Frequently
Asked Questions About Buying a Home
1.
What should I do if I don’t have a credit history?
2. How much money do I need for a
down payment?
3. Can I afford to pay a mortgage
each month?
4. How do I calculate
my monthly payment?
5. How does the lender determine the
amount of the mortgage I may receive?
6. I’m a single mother. How would
I go about buying a home?
7. I’ve had bad credit, and I don’t
have much for a down payment. Can I become a home buyer?
8. Should I use a real estate broker?
How do I find one?
9. How much money will I have to come
up with to buy a home?
10. How do I find a lender?
11. In addition to the mortgage payment,
what other costs do I need to consider?
12. What will my mortgage cover?
13. What do I need to take with me
when I apply for a mortgage?
14. I know there are lots of types
of mortgages. How do I know which one is best for me?
15. When I find the home I want,
how much should I 0ffer?
16. What if my offer is rejected?
17. What will happen at closing?
18. What are the warning
signs of bad credit?
19. What should I do if I
have credit problems?
More
frequently asked questions.
1. What should I do if I don’t have a credit history?
If you have never had any credit cards or taken out a loan
through a financial institution, the various credit-reporting
firms may not be able to issue a credit report on you. In that
case, you may be able to use a “nontraditional” credit history.
For example, you may be able to document that you pay your rent,
telephone bills, or utility payments on time each month. You
can put these records together yourself by making copies of
canceled checks or showing copies of monthly bills that do not
have any late charges. A mortgage lender may be able to help
you put this information together. If you have a good record
of paying your rent and other bills and will be able to prove
that record, give yourself a “+.” If you do not always pay your
bills on time or have no record of your payments, give yourself
a “–.”
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2. How much money do I need for a down payment?
When you buy a home, you will need money that you have saved
for a down payment and “closing costs.” The amount of the down
payment may vary, but generally you must make a down payment
that equals at least 5 percent of the purchase price. You will
also need money for closing costs. These costs can be expensive,
depending upon where you live. Sometimes the property seller
is willing to pay part of your closing costs.
The mortgage lender will want proof that you have saved the
funds that you will use for a down payment and part or all
of
the closing costs. If the funds are in a savings account, the
lender will ask the financial institution to verify the amount
and the length of time that the funds have been in your account.
The lender wants to make sure that you are not borrowing all
the money you will use for the down payment and closing costs.
Some communities have programs to help first-time buyers.
With some of these programs, you may be able to accept a gift
from
a relative or to borrow a portion of the money you will need
for the down payment and closing costs from a local nonprofit
organization or government agency. With others, you may be
able to get a grant or other funds that you will not have
to repay
and can use to cover some of these costs. If you do not now
have at least a portion of the money saved, this probably
is
not the right time for you to try to buy a home. Instead, it
would be a good idea to open a savings account and begin putting
away some funds from every paycheck. The longer you have accounts
and the longer and more consistently you have been able to
save
money, the better you will look to lenders when you are ready
to apply for a mortgage in the future. Based on the information
above, give yourself a “+” if you have money saved for your
down payment and closing costs. Give yourself a “–” if you
do not have money saved right now.
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3. Can I afford to pay a mortgage each month?
If you pay rent each month, you may be prepared to make monthly
mortgage payments. The amount of your monthly payment depends
upon the amount you borrow, the interest rate, and the repayment
period or “term.” The shorter the term, the higher your monthly
payment will be. For that reason, most home buyers repay
their
mortgage over the longest term possible, usually 30 years.
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4. How do I calculate my monthly payment?
The amount of your mortgage payment will depend on how much
you borrow, the term (repayment period) of the loan, and the
interest rate. If you know how much you need to borrow (the
purchase price minus your down payment), and what the interest
rate will be, you can use the chart on the following page to
find out what your monthly payment will be with a standard
3
0 - year, fixed-rate mortgage. Note that this chart includes
only principal and interest payments, not property taxes and
insurance. Go to the
Loan calculator
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5. How does the lender determine the amount of the
mortgage I may receive?
When you first approach lenders about financing a mortgage
for you, they will use two commonly accepted guidelines to help
determine your ability to make mortgage payments. These guidelines
are a starting point for evaluating your ability to make the
payments on the proposed loan. So your lender will look closely
at your individual financial situation to determine if more
flexible guidelines are appropriate for you.
a. Your monthly housing costs (including mortgage payments,
property taxes, homeowner and mortgage insurance, and homeowner’s
fees) should total no more than 28 percent of your monthly
gross (before taxes) income. In addition to your regular
pay, your income can include funds you receive from overtime
work, a part-time job or second job; retirement, VA, and
Social
Security benefits; disability; welfare and unemployment benefits;
alimony; and child support.
b. Your monthly housing costs plus other long-term debts such
as payments on car loans, student loans, or other installment
debt (debts with more than ten months left to repay) should
total no more than 36 percent of your monthly gross income.
Depending upon your household income, you may be eligible
for special assistance programs. These programs may make it
easier for you to get a larger mortgage loan than you normally
would be able to using the above qualifying rules.
Now, to get an idea of the mortgage amount that you might
be able to qualify for based on your annual income, look at
the chart on page 16. You will need to know the approximate
interest rate that lenders currently are charging for a 30-year,
fixed-rate mortgage. Check the real estate section of your
local newspaper or call a mortgage lender to get the current
rates for your area. Find this interest rate (or the one closest
to it) in the column on the left. Then follow that line to
the right until you reach your approximate income level. This
is the amount you could potentially borrow. Only you can decide
whether you feel comfortable carrying the maximum amount of
financing that you qualify for. And this chart can only help
you with the first qualifying rule – the amount of your home
payment. The chart does not take into account the amount of
your other debts. If they are high, that could reduce the
amount of the loan for which you can qualify.
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6. I’m a single mother. How would I go about buying
a home?
Although you won’t nave the benefit of two incomes with which
to qualify for a loan, there’s no reason that you can’t become
a homeowner. Become familiar with the process, pick a good real
estate broker, and think about getting pre-qualified for a loan.
You might want to contact one of the HUD-funded housing counseling
agencies in y0ur area to talk through your options. Also, contact
your local government to see if there are any local home buying
programs that could help you. Look in the blue pages of your
phone directory for your local office of housing and community
development or, if you can’t find it, contact your mayor’s office
or your county executive’s office.
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7. I’ve had bad credit, and I don’t have much for a down payment.
Can I become a home buyer?
You may be a good candidate for one of the federal mortgage
programs that are available. A good place for you to start
is
by contacting one of the HUD-funded housing counseling agencies.
They can help you sort through your options. In addition,
contact
your local government to see if there are any local home ownership
programs that might work for you. Look in the blue pages of
your phone directory for your local office of housing and community
development or, if you can’t find it, contact your mayor’s
office or your county executive’s office.
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8. Should I use a real estate broker? How do I find
one?
Using a real estate broker is a very good idea. All the details
involved in home buying, particularly the financial ones, can
be mind-boggling. A good real estate professional can guide
you through the entire process and make the experience much
easier.
A real estate broker will be well-acquainted with all the important
things you’ll want to know about a neighborhood you may be considering…the
quality of schools, the number of children in the area, the
safety of the neighborhood, traffic volume, and more. He or
she will help you figure the price range you can afford and
search the classified ads and multiple listing services for
homes you’ll want to see. With immediate access to homes as
soon as they’re put on the market, the broker can save you hours
of wasted driving-around time.
When it’s time to make an offer on a home, the broker can point
out ways to structure your deal to save you money. He or she
will explain the advantages and disadvantages of different types
of mortgages, guide you through the paperwork, and be there
to hold your hand and answer last-minute questions when you
sign the final papers at closing. And you don’t have to pay
the broker anything! The payment comes from the home seller-not
from the buyer.
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9. How much money will I have to come up with to buy
a home?
That depends on a number of factors, including the cost of the
house and the type of mortgage you get. In general, you need
to come up with enough money to cover three costs: earnest money-
the deposit you make on the home when you submit your offer
to prove to the seller that you are serious about wanting to
buy the house; the down payment, a percentage of the cost of
the home that you must pay when you go to settlement; and closing
costs, the costs associated with processing the paperwork to
buy a home.
When you make an offer on a home, your real estate broker will
put your earnest money into an escrow account. If the offer
is accepted, your earnest money will be applied to the down
payment or closing costs. If your offer is not accepted, your
money will be returned to you. The amount of your earnest money
varied. For example, your deposit generally will range from
$500 - $2,000.
The more money you can put into your down payment, the lower
your mortgage payments will be. Some types of loans require
10-20% of the purchase price. That’s why many first-time home
buyers turn to HUD’s FHA for help. FHA loans require only
3% down and sometimes less.
Closing costs-which you will pay at settlement – average 3-4%
of the price of your home. These costs cover various fees your
lender charges and other processing expenses. When you apply
for your loan, your lender will give you an estimate of the
closing costs, so you won’t be caught by surprise.
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10. How do I find a lender?
You can finance a home with a loan from a bank, a saving and
loan, a credit union, a private mortgage company, or various
state government lenders. It’s like shopping for any other large
purchase; you can save money if you take some time to look around
for the best prices.
Different lenders can offer quite different interest rates and
loan fees; and as you know, a lower interest rate can make a
bid different in how much home you can afford. Talk with several
lenders before you decide. Most lenders need 3-6 weeks for the
whole loan approval process.
Your real estate broker will be familiar with lenders in the
area and what they’re offering. Or you can look in your local
newspaper’s real estate section- most papers list interest rates
being offered by local lenders. You can find FHA-approved lenders
in the Yellow Pages of your phone book. HUD does not make loans
directly- you must use a HUD-approved lender if you’re interested
in an FHA loan.
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11. In addition to the mortgage payment, what other
costs do I need to consider?
You’ll have your monthly utilities. If your utilities have been
covered in your rent, this may be new for you. Your real estate
broker will be able to help you get information from the seller
on how much utilities normally cost.
In addition, you might have homeowner association or condo association
dues. You’ll definitely have property taxes. Taxes normally
are rolled into your mortgage payment. Your broker will be able
to help you anticipate these costs.
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12. What will my mortgage cover?
Most loans have 4 parts: principal, the repayment of the amount
you actually borrowed; interest, payment to the lender for
the
money you've borrowed; homeowners insurance, a monthly amount
to insure the property against loss from fire, smoke, theft,
and other hazards required by most lenders; and property taxes,
the annual city/county taxes assessed on your property, divided
by the number of mortgage payments you make in a year.
Most loans are for 30 years, although 15-year loans are available,
too. During the life of the loan, you’ll pay far more in interest
than you will in principal – sometimes two or three times
more. Because of the way loans are structured, in the first
years,
you will be paying mostly interest in your monthly payments.
In the final years, you’ll be paying mostly principal.
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13. What do I need to take with me when I apply for a mortgage?
You should have: 1.) social security numbers for both your and
your spouse, if both of you are applying for the loan; 2.) copies
of your checking and saving account statements for the past
6 months; 3.) evidence of any other assets like bonds or stocks;
4.) a recent paycheck stub detailing your earnings; 5.) a list
of all credit card accounts and the approximate monthly amounts
owed on each ; 6.) a list of account numbers and balances due
on outstanding loans, such as car loans; 7.) copies of your
last 2 years’ income tax statements; and 8.) the name and address
of someone who can verify your employment. Depending on your
lender, you may be asked for other information.
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14. I know there are lots of types of mortgages. How do I know
which one is best for me?
The more you know about them before you start, the better. Most
people use a fixed-rate mortgage. In a fixed-rate mortgage,
your interest rate stays the same for the term of the mortgage,
which normally is 30 years. The advantage of a fixed-rated mortgage
is that you always know exactly how much your mortgage payment
will be, and you can plan for it.
Another kind of mortgage is an Adjustable Rate Mortgage (ARM).
With this kind of mortgage, your interest rate and monthly payments
usually start lower than a fixed rate mortgage. But, your rate
and payment can change either up or down, as often as once or
twice a year. The adjustment is tied to a financial index, such
as the U.S. Treasury Securities index. The advantage of an ARM
is that you may be able to afford a more expensive house because
your initial rate will be lower.
There are several government mortgage programs that might interest
you, too. Most people have heard of FHA mortgages. FHA does
not actually make loans. Instead, it insures loans so that if
buyers default for some reason, the lenders will get their money.
This encourages lenders to give mortgages to people who might
not otherwise qualify for a loan. Talk to your real estate broker
about the various kinds o9f loans, before you begin shopping
for a mortgage.
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15. When I find the home I want, how much should I 0ffer?
There are several things you should consider: is the asking
price in the line with prices of similar homes in the area;
is the home in good condition or will you have to spend a substantial
amount of money making it the way you want it? You probably
want to get a professional home inspection before you make your
offer. Your real estate broker can help you arrange one; how
long has the home been on the market? If it’s been for sale
for a while, the seller may be more eager to accept a lower
offer; how much mortgage will be required? Make sure you really
can afford whatever offer you make; how much you really want
the home? The closer you are to the asking price, the more likely
your offer will be accepted. In some areas, you may even want
to offer more than the asking price, if you know you are competing
with others for the house.
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16. What if my offer is rejected?
They often are! But don’t let that stop you. Now you begin negotiating.
Your broker will help you. You may have to offer more money,
but you may ask the seller to cover some or all of your closing
costs or to make repairs that wouldn’t normally be expected.
Often, negotiations on a price go back and forth several times
before a deal is made. Just remember- don’t get so caught up
in negotiations that you lose sight of what you really want
and can afford!
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17. What will happen at closing?
Basically, you’ll sit at a table with your broker, the broker
for the seller, probably the seller, and a closing agent. The
closing agent will have a stack of papers for you and the seller
to sign. While he or she will give you a basic explanation of
each paper, you may want to take the time to read each one and/or
consult with your agent to make sure you know exactly what you’re
signing. After all, this is a large amount of money you’re committing
to pay for a lot of years!
Before you go to closing, your lender is required to give you
a booklet explaining the closing costs, a “good faith estimate”
of how much cash you’ll have to supply at closing, and a list
of documents you’ll need at closing. If you don’t get those
items, be sure to call your lender before you go to the closing.
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18. What are warning signs of bad credit?
·
Charge card balances near the over limits
·
Paying the minimum due on accounts
·
Using one credit card to make payments on the other credit card
·
Borrowing to meet monthly payments
·
Putting off one bill to pay another
·
Taking advances on paychecks or depending on extra income such
as overtime
·
Avoiding the mail
·
Receiving collection calls at home or work
·
Worrying about your debts
·
Routinely spending more than you earn
·
Making day-to-day purchases on credit
·
If missing one paycheck would create severe difficulty
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19. What should I do if I have credit problems?
The
most destructive thing you can do if you are saddled with overwhelming
debt is to deny that you have it. For many people, recognizing
the problem is the most difficult step. So, the most empowering
thing you can do is to handle the problem. Handling it
requires that you contact each and every creditor, either
by phone or letter, and explain your situation to him or her
thoroughly. Tell him exactly what you intend to do about it.
Lenders panic when they don’t hear from borrowers. They are
usually reasonable and helpful when they hear from people who
have problems. Most of the time, lenders will try everything
to work out the debt situation with the borrower if he calls,
keeps promises, and has a plan.
The best way to use credit cards is to pay the full amount
due every month.
Usually your credit cards allow a grace period of 25 to
30 days from the date when you are billed until you will be
charged a finance charge. So, if you make a purchase immediately
after your billing date (printed on your bill), and if you
pay in full, you can gain free credit for almost two months.
Each time you use your credit cards, write out a check
for that amount and put it in an envelope. You will begin
to see your checking-account balance in your check register
decrease. At some point, you will realize that it is time to
stop incurring debt for the month. When the credit card statement
arrives, simply gather up the checks you have written, and mail
them with the bill. This method is a great reminder that every
time you charge something, you are making additional debt.
Every time you
apply for a credit card, a mortgage loan, a loan from a car
financing company, or some other type of credit, your record
is likely to reflect an additional inquiry. To minimize the
number of inquiries in your credit report, apply only for
the credit you feel is essential. If creditors feel that
you are applying for too much credit and possibly going beyond
your ability to repay, they may consider you an unaccepted
risk.
Finally, use your credit to purchase necessities only
when you don’t have the cash. Keep balances as low as
possible. Be sure to make all account payments on time
so that the credit
history you build will be a positive one. See additional information
about credit.
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