Applying For A Mortgage


Part I – Getting Started

1.How do I know if I’m ready to buy a home?

**If you can answer “yes” to these questions, you are probably ready to buy your own home. **

a.Do I have a steady source of income (usually a job)?
b.Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
c.Do I have a good record of paying my bills?
d.Do I have a few outstanding long-term debts, like car payments?
e.Do I have money saved for a down payment?
f.Do I have the ability to pay a mortgage every month, plus additional costs?

2.How do I begin the process of buying a home?

**After answering 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.**

a.Are you ready to buy a home?
b.How much can you afford in a monthly mortgage payment?
c.How much space do you need?
d.What areas of town do you like?

3.How does purchasing a home compare with renting?
There really is no comparison. An advantage of renting is freedom from most maintenance responsibilities. However, with 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.
On the other hand, owning has many benefits. When you make a mortgage payment, you build equity (think investment), plus owning a home qualifies you for tax breaks that assist you in dealing with your new financial responsibilities (i.e. insurance, real estate taxes, and upkeeps).

4.How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio (a comparison of your gross income, pre-tax, to housing and non-housing expenses). Non –housing expenses include long-term debts, such as a car or student loan payment, alimony, or child support. Monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers your cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

5.How do I select the right real estate agent?
Begin with your family and friends. Compile a list of several agents and talk to each before housing one. Look for an agent who LISTENS WELL and understands YOUR needs, and whose judgment you trust. The ideal agent will know the local area well and has resources and contacts to help you in your search.

6.How can I determine my housing needs before I begin the search?
Your home should fit the 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, and/or public transportation? How large should the house be? What type of lot do you prefer? What types of amenities are you looking for?
Establish a set of minimum requirements and a “wish list.” Minimum requirements are things a house must have for you to consider it, whereas a “wish list” encompasses things you’d like but are not essential.

Part II – Finding Your Home

7.What should I look for when deciding on a community?

Select a community that will allow you to best live your daily life. Many people choose communities based on schools. Do you want access to shopping and public transportation? Is access s to local facilities like libraries and museums important to you? Or do you prefer the peace and quite of a rural community? When you find places that you like, talk to people that live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighborhood where you feel comfortable in.

8.What should I do if I’m feeling excluded from certain neighborhoods?
You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area.

9.How can I find out about local schools?
You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area.

10.How can I find out about community resources?
Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You may also want to visit the local library. It can be an excellent source for information on local events and resources and the librarians will probably be able to answer many of the questions you have.

11.How can I find out how much homes are selling for in certain communities and neighborhoods?
Your real estate agent can give you a ballpark figure by showing you comparable listings. If you’re working with a REALTOR, they may have access to comparable sales maintained on a database.
12.How can I found information on the property tax liability?
The total amount of the previous year’s property taxes is usually included in the listing information. If it’s not, ask the seller for a tax receipt or contact the local assessor’s office. Tax rates can change from year to year, so these figures may be approximate.

13.What other tax issues should I take into considerations?
Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities.

14.Is an older home a better value than a new one?

There isn’t a definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older homes, however shouldn’t mind maintaining their home and making some repairs. New homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don’t want to worry initially about upkeep and repairs.

15.What should I look for when walking through a home?
In addition to comparing the home to your minimum requirement and wish lists, use the HUD Home Scorecard and consider the following:

__+ Is there enough room for both the present and the future?
__+Are there enough bedrooms and bathrooms?
__+Is the house structurally sound?
__+Do the mechanical systems and appliances work?
__+Is the yard big enough?
__+Do you like the floor plan?
__+Will your furniture fit in the space?
__+Is there enough storage space?
__+Does anything need to be repaired or replaced? Will the seller repair or replace the items?
__+Imagine the house in good weather, and bad, and in each, will you e happy with year round?

16.What questions should I ask when looking at homes?
Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance?

17.How can I keep track of all the homes I see?
If possible, take photographs of each house: the outside, the major rooms, the yard and extra features that you like or ones you see as potential problems. Don’t hesitate to return for a second look.

18.How many homes should I consider before choosing one?
Thee isn’t a set number of house you should see before you decide. Visit as many as it takes to fine 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.

Part III – You’ve Found “the one”

19.What does a Home Inspector do and how does an inspection figure into the purchase of a home?
An inspector checks the safety of your potential new home. Home inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of any repairs that are needed.

The inspector does not evaluate whether or not you’re getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors and rood. Be sure to hire a home inspector that is qualified and experienced.

It’s a good idea to have an inspection before you sign a written offer since, once the deal is close, 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 clause give you an “out” on buying the house if serious problems are found, or give you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.

20.Do I need to be thee for the inspection?
It’s not required, but its a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. There is also an opportunity to hear an objective opinion on the home you’d like to purchase and it’s a good time to ask general maintenance questions

21.Are other types of inspections required?
If your home inspector discovers a serious problem, another 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 systems.

22.How can I protect my family from lead in the home?
If the house you’re considering was built before 1978 and you have children under the age of seven, you will want to have an inspection for lead-based paint. It’s important to know that lead flakes from paint can be present in both the home and in the soil surrounding g the house. The problem can be fixed temporarily by repairing damaged paint surfaces or planting grass over affected soil. Hiring a lead abatement contractor to remove paint chips and seal damaged areas will fix the problem permanently.

23.Are power lines a health hazard?
There are no definitive research findings that indicate exposure to power lines results in greater instances of disease or illness.

24.Do I need a lawyer to buy a home?
Laws vary by state. Some states require a lawyer to assist in several aspects of the home buying process while other states do not, as long as a qualified real estate professional is involved. Even if your state doesn’t require one, you may want to hire a lawyer to help with the complex paperwork and legal contracts. A lawyer can review contracts, make you aware of special considerations, and assist you with the closing process.
Your real estate agent may be able to recommend a lawyer. If not shop around. Find out what services are provided for what fee, and whether the attorney is experience at representing homebuyers.

25.Do I really need homeowner’s insurance?
Yes. A paid homeowner’s insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to e 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 the can give tips on how to keep insurance premiums low.

26.What steps could I take to lower my homeowner’s insurance costs?
Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you’re looking at homes; as new 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 close by.

27.Is the home located in a flood plain?
Your real estate agent or lender can help you answer this question. If you live in a flood plain, the lender will require that you have flood insurance before lending any money to you. But, if you live near a flood plan, you may choose whether or not to get flood insurance coverage for your home.

28.What other issues should I consider before I buy my home?
Always check to see if the house is in a low-lying area, in a high-risk area for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or making an addition in the future. Your real estate agent should be able to help you with these questions.

29.How do I make an offer?
Your real estate agent will assist you in making an offer, which will include the following information:

__+ Complete legal description of the property
__+Amount of earnest money
__+Down payment and financing details
__+Proposed move-in date
__+Price you are offering
__+Proposed closing date
__+Length of time the offer is valid
__+Details of the deal
Remember that the sale commitment depends on negotiating a satisfactory contract with the seller, not just making an offer.

30.How do I determine the initial offer?
Unless you have a buyer’s agent, remember that the agent work 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.

31.What is earnest money? How much should I set aside?
Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer rejected, your money is returned to you. If you back out of a deal, you must forfeit the entire amount.

32.What are “home warranties” and should I consider them?
Home warranties offer you protection for a specific period of time (e.g. one year) against potentially costly problems, like unexpected repairs on appliance 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.

Part IV – General Financing Questions: The Basics

33.What is a mortgage?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The “mortgage” itself is a lien (a legal claim) on the home or property that secure s the promise to pay the debt. All mortgages have two features in common: principal and interest.

34.What is a loan-to-value (LTV) ratio? How does it determine the size of the loan?

The LTV ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit.
For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTC ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, high LTV loans (80% or more) usually require a mortgage insurance policy.

35.When do ARMS make sense?
An ARM makes sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.

36.What are the advantages of 15– and 30-year loan terms?
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

37.Can I pay off my loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

38.Are there special mortgages for first-time homebuyers?

Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don’t have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

39.How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and possibly repairs and decorating.

40.What is included in a monthly mortgage payment?
The monthly mortgage payment mainly pays of principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).

41.What factors affect mortgage payments?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

42.How does the interest rate factor in securing a mortgage loan?
A lower interest rate allows you to borrow more money than a high rate with the same 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 the 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 and other fees included in the loan.

43.What happens if interest rates decrease and I have a fixed-rate loan?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

44.What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or .125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart, if you plan to say 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.

45.What is an escrow account? Do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges fro 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 taxes for homeowner’s insurance, make sure you are not penalized for late payments since it’s the lender’s responsibility to make those payments.

Part V – First Steps

46.What steps need to be taken to secure a loan?
See the PDF entitled, “Loan Application Checklist.”

47.How do I choose the right lender for me?
Choose your lender carefully. Look for financial stability, and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it’s beneficial when the lender knows home values and conditions in the local area.

48.How are pre-qualifying and pre-approval different?

Pre-qualification is an informal way to see how much you may be able to borrow. You can be “pre-qualified” over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender’s actual commitment to lend to you. It involves assembling the financial records mentioned in Question 47 (without the property description and sales contract) and going through a preliminary approval process. Pre-approval fives you a definite idea of what you can afford and shows sellers that you are serious about buying.

49.How can I find out information about my credit history?
There are three major credit reporting companies: Equifax, Experian and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it’s important to verify its accuracy. Double-check the “high credit limit”, “total loan”, and “past due” columns. It’s a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fee, 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 below for more information:

Experian – 1.800.682.7654
Equifax – 1.800.685.1111
Trans Union – 1.800.916.8800

50.What if I find a mistake in my credit history?
Simple mistakes are easily corrected by writing to the reporting company and pointing out the error, in addition to 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 it for the record. Lenders are usually understanding about legitimate problems.

51.What is a credit bureau score and how do lenders use them?
A credit bureau score is a number, based upon your credit history that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.

52.How can I improve my score?
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.

Part VI – Finding the Right Loan For You

53.How do I choose the best loan program for me?
Your personal situation will determine the best kind of loan for you. By asking yourself these next few questions, you can help narrow your search among the many options available and discover which loan suits you best:

+ Do you expect your finances to change over the next few years?
__+Are you planning to live in this home for a long period of time?
__+Are you comfortable with the idea of a changing mortgage payment amount?
__+Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?

54.What is the best way to compare loan terms between terms between lenders?
First, devise a checklist for the information from each lending institution.
You should include the company’s name and basic information, the type of mortgage, minimum

55.Are there any costs or fees associated with the loan origination process?
Yes. When you turn in your application, you’ll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.

56.What is RESPA?
RESPA stands fore 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, ad business relationships between closing service providers and other parties to the transaction.
For more information on RESPA, call 1.800.217.6970, for a local counseling referral.

57.What is a good faith estimate, and how does it help me?
It’s an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.

58.Besides RESPA, does the lender have any additional responsibilities?
Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status or disability, contact HUD’s Office of Fair Housing at 1.800.669.9777 (or 1.800.927.9275 for the hearing impaired).

59.What responsibilities do I have during the lending process?
To ensure you won’t fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:

+Be sure to read and understand everything before you sign
+Refuse to sign any blank documents
+Do not buy property for someone else
+Do not overstate your income
+Do not overstate how long you have been employed
+Do not overstate your assets
+Accurately report your debts
+Do not change your income tax returns for any reason
+Tell the whole truth about gifts
+Do not list fake co-borrowers on your loan application
+Be truthful about your credit problems, past and present
+Be honest about your intention to occupy the house. Do not provide false supporting documents!

Part VII – Closing

60.What happens after I have applied for a loan?
It usually takes a lender between 1-6 weeks to complete the evaluation of your application. It’s 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 process with you. And after closing, you’ll be able to move into your new home.

61.What should I look out for during the final walk-through?
This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as an y 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.

62.What makes up the closing costs?
There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:
+Attorney’s or escrow fees (yours and your lender’s, if applicable)
+Property taxes (to cover tax period-to-date)
+Interest (paid from date of closing to 30 days before first monthly payment)
+Loan origination fee (covers lender’s administrative costs)
+Recording fees
+Survey fee
+First premium of mortgage insurance (if applicable)
+Title insurance (yours and your lender’s)
+Loan discount points

63.What can I expect to happen on closing day?
You’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the sellers owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proof(s) of any inspection(s), warranties, etc.

Once you’re sure you understand all the documentation you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.

You’ll pay the lender’s agent all closing costs and, in turn, he/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 it the state Register of Deeds and you will be a homeowner.

64.What do I get a closing?
+Settlement Statement (HUD-1 Form, which itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before the closing)
+Truth-in-Lending Statement
+Mortgage Note
+Mortgage or Deed of Trust
+Binding Sales Contract (prepared by the seller; your lawyer should review it)
+Keys to your new home

PART VIII – Can HUD and the FHA help me become a homeowner?

65.What is the U.S. Department of Housing and Urban Development?
How does HUD help homebuyers and homeowners?

Also known as HUD, the U.S. Department of Housing and Urban Development was established in 1965 to develop national policies and programs to address housing needs in the U.S. One of HUD’s primary missions is to create a suitable living environment for all Americans by developing and improving the country’s communities and enforcing fair housing laws.

66.How does HUD help homebuyers and homeowners?
HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD play 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 owners 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 Law, and rehabilitation initiatives.

67.What is the FHA?
Now an agency within HUD, the Federal Housing Administration was established n 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 millions American buy a home.

68.How can the FHA assist me in buying a home?
The FHA works to make homeownership a possibility for more Americans. With the FHA, you don’t need perfect credit or a high-paying job to qualify for a loan. The FHA also makes loans more accessible by requiring smaller down payments than conventional loans. In fact, an FHA down payment could be as little as a few months’ rent. And your monthly payments may not be much more than rent.

69.How is the FHA funded?
Lender claims paid by the FHA mortgage insurance program are drawn from the mutual Mortgage insurance fund. This fund is made up of premiums paid by FDA-insured loan borrowers. No tax dollars are used to fund the program.

70.Who can qualify for FHA loans?
Anyone who meets the credit requirements, who can afford the mortgage payments and cash investment, and plans to use the mortgaged property as a primary residence, may apply for an FHA-insured loan.

71.What is the FHA loan limit?
FHA loan limits vary throughout the country. The loan maximums for multi-unit homes are higher than those for single units and also vary by area. Ask your lender for details and confirmation of current limits.

72.What are the steps involved in the FHA loan process?
With the exception of a few additional forms, the FHA loan application process is similar to that of a conventional loan (see Question 47). With new automation measures, FHA loans may be originated more quickly than before. And, if you don’t prefer a face-to-face meeting, you can apply for an FHA loan via mail, telephone, the Internet, or videoconference.

73.How much income do I need to have to qualify for an FHA loan?
There is no minimum income requirement. But you must prove steady income, for at least three years, and demonstrate that you’ve consistently paid your bills on time.

74.What qualifies as an income source the FHA?
Seasonal pay, child support, retirement pension payments, unemployment compensation, VA benefits, military pay, Social Security income, alimony and rent paid by family all qualify as income sources. Part-time pay, overtime and bonus pay also count as long as they are steady. Special savings plans-such as those set up by church or community association qualify, too. Income type is not as important as income steadiness with the FHA.

75.Can I carry debt and still qualify for FHA loans?
Yes. Short-term doesn’t count as long as it can be paid off within 10 months; and some regular expenses, like childcare costs, are not considered debt. Talk to your lender, or real estate agent, about meeting the FHA debt-to-income ratio.

76.What is the debt-to-income ratio for FHA loans?
The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt.

77.Can I exceed the ratio?
You may qualify to exceed, if you have the following:
+Large down payment
+Demonstrated ability to pay more toward your housing expenses
+Substantial cash reserves
+Net worth enough to repay the mortgage regardless of income
+Evidence of acceptable credit history or limited credit use
+Less-than-maximum mortgage terms
+Funds provided by an organization
+Decrease in monthly housing expenses

78.How large a down payment do I need with an FHA loan?
You must have a down payment of at least 3% of the purchase price of the home. Most affordable loan programs offered by private lenders require between a 3-5% down payment, with a minimum of 3% coming directly from the borrower’s own funds.

79.What can I use to pay the down payment and closing costs of an FHA loan?
Besides your own funds, you may use cash gifts or money from a private savings club. If you can do certain repairs and improvements yourself, your labor may be used as part of a down payment (called “sweat equity”). If you are doing a lease purchase, paying extra rent to the seller also be considered the same as accumulating cash.

80.How does my credit history impact my ability to qualify?
The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:

+ Two years have passed since a bankruptcy has been discharged
+All judgments have been paid
+Any outstanding tax liens have been satisfied or appropriate arrangement have been made to establish a repayment plan with the IRS or State Department of Revenue.

81.Can I qualify for an FHA loan without a credit history?
Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

82.What types of closing costs are associated with FHA-insured loans?
Except for the addition of an FHA mortgage insurance premium FHA closing costs are similar to those of a conventional loan outlined in Question 63. The FHA requires a single, up-front mortgage insurance premium equal to 2.25% of the mortgage to be paid at closing (or 1.75% if you complete the HELP program – see Question 91). This initial premium may be partially refunded if the loan is paid in full during the first seven years of the loan term. After closing, you will then be responsible for an annual premium (paid monthly) if your mortgage is over 15 years or if you have a 15-year loan with an LTV greater than 90%.

83.Can I roll closing costs into my FHA loan?
No. Though you can’t roll closing costs into your FHA loan, you may be able to use the amount you pay for them to help satisfy the down payment requirement. Ask your lender for details.

84.Are FHA loans assumable?
Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, sine the process is streamlined and less expansive 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.

85.What should I do if I can’t make a payment on my loan?
Call or write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him/her with financial information.

86.Are there any options if I fall behind on my loan payments?
Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you in getting back on track:

+ Keep living in your home to qualify for assistance
+Contact a HUD-approved housing counseling agency and cooperate with the counselor/lender trying to help you
+Special Forbearance: Your lender will arrange for a revised repayment plan, which may include temporary reduction or suspension of payments; you can qualify by having an involuntary reduction in your income and increase in living expenses.
+Mortgage Modification: Allows you to refinance debt and/or extend the term of the mortgage loan, which may reduce your monthly payments; you can qualify if you have recovered from financial problems, but net income is less than before.
+Partial Claim: Your lender may be able to help you obtain an interest-free loan from HUD to bring your mortgage current.
+Pre-foreclosure Sale: Allows you to sell your property and pay off your mortgage loan to avoid foreclosure.
+Deed-in-lieu of Foreclosure: Lets you voluntarily “give back” your property to the lender; it won’t save your house but will help you avoid the costs, time and effort of the foreclosure process.

If you are having difficulty with an uncooperative lender or feel your loan servicer is not providing you with the most effective loss mitigation options, call the FHA Loss Mitigation Center at 1.888.297.8685 for additional help.

For Conventional Loans:
Talk to your lender about specific loss mitigation options. Work directly with him or her to request a “workout packet.” A secondary lender, like Fannie Mae or Freddie Mac may have purchased your loan. Your lender can follow the appropriate guidelines set by Fannie or Freddie to determine the best option for your situation.

Fannie Mae does not deal directly with the borrower. They work with the lender to determine the loss mitigation program that best fits your needs.

Freddie Mac, like Fannie Mae, will usually only work with the loan servicer. However, if you encounter problems with your lender during the loss mitigation process, you can call customer service for help at 1.800.373.3343.

+In any loss mitigation it is important to remember a few helpful hints:

+Explore every reasonable alternative to avoid losing your home, but beware of scams, such as:
__+Equity Skimming: a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
__+Phony Counseling Agencies: offer counseling for a fee when it is often given at no charge.
+Don’t sign anything you don’t understand.

Part IX – Mortgage Insurance

87.What is mortgage insurance?
Mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. It required primarily for borrowers making a down payment of less than 20%.

88.How does mortgage insurance work? Is it like home or auto insurance?
Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency. If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

89.Do I need mortgage insurance? How do I get it?
You need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet our needs. Ask your lender for details.

90.How can I receive a discount on the FHA initial mortgage insurance premium?
Ask your real estate agent or lender for information on the HELP program from the FHA.
HELP – Homebuyer Education Learning Program – is structured to help people like you begin the home buying 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.

91.What is PMI?
PMI stands for Private Mortgage Insurance or Insurer. These are privately owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These types of 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 large down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.

Part X – FHA Products

92.What is a 203(b) loan?
This is the most commonly used FHA program. It offers a low down payment, flexible-qualifying guidelines, limited lending fees, and a maximum loan amount.

93.What is a 203(k) loan?
This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller’s existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows:

__+ The home must be at least one year old
__+Cost of rehabilitation must be at least $5,000 but the total property value, including the cost of repairs must fall within the FHA maximum mortgage limit.
__+The 203(k) loan must follow many of the 203(b) eligibility requirements
Talk to your lender about specific improvement, energy efficiency and structural guidelines.

94.What is a title I loan?
Given by a lender and insured by the FHA, a Title I loan is used to make non-luxury renovations and repairs to a home. It offers a manageable interest rate and repayment schedule. Loans are limited to between $5,000 and $20,000. If the loan amount is under $7,500, no lien is required against your home. Ask your lender for details.

95.What other loan products or programs does the FHA offer?
The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums and cooperatives. It also has special program for urban areas, disaster victims and members of the armed forces. Insurance for ARMS is also available from the FHA.




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