Securing the loan:
Your credit and credit
score Mortgage lenders closely scrutinize your financial history
to determine whether to approve your loan application. Of primary
concern are your credit report, which details your loan history,
credit cards, mortgages, bankruptcy filings and other financial
information, and your credit score, which uses your credit
report to arrive at a numerical representation of your overall
creditworthiness. Credit scores (sometimes called FICO scores
after Fair Isaac & Co., the firm that created the most
commonly used form) range from the 300s to about 900, with
most home buyers falling in the 600-700 range. Factors used
to determine your credit score include:
• Past delinquency: Those who have failed to make
payments in the past tend to do so in the future. The more
recent a delinquency, the more it counts against you; a 30-day
delinquency within the past 12 months really hinders your chances
of securing favorable mortgage terms.
• Length of credit: The longer you've had credit,
the better.
• Credit use: If you're "maxed out" or
close to your credit limits, you're viewed as risky.
• Mix of credit: Someone with a combination of
revolving and installment debt is considered less risky than
one with only a secured credit card.
The higher your credit score, the less risky you appear to
a lender. A good credit score will help you qualify for a mortgage
loan and obtain better terms. Cleaning up your credit report
Why check your credit report before your lender does? Because
an estimated four out of five credit reports contain some kind
of misinformation -- errors you'll want to clear up before
approaching any lender. Obtain copies of your credit report
from all three credit reporting agencies -- Equifax, Experian
and Trans Union. Probably each will differ from the others
in small ways.
Tips for cleaning up your credit report
• Look closely for any errors and correct them.
Check for credit cards you no longer use and close them out.
• Note late payments and credit balances; you may
have to explain them to a lender.
• Compare account numbers to make sure they're
yours.
• Resolve outstanding bills.
• Pay all bills on time.
• Limit your amount of outstanding credit. Even
if you pay your bills on time, you'll improve your credit score
by having lower balances and fewer cards.
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Pre-purchase counseling: "Do you, John and Jane,
take this house ..."
Home buying is complex, confusing and sometimes even dangerous
for inexperienced consumers. But shoppers don't have to feel
intimidated anymore. The U.S. government, Fannie Mae, Freddie
Mac and some nonprofit agencies have teamed up to make pre-purchase
counseling widely available in recent years. Consumers now
can take free classes that teach everything from money management
to the loan closing process in cities and towns around the
country. And while lenders only require attendance for borrowers
in certain loan programs, novice mortgage hunters may want
to consider going anyway so they don't find themselves flummoxed
in the field. "Anyone that's seriously thinking about
or just wants information about the home buying process, I
would strongly encourage them to attend a home buying workshop
before they do anything," says Teresa Johnson, housing
director at the Urban League of Palm Beach County in West Palm
Beach, Fla. "If they would just take the time out on the
front end to attend a class and become informed, it would work
out so much better. "There are so many things that new
homeowners are unaware of," she adds. "All we're
trying to do is arm them with information."
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Federal intervention
Fannie Mae, Freddie Mac, the Department of Housing and Urban
Development, state housing agencies and lenders started pushing
pre-purchase counseling in earnest during the mid-1990s as
a way to stem mortgage defaults and foreclosures. Officials
figured that consumers who received money management and credit
education before shopping wouldn't end up buying more house
than they could afford. By stressing the importance of making
payments, they also hoped to keep people from just giving up
and defaulting on their mortgages during hard times. To promote
their efforts, the agencies provided grants to nonprofits so
they could pay for counseling programs and built education
offices in several metropolitan areas where counselors could
receive training. They formed a trade organization called the
American Homeowner Education and Counseling Institute to develop
standardized training methods and materials, as well as come
up with a nationwide counselor certification program. Most
borrowers can now find homeownership classes nearby as a result. "It
has not always been a part of the industry. The first home-buyer
education started in about '90, '91 when what the industry
terms 'community lending' started, when we really started to
reach low income borrowers," says Colleen Fraley, deputy
director of Fannie Mae's Minnesota Partnership Office in St.
Paul. "But it didn't become really active until '93, '94.
That's when people realized we need to standardize this and
make it more available." Who needs counseling? Maybe youTypically,
nonprofit agencies offer the classes once or twice a month
at community centers, schools, libraries and their own offices.
The classes, which have two or three dozen participants on
average, last from three to six hours and are sometimes spread
out over two days. Students generally don't have to pay anything
to attend. Run-of-the-mill borrowers don't have to take classes
to obtain home loans, but many others do. These include borrowers
who use special mortgage programs -- such as Fannie Mae-backed
low down payment loans geared toward lower-income home shoppers
-- and those who receive down payment assistance or interest
rate subsidies from state housing finance agencies. In these
cases, attendees receive certificates of completion they have
to give to their lenders before closing. Yet even if they aren't
required to attend classes, first-time buyers and others who
aren't familiar with house hunting will benefit by doing so,
experts say. That's because counselors cover the entire buying
process from beginning to end -- something that's invaluable
to people who don't know the difference between APR (link to
glossary) and LTV (link to glossary). Learning the ropes
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At seminars run by the Consumer Credit Counseling Service
of Palm Beach and the Treasure Coast in West Palm Beach, community
outreach coordinator Derrick Lee discusses budgeting, credit,
money management and default and foreclosure prevention. He
also brings in real estate agents to talk about locating homes,
lenders to discuss qualifying for mortgages, home inspectors
to talk about finding home defects, local utility officials
to discuss energy savings programs and insurance agents to
discuss flood and property coverage. Fair housing advocates
give presentations warning minority borrowers about the potential
for lenders to steer them into certain loans or otherwjsise
discriminate against them. "We want most people, if not
all, that are first-time home buyers to come. They have no
idea about what they're about to embark upon. They don't know
anything. And who would, being that it's the first time?" says
Lee. "We want people to be informed and educated about
the process as a whole so they don't get caught in a situation
where there's a house they can't afford that they're stuck
in or where they've set themselves up for foreclosure." Building
better borrowers
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Lenora Davis says the seminar she attended made the process
easier to understand and "tied it all together." The
45-year corporate support representative with AT&T Corp.
rents a place in West Palm Beach now. But she hopes to use
the knowledge and certificate she picked up at her October
class to buy a place by the middle of this year. "It was
very informative and a lot of questions were answered," Davis
says. "The book they give you, it takes you from the first
step through the last and they also walk you through the entire
process." She jokes that lenders have a force to reckon
with now. "You can't pull one over on me because I've
got my little book." Both HUD (link to glossary) and Fannie
Mae (link to glossary) maintain lists of approved counseling
agencies that borrowers can use to find classes in their area.
Local housing authorities and state housing agencies can provide
information too. As a result, inexperienced home buyers should
have no trouble finding help before applying for a mortgage
-- and avoiding potential rip-offs at closing. "Anytime
someone is dealing with a person that either is buying a house
for the first time or hasn't bought a house in a while, if
you can get them in home buyer education before they get into
a purchase contract, then do so," says Fraley. "Anytime
we can educate a buyer, we're going to keep them away from
a predatory lender."
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House buying 101 -- simple house-buying terms defined
Escrow? Jumbo loan? PMI? Before your head is swimming with
these house-buying terms, get a quick vocabulary lesson in
some real estate and mortgage terms. See the glossary for a
list of terms.
States offer home financing for those in need
If you're looking for a mortgage, the best place to start
might be your state capital rather than the local mortgage
broker's office. That's because little-known outfits called
housing finance agencies can often be found near governors'
mansions. These quasi-independent agencies offer special loan
programs to low- and moderate-income home buyers, buyers interested
in helping to rehabilitate urban areas and a host of other
groups. For borrowers, their mortgages can slash ownership
costs considerably because they feature below-market interest
rates, closing-cost discounts and other benefits that conventional
loans simply can't match. "We operate a number of different
loan programs for home buyers as well as provide other services
to help meet the needs of our respective states," says
Mark Stalsworth, homeownership manager with the Missouri Housing
Development Commission. "We are there to try to fill those
gaps the private sector either can't or isn't meeting and put
enough money into the deal. "Our goal is to get funds
out and to help the people who need them." You can find
a housing finance agency in your state by contacting the National
Council of State Housing Agencies at 202-624-7710 or visiting
the NCSHA website at www.ncsha.org. State secrets
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Housing finance agencies have been around for almost three
decades in some states. But because they operate behind the
scenes, many home buyers aren't aware of their existence. Their
primary mission is to boost homeownership among needy groups,
including first-time home buyers, urban shoppers and people
with little money for down payments. Most are nonprofit companies
originally financed with state-government seed money that now
operate independently. They raise money for loans by selling
tax-exempt bonds. Investors in those bonds are willing to accept
yields that aren't as high as the ones on traditional mortgage-backed
securities made up of conventional home loans because the lack
of taxes boosts their investment return. That allows agencies,
and the lenders who offer their programs, to cut consumer loan
costs. We issue bonds and basically, there are investors out
there purchasing those bonds," says Sherrie Simmonds,
a spokeswoman for the Alaska Housing Finance Corp. in Anchorage. "Anyone
investing in those does not have to pay taxes on the interest
they earn. "They are willing to take a lower interest
rate than what they might if they would have to pay taxes on
that. And since we're not having to pay as much to issue the
bonds, we're able to pass those savings on and charge a lower
interest rate to people who are getting the loans through us." Traditionally,
most agency programs have come with fairly strict income and
home-value limits. That's because the federal government will
only waive taxes on agency bonds if the agencies agree to use
the subsidies for social good. Yet in recent years, the agencies
have figured out ways to branch out using excess money from
tax-exempt bond sales and cash from the sale of taxable bonds.
They now offer all kinds of tailored loans that feature less
onerous borrower restrictions, giving many more people the
chance to save money. "The agencies are maturing," says
Phil Friday, a spokesman for the Pennsylvania Housing Finance
Agency in Harrisburg, Pa. "Because they have the experience
and they've done it a long time, they're innovating. "Also,
necessity is the mother of invention. You just can't issue
enough bonds to meet the demand you have, so agencies have
developed relationships with the lenders that meet their needs
in particular states." Special deals for special cases
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What kinds of deals do agencies offer? In Philadelphia, a
family of four whose annual household income does not exceed
$36,000 and aren't buying existing homes worth more than $110,000
can get 30-year loans for just 4.75 percent, one point and
a $300 fee, plus normal closing costs. A conventional one-point
loan, on the other hand, runs about 5.0 percent in the city,
according to Bankrate.com data. Borrowers who are a little
well-off can get discounted loans through the Statewide Homeownership
Program. The current regular Statewide rates run between 5.00
to 5.50 percent. A family of four who earns up to $55,000 a
year may purchase existing homes worth up to $130,000. Borrowers
do have to pay a one-point origination fee, a $300 qualifying
fee and other normal closing costs to participate in the program. "What
they offer primarily are discounted interest rates compared
to the normal street rate on regular loans," says Richard
Mahan, a branch manager with Columbia National Inc. in Harrisburg,
Pa. The company is authorized to write Pennsylvania Housing
loans. "In its simplest form, that's what the program
is all about." The rates that agencies offer vary widely
and can be lower in some states than in others. If a state
just issued new bonds and market rates have fallen for several
weeks, its rates will often be lower than rates in a state
where the most recent bond sale took place before the market
decline. Poorer consumers and those who meet certain state-specific
criteria can get even lower rates. In Alaska, Simmonds says
certain buyers can qualify for multiple discounts and reduce
their rates. The state gives people extra help if they make
very little money, purchase energy-efficient homes or choose
to live in towns with less than 1,400 people who aren't connected
to Anchorage or Fairbanks by road or rail. Remember the recapture
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Borrowers need to watch out for the so-called "recapture
tax" on subsidized loans, however, because it can come
back and bite people whose incomes or home values rise substantially.
Remember that the government is happy to help needy buyers
by forgoing the taxes it would otherwise charge on agency bonds
in order to lower consumer rates. At the same time, Uncle Sam
doesn't want borrowers benefiting from subsidies they don't
need or who are using them as a way to get rich. So on programs
backed by tax-exempt bonds, it has developed a way to recapture
its subsidies, if necessary. The rules are somewhat complicated.
But generally speaking, people have to pay the tax if their
incomes rise more than 5 percent a year and if they profit
from their home sales after subtracting real estate commissions,
fix-up expenses and other assorted costs. The tax usually amounts
to a few hundred dollars. There are plenty of exceptions, though.
People who own their homes for more than nine years don't pay
the tax. Consumers who make less than the program limit to
begin with can increase their incomes at a faster pace than
5 percent annually without being subject to it. And no matter
what, the tax will never be more than 6.25 percent of the original
loan amount. But even with the tax drawbacks, agency loans
stack up well against conventional ones. That's why experts
say borrowers should be giving these increasingly innovative
mortgages a closer look. "Because we're able to tailor
loans to the specific needs of the state and the local economy
and to the needs that might not be met by other types of loan
options, that really is where we're able to make a difference," says
Simmonds.
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Your changing tax life: Owning a home
Congratulations, you're about to take another step up the
American-dream ladder and become a homeowner. Along with the
joy of painting, plumbing and yard work, you'll now have some
new tax considerations. The good news is that you'll be able
to deduct many home-related expenses. These tax breaks are
available for any abode -- mobile home, single-family residence,
townhouse, condominium or cooperative apartment. The bad news
is that to take full tax advantage of your home, your taxes
will get more complicated. You're not living on "EZ" Street
anymore; you've moved to the 1040 long form and Schedule A,
where you'll have to itemize deductions. For many homeowners,
the effort of itemizing is well worth it at tax time. Some,
however, might find that claiming the standard deduction remains
their best move. How do you decide? First, find your standard
deduction amount, based on your filing status: $4,750 for single
or married filing separately taxpayers; $7,000 for heads of
households; and $9,500 for married couples who file joint returns.
Then compare it to the total expenses you can itemize and file
using the method that gives you the larger deduction.
Here's
a look at homeowner expenses you'll be to able to deduct (maybe
enough to make itemizing worthwhile), ones you can't and some
tips to get the most tax advantages out of your new property
owning status. Mortgage interest Your biggest tax break will
be reflected in the house payment you make each month since,
for most homeowners, the bulk of that check goes toward interest.
And all that interest is deductible, unless your loan is more
than $1 million. If you're the proud owner of a multimillion-dollar
mortgaged mansion, the Internal Revenue Service will limit
your deductible interest. Interest tax breaks won't end with
your home's first mortgage. In the future you may decide to
take advantage of low rates and your real estate's growing
value to pull out extra cash through refinancing (link to
Refinance Center). Or you might decide instead to get a home
equity loan or line of credit (link to Home Equity Center).
Either way, that interest also will be deductible, again within
IRS guidelines. Generally, equity debts of $100,000 or less
are fully deductible. But even then, the remaining amount of
your first mortgage could restrict your tax break. This could
be a concern if you excessively leverage your rapidly appreciating
house. When a homeowner takes out an equity loan that, when
combined with his first mortgage amount, increases the debt
on the house to an amount more than the property's actual value,
the homeowner faces additional deductibility limits. In these
cases, the IRS says you can deduct the smaller of interest
on a $100,000 loan or your home's value less the amount of
your existing mortgage. For example, you buy your home with
a minimal down payment. Three years down the road your mortgage
balance is $95,000 and the house is then worth $110,000. Your
bank then says you qualify for a 125 percent loan-to-value
equity line, or $42,500 ($110,000 x 125 percent = $137,000
- $95,000 left on your first mortgage). To pay for your daughter's
college tuition and buy her a car to get to school, you take
the bank up on the offer, thinking the interest deduction on
the loan would be icing on the tax-break cake. However, you're
not going to get to deduct all that interest. Instead, your
deduction is limited to interest on just $15,000 of the loan;
that's the amount your home's value will exceed your first
mortgage. Interest payments on the other $27,500 will not be
deductible, even though the equity line is secured by your
home. So don't automatically assume you'll be able to deduct
all interest on home equity debts. What if your real estate
circumstances are a bit brighter? Say, for instance, you're
able to swing a vacation home on the lake. You're in tax luck.
Mortgage interest on second homes is fully deductible. In fact,
your additional property doesn't have to strictly be a house.
It could be a boat or RV, as long as it has cooking, sleeping
and bathroom facilities. You can even rent out your second
property for part of the year and still take full advantage
of the mortgage interest deduction as long as you also spend
some time there. But be careful. If you don't vacation at least
14 days at your second property, or more than 10 percent of
the number of days that you do rent it out (whichever is longer),
the IRS could consider the place a residential rental property
and axe your interest deduction.
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Points Will you pay points
to get a better rate on any of your various home loans? They
offer a tax break, too. The only issue is exactly when you'll
get to claim it. The IRS lets you deduct points in the year
you paid them if, among other things, the loan is to purchase
or build your main home, payment of points is an established
business practice in your area and the points were within the
usual range. A homeowner who pays points on a refinanced loan
also is eligible for this tax break, but in most cases the
points must be deducted over the life of the loan. So if you
pay $2,000 in points to refinance your mortgage for 30 years,
you can deduct $5.56 per monthly payment, or a total of $66.72
if you made 12 payments in one year on the new loan. But if
the refinancing frees up cash you then use to improve your
house, you can fully deduct points on that money in the year
you paid the points. The same rule applies to home equity loans
or lines of credit. When the loan money is used for work on
the house securing the loan, the points are deductible in the
year the loan is taken out. If you use the extra cash for something
else, such as buying a car, you still can deduct the points
but not completely on one tax return. The points deductions
must be parceled out over the equity loan's term. And points
paid on a loan secured by a second home or vacation residence,
regardless of how the cash is used, must be amortized over
the life of the loan.
Taxes The other major deduction in connection
with your future home is property taxes. A big part of most
monthly loan payments is taxes, which go into an escrow account
for payment once a year. This amount should be included on
the annual statement you'll get from your mortgager, along
with your loan interest information. These taxes will be an
annual deduction as long as you own your home. But as this
will be your first tax year in your house, scan the settlement
sheet you'll get at closing to find additional tax payment
data. When the property is transferred from the seller to
you, the year's tax payments are divided so that each of you
pay the taxes for that portion of the tax year during which
you'll own the home. Your share of these taxes is fully deductible.
A word of caution: If your settlement statement shows any
money you'll pay into an escrow account for future taxes, this
amount is not deductible. You can only deduct the taxes in
the year your lender actually pays them to the property tax
collector. For example, you buy your house on July 1. Your
property taxes are due each Jan. 1. When you close, the seller
had already paid the year's taxes of $1,000 in full so you'll
reimburse the seller half of his annual tax payment to cover
your ownership of the property for the last six months of the
year. Your $500 reimbursement to the seller will be shown on
your settlement documents. The closing document will also show
you pre-paid another $500 to the lender as escrow for the coming
year's taxes due next Jan. 1. The $500 you'll reimburse the
seller at closing is deductible on this year's tax return,
but the $500 held in escrow is not deductible until it is paid
the next year. When you sell When you decide to move up to
a bigger home, you'll be able to avoid some taxes on the profit
you make. And a ruling by the IRS in late 2002 could put more
dollars in homeowners' pockets when they must sell before they
qualify for the full tax break. The Treasury has defined the
unforeseen circumstances that often force homeowners to sell
and under which they now can get some tax relief.
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They include:
• Death
• Divorce or legal separation
• Job loss that qualifies for unemployment compensation
• Employment changes that make it difficult for the
homeowner to meet mortgage and basic living expenses, and
• Multiple births from the same pregnancy.
A partial exclusion can be claimed if the sale was prompted
by residential damage from a natural or man-made disaster
or the property was "involuntarily converted," for example,
taken by a local government under eminent domain law. What's
not deductible
While many tax breaks are available to a homeowner, don't
get too carried away. There are still a few things for which
you have to bear the full cost. One such expense is insurance.
If you pay private mortgage insurance because you weren't able
to come up with a large enough down payment, that's a cost
you can't write off at tax time. Neither can you deduct your
property insurance premiums, even though the coverage generally
is required as part of the home loan and is included as a portion
of your monthly payment. Other nondeductible residential expenses
include homeowner association dues, any additional principal
payments you make, depreciation of your home, general closing
costs and local assessments to increase the value of your neighborhood,
such as construction of new sidewalks or utility connections.
What about all those repairs that seem to crop up the day after
you move in? Surely they're tax deductible. Sorry. While they'll
make your house much more comfortable, you're on your own here,
too. But hold onto the receipts. In today's hot real estate
market, some homeowners may find their property will appreciate
beyond the $250,000 ($500,000 for married couples) amount the
IRS will let you keep tax free when you sell. If that happens,
the records of property improvements could help you establish
a higher basis for your house and reduce your taxable profit.
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Buyer prepare: Tips for first-time home buyers
Buying a home for the first time can be scary, but as with
anything else in life, the right preparation brings about good
results. Remember, the right home for you is one you want and
can afford.
Step 1: Ask yourself if you're ready.
You need to decide whether you're financially ready to buy
a home, says Connie Barbosa, vice president and branch manager
of Slade's Ferry Bank in Somerset, Mass. She suggests first-time
buyers ask themselves some simple questions:
• Do you have a steady job and income?
• Do you plan on remaining in the same area for a
few years?
• Do you have enough money set aside for your down
payment and closing costs?
• Do you have an emergency fund?
• Do you live within your means, avoiding credit card
debt?
Another consideration is whether you're mentally prepared for
the responsibility, says Charles Glass, a real estate agent
who sells in the Washington, D.C.-Maryland market. "A
first-time home buyer is probably used to renting," Glass
says. "They've got to get used to budgeting a little differently
in terms of having a reserve when things go wrong. And whether
it's a new home or an old one, things will go wrong. Experienced
homeowners know this. First-time buyers don't."
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Step 2:
Find out what you can afford.
When you're sure you have the right mind set to be a homeowner,
it's time to determine how much house you can afford. Probably
the best way to do that is to get pre-qualified for a loan.
In fact, some real estate agents won't work with someone who
is not pre-qualified.
There are three options for pre-qualifying: go to a lender
with whom you have already established rapport, find a real
estate agent you trust and follow the agent's recommendations
for a lender, or research lenders online. Glass says the first
option is the best because "if you've built a relationship
with a lender, they will go to extra lengths to make sure they
qualify you for the loan." Your total monthly mortgage
payment -- principal, interest, taxes and insurance (or PITI)
-- should not exceed 32 percent of your monthly gross income,
Barbosa says. The U.S. Department of Housing and Urban Development
(HUD) suggests that figure should be 29 percent. So this is
not an exact science. You can calculate a ballpark figure from
this information, but then talk to your lender to get a better
feel for how much flexibility you might have with different
lending arrangements. According to Bank of America's Consumer
Real Estate Group, you should find a lender that offers "first-time
buyer options and financing ideas that take into consideration
your personal situation. For example, many first-time buyer
mortgage programs require only a low down payment or even no
money down. If a down payment is required, you may be allowed
to use 'gift' money from family members and other sources.
Some first-time home buyer programs feature no closing costs.
There may also be down-payment assistance programs available
in your community." Remember, the bigger the down payment,
the less you're borrowing, and the less expensive your mortgage
will be in the long run. HUD (link to glossary) offers programs
to help first-time buyers, too.
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Step 3: Find out what's available
Now it's time to decide where you want to live and research
what types of housing are available -- one-story single family,
condos, town homes, etc. You can get an idea by looking at
ads and driving around the community before you ever call
a real estate agent, Glass says. In fact, he prefers clients
who have done some research.
In searching for an agent, find one who makes you feel comfortable
and, more importantly, one who listens to you, Glass says.
HUD points out that it's traditional for the real estate agent
to represent the seller's interests, although most state licensing
laws require them to treat the buyer fairly. Laws regarding
the relationships between real estate agents and clients vary
from state to state and buyers should be aware who your agent
is working for.
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Step 4: Choose a neighborhood.
Once you know the housing stock, you can look at specific neighborhoods.
Cruise by at night time to see whether you get a "vibe" that
it's a safe neighborhood. If you have children, you'll want
to check out the quality of the schools. You may want to check
out what types of large-scale facilities (airports, highways,
chemical plants, etc.) are nearby, and whether you're convenient
to shopping, work and schools. You can do much of this independently,
but you can also ask your agent to help you find sources of
information about such things.
Step 5: Define your house and find it.
Now, you can narrow down the features you want in a house.
Do you want an energy-efficient model? Do you want two stories,
a basement, a bathroom downstairs or a large back yard? You
may not find a unit with every feature that you want, but
this will help you to define what's most important for you,
Glass says.
When you've found a house that has your most important features,
is in the right neighborhood and is affordable, you're ready
to buy.
Step 6: Do a home inspection.
HUD recommends that an offer should be contingent on a home
inspection. As the buyer, you cover the cost of the inspection.
If you're unsatisfied with the results, you may ask the seller
to pay for certain repairs or to lower the price, or you may
decide to walk away from the deal.
Reggie Marston, a home inspector who can be seen regularly
on HGTV's "House Detective" program, says home buyers
should have an inspection done regardless of the age of the
home and should interview several inspectors before hiring
one. "A home inspection should uncover defects that could
become very costly to repair after (buyers) assume ownership," he
says. "It will also uncover safety issues, water infiltration
issues, roof problems, structural issues, etc. "A first-time
home buyer should start interviewing home inspectors before
or at the same time they're interviewing real estate agents
and mortgage lenders. Normally, real estate contracts only
allow three to 10 days for a home inspection after acceptance
of the contract and that doesn't allow the purchaser adequate
time to find a qualified home inspector."
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Step 7: Shop
around for homeowners insurance.
Your lender will require you to carry homeowners insurance.
Such insurance comes in many flavors, so it's a good idea
to search for a policy that meets your needs for protection
while being easy on your pocketbook. Access insurance information
that is appropriate for your state (link to www.naic.org/cis)
. Many states provide data on typical rates charged by insurers,
as well as information on the frequency of consumer complaints
against a company.
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Step 8: Negotiate.
Your lender will require you to carry homeowners insurance.
Such insurance comes in many flavors, so it's a good idea
to search for a policy that meets your needs for protection
while being easy on your pocketbook. Access insurance information
that is appropriate for your state (link to www.naic.org/cis)
. Many states provide data on typical rates charged by insurers,
as well as information on the frequency of consumer complaints
against a company.
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Step 9: Closing.
In a number of states, it is customary for each party to have
an attorney review the closing papers and to be present at
closing. Whether that's the custom in your state or not, it's
a good idea to hire your own attorney to review the documents
to be sure that your best interests are represented in the
paperwork. You'll foot the bill for your own attorney.
Step 10: Move in.
You've done all the homework and bought a great home. Enjoy
it.
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What is a good faith estimate?
Your lender is required by the federal Real Estate Settlement
Procedures Act to provide you with a good faith estimate of
the fees due at closing within three days of applying for a
loan. These mortgage fees, also called settlement costs, cover
every expense associated with your home loan: inspections,
title insurance, taxes and other charges. Because closing costs
typically amount to between 3 and 5 percent of the sale price,
it is best to wait until you receive the good faith estimate
before signing any loan. In fact, smart shoppers will obtain
good faith estimates from several lenders, compare their costs,
then ask their chosen lender to meet or beat the competition's
best offer. Here's a list of some of the fees you'll find listed
on your good faith estimate (for an average price range, see
table of closing costs below): • Loan application
and credit report
• Title search and title insurance
• Lender's attorney
• Property appraisal
• Inspection
• Survey
• Document recording
• Transfer taxes
• Buyer's attorney
• Documentary stamps on new note
• Points and origination
• Condominium application
• Escrow account balances/prepaids
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Title Insurance
Title insurance insures against errors in the title search
and guarantees that you and your lender retain financial interest
in the property. A title search checks for liens, encumbrances
and legal errors, as well as fraud, forgery, missing heirs
or divorce proceedings that could affect your rights of ownership,
possession or use of the property. The required title insurance
only protects the lender, so if the property has a long and
checkered history, you may want to take out an owner's title
insurance policy to protect yourself. If the property is relatively
new, you may be able to lower the cost of title insurance by
asking your insurer for a reissue rate if there have been no
claims against the title since the previous title search was
done. If you and the seller are both getting title insurance,
you may save by using the same insurer, who then only has to
research the property once for both of you. Escrow At closing
you may have to put aside money into special escrow accounts
to insure that such things as private mortgage insurance (PMI),
property taxes and homeowners insurance are paid on time.
Federal
law limits the amount of escrow "cushion" to
two months of payments. Be sure to ask the lender what escrow
payments will be required at closing; some mortgage companies
may waive escrow requirements if you pay more points or a higher
interest rate. Ways to Save at Closing
• Many closing costs are standard and won't vary
from lender to lender, for instance appraisals, credit reports,
title insurance, government stamps and recording fees. Others,
however, may be eliminated simply by opting out of a service,
such as overnight delivery of documents. If a fee seems vague
or questionable, ask. Some mortgage companies include so-called
junk fees that you can eliminate or reduce.
• Because all mortgage loan payments are due on the
first of the month, you can avoid or reduce the prepaid interest
due by closing on or near the last day of the month.
• Remember, you can always negotiate with the seller
to have them split or pay outright some of the closing costs,
points or fees.
When good faith estimates go bad
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You can't blame Martha Gonzalez for feeling nervous. As she
prepares to close on a mortgage for the second time in her
life, she worries about a replay of the first. The day before
closing on her first house five years ago, "I got a call
that my numbers were wrong," she says. The title company
informed her that she would have to go to closing with $2,500
more than she and her husband had expected to need. The Gonzalezes
were bitten by an inaccurate good faith estimate. It happens
to thousands of people every year, and the victims have no
recourse. Either they pay up or the deal falls apart. For the
Gonzalezes, excitement over buying that first house yielded
to panic. They had scraped together every last bit of savings
for the down payment on the newly built house in Miami. They
didn't have a spare $2,500. "You try to scrounge up every
relative you have and say, 'Can we borrow?'" Gonzalez
says. "To be hit with news like that was, like, wow." Federal
regulations require brokers and lenders to provide a good faith
estimate of closing costs, but there is no penalty for inaccuracy.
Lenders and brokers can provide a low estimate, then spring
an expensive surprise in the final hours without getting into
trouble with the feds. U.S. housing secretary Mel Martinez
calls it "settlement sticker shock." He has proposed
making the good faith estimate binding, but has met resistance
from the title industry and its allies in Congress.
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"Today,
this estimate is more like a good faith guesstimate," Martinez
told a House committee last year. Because the government won't
protect you from an inaccurate good faith estimate, you have
to watch out for yourself. You have to review the estimate
critically and ask questions. That's what Gonzalez has been
doing as she prepares to buy a house for the second time. "My
whole fear is the day before closing I'm going to get this
whopper where my good faith estimate is incorrect," she
says. To prevent an unpleasant surprise, she keeps in regular
contact with the title agent, who is the first to know when
the real fees differ from the fees listed on the good faith
estimate. All fees are subject to change between the good faith
estimate and the closing table. Hazard insurance premiums and
government fees such as property taxes are among the most likely
to be inaccurate in the good faith estimate. You can always
talk to the insurance agent yourself to find out how much the
insurance will really cost, and you can visit the county courthouse
to learn how much the property taxes will be. In Gonzalez's
case, the $2,500 error involved property taxes. The good faith
estimate listed the property tax for an empty lot, without
a house. Looking back, Gonzalez wonders why no one caught the
error earlier. When drawing up the estimate, was the lender
dishonest or incompetent? "I think it might have been
a little bit of both," she says. Either way, there was
nothing she could do about it but grit her teeth and find the
extra $2,500. The good faith estimate is required under a law
called the Real Estate Settlement Procedures Act. The law also
bars kickbacks among settlement providers and prohibits the
property seller from requiring the buyer to use a particular
title insurance company.
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Those elements of the law are enforced.
But the law doesn't establish an enforcement mechanism for
ensuring the accuracy of good faith estimates. Martinez, the
secretary of the Department of Housing and Urban Development,
has proposed a new set of regulations governing closing costs,
explaining to Congress: "It isn't right that far too many
Americans sit down at the settlement table only to discover
unexpected fees that can add hundreds, if not thousands of
dollars to the cost of their loan." Under HUD's proposal,
lenders either would have to abide by their good faith estimates
(with a bit of wiggle room on some of the itemized fees), or
they could dispense with the good faith estimate altogether
and give borrowers a binding, bottom-line closing cost, without
having to itemize fees. Lenders using the latter method would
be exempt from the law's anti-kickback provisions. Martinez
estimates that the proposal, if put into effect, would reduce
closing costs by an average of $700 on each loan. The biggest
winners would be borrowers and large banks. The losers would
be mortgage brokers and small title agencies, which are fighting
to dilute or kill the proposed changes. One of the nation's
biggest mortgage lenders, ABN AMRO, guarantees a bottom-line
price for closing costs. The Guaranteed OneFee program lumps
all of the lender's fees and most third-party fees into one
price, which the company won't increase after the borrower
locks in an interest rate. OneFee excludes property taxes and
hazard insurance though, so borrowers still have to make sure
those are estimated accurately. "Customers have embraced
it," ABN AMRO Mortgage vice president William Newman says,
although "it's a challenge to explain it." "Customers
have embraced it," ABN AMRO Mortgage vice president William
Newman says, although "it's a challenge to explain it."
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Ready, set, go!
No-money-down home buying
In this difficult economy where stock valuations are questionable,
one of the best investments is real estate. But for many potential
buyers, the problem is coming up with a down payment to make
this all-important purchase. This should not be the case. It
is possible to buy a home with nothing down, meaning no down
payment. There are several methods by which eligible home buyers
can minimize or even eliminate down payments. They include: • VA
loans
• Owner financing
• Lease/purchase
• House trading
• Job-related federal programs
• State and local government programs
VA loans
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The method of purchasing a home with no down payment that
most people are familiar with is through the Department of
Veterans Affairs, or VA. This benefit is available to active
and retired members of the military service, veterans, POW's
and MIA's and their unmarried widows. All branches of the service
including the Coast Guard are eligible. Also members of Selected
Reserves or National Guard who have completed six years may
be eligible along with many with WW II service from the merchant
marines, military academies and others pulled into service
for the war effort. Many older veterans may recall a time when
they were entitled to use this benefit only once in their lifetime.
This was changed in 1989. Now, the only existing stipulation
is that an eligible person may use this benefit on only one
house at a time. As with all VA loans, the house must be used
as a primary residence. It may not be a rental home or second/vacation
home. There is no maximum home loan amount. Nothing-down VA
foreclosures available to everyone
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What many people do not know is that you do not have to be
a veteran to purchase a VA foreclosure with nothing down. VA
foreclosures are available to the general public. Some require
nothing down or just a fee of $500. Although the homes are
sold from the VA, purchasers must obtain conventional or FHA
loans unless they are veterans or active military. VA foreclosures
with nothing down or $500 fees can be found among those from
banks, lending institutions and federal agencies. If a glut
of unsold homes develops in a market, some sellers -- especially
those in a hurry -- become willing to assist the buyer. There
may be additional pressure on sellers of used homes when they
compete with builders in their areas who fund down payments
on new homes. These sellers may agree to lease-purchase or
owner-financing plans. In both cases, purchasers do not pay
down payments to acquire the properties. Although they allow
a home buyer to purchase a home with no money down, these programs
can be good and bad for the purchaser and should be approached
with caution. As with any legal transaction, you should use
a standard legal form. Lease-purchase forms are obtainable
at most major office supply stores. Owner financing contracts
are not readily available and will have to be drafted by an
attorney. In the case of lease/purchase agreements, the seller
agrees to a price that he will sell the house for at some future
date and the buyer usually pays a monthly amount several hundred
dollars more than what the home would receive as a rental.
Depending on how the agreement is written, this additional
money can be a "down payment" savings plan. A portion
of the additional money can be returned to the buyer when the
house is sold and used as a down payment. If the buyer decides
not to buy the house, all additional moneys are forfeited.
If the buyer decides to complete the transaction, he or she
would secure a mortgage from a lender. These arrangements are
similar to those in owner financing except in that case the
seller is the lender. There are two areas of concern for the
buyer with these types of purchasing options. In both cases,
because the buyer is not paying a mortgage company he does
not receive any of the tax deductions for the interest on the
house payments. This may be an acceptable trade-off for the
ability to purchase a home without a down payment. The second
area of concern requires more judgment. Because the buyer is
paying the seller each month instead of a mortgage company,
if the seller were to go bankrupt or lose the home in foreclosure,
the buyer's entire investment might be lost. But on the flip
side, there have been several occasions where persons have
entered into lease-purchase agreements and then found purchasers
for the homes at amounts much greater than the selling prices
contractually agreed upon. The lessees bought the houses from
the sellers and then resold the houses for a large profit in
the same day. House trading, lines of credit
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Many professional investors acquire homes with no money down
by trading one property for another. In some cases, they trade
one large property for several smaller rental properties. Or
they trade houses in different cities to acquire a vacation
or retirement home. Property trading is also a legal way to
avoid the capital gains associated with selling a property.
Another way to acquire a property with no money down may be
with a line of credit secured by the equity in another property.
This allows the homeowner to purchase another property using
the accumulated equity in a home without selling the original
property.
HUD
The Office of Housing and Urban Development (HUD) offers
special financing for first-time home buyers. This program
is based upon need and is designed to allow low-income families
to obtain their first home without a significant down payment
or closing fees. Also, many HUD foreclosure homes require no
down payments. Job-related federal programs
The federal government also has programs to help farmers
and police personnel acquire homes with nothing down. For those
with limited income who wish to live in rural areas, the Rural
Economic and Community Development Administration offers farmers
home loans with nothing down. Monthly payments may be subsidized
and the interest can be as low as 1 percent. To encourage police
to occupy homes in crime-targeted areas, special federal programs
permit police officers to purchase homes in selected areas
with nothing down. Information is available to law enforcement
officers through their places of employment. Local programs
Some states, counties and cities offer programs that can eliminate
down payments. Often, prospective home buyers must meet income
requirements, hold certain jobs, be a first-time buyer or agree
to buy in a specific area. It can take some sleuthing to find
such programs. Start with your state's housing agency (links
to www.ncsha.org/) .
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