life of major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes

The home inspector does not estimate the value of the house.

After the inspection is complete, you will receive a written report of the home inspector's findings, usually within five to seven days.

Home inspections are not appraisals. A property appraisal provides an estimate of a property's market value. Lenders require appraisals on properties before loan approval because they do not want to loan more than the property is worth. Appraisals benefit lenders; home inspections benefit buyers. The FHA requires lenders to obtain appraisals of properties backing FHA-insured loans. The FHA requires appraisals for three reasons:

1. To estimate the market value of the property
2. To make sure that the property meets FHA minimum property requirements/standards (health and safety)
3. To make sure that the property is or easy to resell.

The appraisal will note problems that are easy to see with the property and non-compliance with HUD's minimum property requirements/standards. These problems may not be the same as those items noted in a home inspection report.

The FHA does not guarantee the value or condition of your future home, and the FHA does not perform home inspections. If you find problems with your new home after closing, FHA cannot give or lend you money for repairs, nor can it buy the home back from you. It cannot help you with the builder or seller.

That's why it is so important for you, the buyer, to get an independent home inspection. Ask a qualified home inspector to thoroughly examine the physical condition of your future home and give you the information you need to make a wise decision.

When you make a written offer on a home, you should insist that the contract state that the offer is contingent (dependent) on a home inspection conducted by a qualified inspector. You will have to pay for the inspection yourself, but it could keep you from buying a house that will cost you far more in repairs down the road. If you are satisfied with the results of the inspection, then you can proceed with your offer.

As the buyer, it is your responsibility to carefully select a qualified inspector. The following sources may help you find a qualified home inspector:

• State regulatory authorities. Some states require licensing of home inspectors.
• Professional organizations. Professional organizations may require home inspectors to pass tests and meet minimum qualifications before becoming a member.
• Phone book Yellow Pages. Look under "Building Inspection Service" or "Home Inspection Service".
• The Internet. Search for "Building Inspection Service" or "Home Inspection Service."
• Your real estate agent. Most real estate professionals have a list of home inspectors they recommend.

Radon gas testing. Radon is a natural radioactive gas found in some homes. Strong concentrations (amounts) can cause serious health problems. The U.S. Environmental Protection Agency and the Surgeon General of the United States recommend that all houses should be tested for radon. For more information on radon testing, call the National Radon Information Line at 1-800-SOS-Radon or 1-800-767-7236. As with a home inspection, if you decide to test for radon, you can do it before or after signing the contract, as long as your contract states your purchase depends on your satisfaction with the results of the radon test.

National Lead Information Clearinghouse - Many homes built before 1978 have lead paint, and some ingredients can threaten your health. To protect your family, you should be sure to get a lead-based inspection and/or risk assessment. For more information, contact the National Lead Information Clearinghouse at 1-800-424-LEAD or 1-800-424-5323.

The bottom line: Spending hundreds of dollars on inspections may save thousands in the future!

Shop for a loan - (Top)

Save money by doing your homework. Talk to several lenders, compare interest rates, and negotiate or bargain to get a better deal. Consider getting pre-approved for a loan.

Why ask for an FHA mortgage loan? There are many reasons to ask your lender for an FHA loan instead of a conventional loan or an expensive, risky sub-prime loan.

• Lower cost - FHA loans have competitive interest rates because the the Federal Government insures the loans. Always compare an FHA loan with other loan types.
  
  
• Smaller down payment - The FHA offers a low 3% down payment, and that money can come from a family member, employer or charitable organization. Many other loans don't allow this.
  
  
• Easier to qualify - Because the FHA insures your mortgage, lenders are more willing to give loans with lower qualifying requirements, so it's easier for you to qualify.
  
  
• Less than perfect credit - Even if you have had credit problems, such as bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan because FHA insures your mortgage.
  
  
• More protection to keep your home - The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, the FHA has many options to help keep you in your home and avoid foreclosure.

Read "Shopping for a Mortgage?", FHA improvements benefit you, a collaborative brochure from the FHA and the National Association of Realtors.

Estimate your loan amount, down payment, and closing costs using this calculator.

Applying for your FHA loan - (Top)

After selecting a lender, you'll meet with a loan officer at a convenient place like your current residence or your real estate agent's office. The loan officer will help you complete a loan application and have you sign a several forms authorizing the lender to verify (check on) your employment, income and savings. Using that information, your lender will order an FHA case number, an identification number specifically for your loan application.

The lender will also order an appraisal to find the value of the property and its condition. An FHA appraisal is no different than other appraisals.

The lender will confirm and write down the information you provide and compare it with FHA requirements. The lender will also review the appraisal, to determine if the value of the property supports the sales price and to see if any property repairs are required. The lender then makes a decision on your application.

Sign papers - (Top)

You're finally ready to go to "settlement" or "closing." Be sure to read everything before you sign. In addition to signing a lot of documents, you may need to bring some extra money for certain closing costs.

Calculate how much money you need at settlement - (Top)

The first page of the HUD-1 Settlement Statement (shown in the sample below) summarizes all the costs and adjustments for the borrower and seller. Section J is the summary of the borrower's side of the transaction and Section K is the summary of the seller's side of the transaction. You may receive a copy of the seller's side, but it is not required.

Section 100 summarizes the borrower's costs, such as the contract cost of the house, any personal property being purchased, and the total settlement charges owed by the borrower from Section L.

Beginning at line 106, adjustments are made for items (such as taxes, assessments, fuel) that the seller has previously paid. If you will benefit from these items after settlement, you will usually repay the seller for that portion of the cost.

Here is an example for you to use in making your own calculations:

In this example, the cost of the house is $100,000 and the borrower's total settlement charges (from Section L, Line 1400) are $4,000. The settlement date is July 1. Here the borrower has agreed to pay the seller for the $40 Home Owners' Association dues that have been paid for the month of July and for 25 gallons of fuel oil left in the tank. This is added together for a gross (total) amount due from the borrower of $104,065.

Section 200 lists the amount paid by the borrower or on behalf of the borrower. This will include the deposit of earnest money you put down with the agreement of sale, the loan(s) you are getting and any loan you may be assuming.

Beginning at Line 210, adjustments are made for items that the seller owes (such as taxes, assessments) that you as the borrower will pay after settlement. The seller will usually pay you or credit you for this portion at settlement.

In this example, the borrower paid an earnest(good faith) deposit of $2,000 and is getting a loan for $80,000. A tax of $1200 and an assessment of $200 are due at the end of the year. The seller will pay the borrower for six months or one-half of these amounts. Line 220 shows the total $82,700 to be paid by or for the borrower.

Section 300 reflects the difference between the gross amount due from the borrower and the total amount paid by/for the borrower. Generally, line 303 will show the amount of cash the borrower must bring to settlement.

In this example, the borrower must bring $21,365.00 to settlement.