Cogent Financial Solutions Corp.

Charting A Course To Homeownership

Cogent Financial Solutions Corp. 9030 Red Branch Road, Suite 150 Columbia, Maryland 21045-2016 (866) 3COGENT

© 2002 In Charge Institute of America, Inc. and Cogent Financial Solutions Corp. All Rights Reserved

Table of Contents
Preface .................................................................................. iii Chapter 1: Is Homeownership For You?...............................1
Owning a home is not for everyone. Whether it's a good choice or bad choice for you will depend on your personal desires, future plans, and general financial position.

Chapter 2: Review Your Credit Report………………………5

Your credit history matters! See how your credit history affects the home loan process and learn what you can do to make your credit report look its best.

Chaper 3: Establish A Spending Plan and Set-Aside Reserves………………………………………………………13

Learn how to analyze your household spending and saving patterns; learn the basic steps to developing and following sound spending and saving plans. Before you shop for a home, take time to calculate the maximum amount you should spend and how much you'll pay each month. Also, take a good look at the additional costs involved in purchasing a home.

Chapter 4: How Much Home Can I Afford………………. .25

Chapter 5: What Kind of Help Is Available For A New Homebuyer?.........................................................................35
You're not alone. There are many sources of general information and direct assistance available for the new or low-to moderate income homebuyer. With the right help, you may be able to buy your dream home with very little money down.

Chapter 6: Home Selection .................................................43

What you want and what you need may not be the same when it comes to buying a home. Once you learn to distinguish wants from needs, you'll be equipped to assess each home you view according to how well it meets your real needs and satisfies your wants.

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Table of Contents

Chapter 7: Who’s Involved In The Buying And Selling Of A Home? ................................................................................. 57

There are many different business professionals involved in buying and selling a home. Take a look at what each individual does and learn whose interests each person represents. "One size fits all" does not apply to home loans. Learn about the different types of loans and loan terms so you'll be equipped to decide which type of loan best suits your financial circumstances. Look at the contents of a loan application and see how it's processed. Examine the pros and cons of online lending.

Chapter 8: What’s In A Loan Officer’s Bag Of Tricks?.......71

Chapter 9: Loan Closing ..................................................... 83

Learn about the people and the procedures involved in a loan closing. Compare the different legal forms of homeownership and see how they can affect the sale or inheritance of a home. Be aware of the general tasks required to maintain the comfort, safety, and appearance of your home. Develop and follow a maintenance schedule for major and minor projects.

Chapter 10: Responsibilities Of A New Homeowner......... 99

Chapter 11: Help! Whom To Contact If A Payment Will Be Late ..................................................................................... 107
Bad things can happen to the best people. Be a smart homeowner and learn how to safeguard your mortgage if you face financial hardship. Find out about possible sources of advice and assistance that can help you avoid foreclosure.

Glossary of Terms and Links.............................................. 113
The Glossary contains terms a homebuyer should know to make the home buying experience easier. The list of Links provides sources that can give additional information on many of the topics covered in this training program.

Certification Worksheets .................................................... 124

Complete the worksheets and then contact Cogent Financial Solutions Corp. for certification to apply for a low-down payment home mortgage loan through one of the lenders that cooperate with Cogent to provide mortgage loans.

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Preface
Welcome to Charting A Course To Homeownership, a practical, easy-tounderstand guidebook for potential homebuyers who have little or no experience with homeownership. This manual is designed to make self-paced study easy that covers the following topics: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Is homeownership for you? Review your credit report. Establish a spending plan and set aside reserves. How much home can I afford? What kind of help is available for a new homebuyer? Home selection. Who’s involved in the buying and selling of a home? What’s in a loan officer’s bag of tricks? Loan closing. Responsibilities of a new homeowner. Help! Whom to contact if a payment will be late.

Each chapter opens with questions that are answered by text, charts, and tables containing important information in an easy-to-understand form. The Glossary and list of Links at the end of the book will help you understand real estate language and identify additional sources of information. When you complete the self-study course, you can complete the worksheets at the back of this book, then contact Cogent Financial Solutions for one-onone counseling and certification that will qualify you to take part in assistance programs offered by several government agencies and private lenders. Belief Statement For Consumers At Cogent Financial Solutions, we believe you’re more likely to reach your financial goals when you combine knowledge and energy, then commit yourself to follow a carefully charted course. Congratulations for giving serious consideration to homeownership. Best wishes to those of you who successfully join the growing ranks of American homeowners. And thank you for allowing Cogent Financial Solutions to be your guide in this rewarding journey.

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Chapter 1: Is Homeownership For You?
For many people, owning a home is the fulfillment of the American dream. For others, it is their worst nightmare. Purchasing a home is one of the biggest financial decisions you will make in your life. So, before you decide to buy, carefully consider the pros and cons of homeownership. When you think about buying a home, many questions will come to mind. Do I really need to buy a home? Is my income going to grow? Will I stay in a home long enough to benefit from the purchase? Have I got enough money saved? Am I ready for the responsibility? Buying a home is a major financial move, so you’re wise to look carefully at the positive and negative aspects. Information in this chapter will help you examine the pros and cons of owning a home, based on your personal desires, future plans, and general financial worthiness. This chapter will help you learn about the following: Advantages and disadvantages of owning a home. Advantages and disadvantages of renting a home.

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Chapter 1: Is Homeownership For You?

Advantages and Disadvantages of Owning a Home Before buying a home, it’s important to consider how such a purchase will affect your finances and your lifestyle. It makes sense to review all the advantages and disadvantages of becoming a homeowner before making such a big commitment What are the advantages? • More privacy. • You’re buying rather than renting. • A home historically increases in value. • Your costs are predictable and more stable than renting because they’re based on a fixed-rate mortgage – in most cases. • The interest and property tax portion of your mortgage payment is a tax deduction. • There’s pride in homeownership, which also closely ties you to your community. What are the disadvantages? • Homeownership is a long-term financial commitment. • You’re responsible for all upkeep and maintenance on your home. This can include something simple and inexpensive like repairing a broken window to something complex and costly like replacing a furnace. • Owning a home ties you to your community, making it more difficult to suddenly pick up and leave a location. • Although mortgage payments are usually fixed, they’re also higher than rent payments. • Buying a home requires a down payment, closing costs and moving expenses. • The bank can take your home away from you if you don’t make your mortgage payments. • The value of your house may not increase – especially during the first few years. Advantages and Disadvantages of Renting a Home Depending on your financial situation and preferred style of living, there are many advantages to renting: • Renting a home can be cheaper than buying a home. Your rent payments tend to be lower than a comparable house payment. Also, your rent may cover your utility costs, an additional saving. • You tend to have more flexibility when you rent. Most leases run for 12 months, after which time you can move or renew your lease. So, if your job requires you to move frequently, renting can be a desirable alternative to owning. 2

Chapter 1: Is Homeownership For You? • Your landlord, not you, is responsible for performing nearly all maintenance and repair work on the property.

Renting a home does have some major financial disadvantages to consider: • • There is no tax break for renting. You won’t be able to claim any deduction for mortgage interest and property taxes when you file your tax returns. Your housing costs aren’t fixed like they are with a fixed-rate mortgage, or even a capped ARM. Your rent can be increased with no end in sight.

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Chapter 1: Is Homeownership For You?

Table 1-1: Advantages and Disadvantages of Renting and Homeownership. Own or Rent?
• • • • • • • • •

Advantages:
Privacy. Usually a good investment. More stable housing costs from year to year. Pride in ownership and strong community ties. Tax incentives. Equity buildup (savings). Lower housing costs. Shorter-term commitment No/minimal maintenance and repair costs. • • • • • • • • •

Disadvantages:
Long-term commitment. Maintenance and repair costs. Lack of flexibility. Usually more expensive than renting. High up-front costs. Foreclosure. No tax incentives. No fixed housing costs. No building of equity

Homeownership

Renting

Summary Here are the factors to consider when comparing buying to renting a home • Homeownership is not for everyone. • Homeownership requires you to have a stable or growing income. • Financial benefits of homeownership are long term. You should have a budget and savings plan in place before buying a home. Owning a home is a big responsibility.

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Chapter 2: Review Your Credit Report.
What do your creditors have to say about the way you handle money? Having a good credit rating can help you turn your home-buying dream into a reality. There’s much more to your credit report than just your credit history. Your credit report can impact the major decisions you make in your life. A good credit report can make it easier to qualify for a home mortgage. That’s why it makes sense to review your credit report at least once a year and then take steps to ensure its accuracy. You should review your credit report before you begin shopping for a new home. The report reveals your indebtedness, your bill-paying habits and other important personal information. “Money is like a sixth sense, without which you cannot make a complete use of the other five.” —W. Somerset Maugham This chapter will help you answer the following questions: What is a credit report? How do I get my credit report? How can I understand my credit report? What is a credit score or credit rating? How can I ensure my credit report is accurate? How can I improve my credit report?

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Chapter 2: Review Your Credit Report. What is a credit report? A credit report is a record of your personal credit history. Private companies called credit bureaus compile your credit report using information submitted by your creditors and obtained from public records. Because of the pertinent financial information in a credit report, creditors review it carefully before granting. While your credit report contains important financial data, it doesn’t include information such as your race, religion—or political affiliation. Information about you in a credit report is divided into the following four sections: • Personal—This section includes your name, past and present addresses, previous and current employers and your Social Security number. • Credit accounts—This section includes information on current and past loans and credit accounts, credit limits, current balances and payment histories. This includes late payments, repossessions, charge-offs and collection activity. • Public record information—This section includes information about any tax liens, bankruptcies or judgments filed against you in court. • Inquiries—This section includes information about businesses that have requested your credit report within the last 30 days. How do I obtain my credit report? • • Obtaining your credit report is easy. You can order a copy from any or all of the top three credit bureaus, which include Equifax, TransUnion or Experian. When you order a credit report, you must use your full name (with Sr., Jr., III), your current address, past addresses within the last five years, your Social Security Number, birth date and telephone number.

Each credit report may cost as much as $8.00, but fees vary by state. Under the following circumstances you can obtain a free copy of your credit report • If you’ve been denied credit, insurance, or employment. However you have just 60 days from time of notice—or you’ll be required to pay. • If you’re on welfare. • Your credit report is inaccurate because of fraud. You also should know that credit bureaus ordinarily don’t share information with each other, although their information sources are the same. Each credit report could contain different information; therefore, you should review all three reports to assure accuracy.

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Chapter 2: Review Your Credit Report. To obtain your credit report, you can call, write or order online at the following bureaus: • Equifax P.O. Box 105873 Atlanta, GA 30348 1-800-685-1111 Website: http://www.equifax.com TransUnion Consumer Disclosure Center P.O. Box 1000 Chester, PA 19022 1-800-888-4213 Website: http://www.transunion.com Experian National Consumer Assistance Center P.O. Box 2104 Allen, TX 75013-2104 1-888-397-3742 Website: http://www.experian.com

How can I understand what’s on my credit report? At first glance, your credit report may look like just a bunch of numbers. But it’ll make sense once you dig a little deeper. Reports prepared by different credit bureaus may state similar information in different formats. The following diagrams will help you better understand your credit report. Credit bureaus are required by law to explain information on your report that you don’t understand; therefore, the credit bureau supplying the report must answer your questions via telephone.

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Review Your Credit Report.

Your name and home address

Please address all future correspondence to the address shown on the right. YOUR NAME HOME ADDRESS CITY, STATE, ZIP CODE

Person who is responsible for the account: J=Joint; I=Individual; A=Authorized user; M=Maker; C=Co-signer; B=On behalf of another; S=Shared; T=Terminated

Chart 2-1: Sample Credit Report (page 1)

Date the report is issued, your SSN, and date of birth.

Name, address, and phone number of the credit bureau issuing the report.

Sample Credit Report
Page 1
DATE OF REPORT YOUR SSN YOUR DATE OF BIRTH CREDIT HISTORY

Credit Reporting Office Business Address City, State, ZIP Code Phone Number

Date of last payment or last change

Number of installments (months)

Balance due on the report date

The reporting company

Date when your account was last updated

Company Name

Account Number

Whose Account

Date Opened

Months Reviewed

Date of Last Activity

High Credit

Items as of Date Reported Terms Balance Past Due Status

Date Reported

AMOUNT IN HIGH CREDIT COLUMN IS CREDIT LIMIT

Your account number

CHASE

94776245

J

08/88

80

07/99

6,500

0

R1

10/98

Highest amount charged or credit limit
VISA DINERS 000111122223 303030303030 I A 01/90 07/93 44 36 06/09 02/95 10,000 1,500 48M 0 0 I1 O1 06/97 02/96

Type of account: O=Open; R=Revolving; I=Installment. Timeliness of payment: 1=On time; 2, 3, 4, or 5= Past due; 6=DMP; 7=Repo; 8=Charge-off

The number of times any of your accounts was 30, 60, or 90 days past due

CLOSED ACCOUNT CITIBANK 999999999999 I 10/88 60 08/98 3,000 60M 3,000 1,000 R5 10/98

>>>PRIOR PAYING HISTORY - 30 (05) 60 (03) 90+ (02)

04/94 – R2, 07/96 - R3, 12/98 – R4

When you opened the account

Most recent and most severe delinquencies on your report

Number of months payments have been reported

Any past due amounts, as of the date of the report

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Review Your Credit Report.

Chart 1-1: Sample Credit Report (page 2)

Sample Credit Report
Page 2
Public information from local, state, and federal courts, on liens, bankruptcies, and judgments filed against you.
04/05/93 03/22/94 ****************************************************Collection Agency Accounts************************************************** Collection reported 06/96; Assigned 09/96 to AAA Collection (800) XXX-XXXX; Client, ZZZ Hospital; Amount - $900; Balance - $900 06/96; Date of last activity 09/94; individual account number – 8888J >>>>>COLLECTION AGENCY TELEPHONE NUMBER (S) AAA Collection (800) XXX-XXXX<<<<< ************************************Public Records or Other Information*************************************** >>> Lien filed 03/93; Newark; Case or other ID number – 73654; Amount - $45,000; Class – State; Released 07/93; Verified 07/93 >>> Bankruptcy filed 12/95; Eastern District Court; Case or other ID number – 735HC12; Liabilities - $18,000; Personal; Individual; Discharged; Assets - $556

Unpaid credit accounts that have been turned over to third-party collection agencies

*********************************************Additional Information***************************************** Former/Other Address – 4565 ZZZ Road, Madison, WI 55533 Last reported employment – Security Guard, Janesville, WI 52222

***************************Companies That Requested Your Credit History***************************** EQUIFAX JC PENNEY 11/15/96 09/29/98 GE CAPITAL PRM VISA 07/08/95 NATIONS BANK

Information such as former or other addresses and employment reported by your creditors

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Chapter 2: Review Your Credit Report. What is a credit score or credit rating? Your credit score, or rating, is a number summarizing the information on your credit report. Lenders use your score to decide whether they will extend credit to you. The number is based on a statistical formula and is designed to estimate how likely you are to repay a loan. The most frequently used credit-scoring system, known as FICO, uses a formula developed by Fair, Isaacs and Co. Scores range from 300 to 900 points, with higher numbers denoting a better credit rating. According to Fair, Isaacs, Co., the score is calculated weighting different aspects of your credit history and behavior in the following manner:: • 35 percent represents your bill-paying history. • 30 percent represents your level of outstanding debt. • 15 percent represents the length of your credit history. • 10 percent represents a combination of your credit accounts and loans. • 10 percent represents your applications for new credit (a high number of applications in a short space of time generally leads to a lower score). Your race or gender has no bearing on your credit score and you won’t see your credit rating on your credit report. Moreover, credit bureaus don’t make decisions about extending credit. They simply provide your credit report to prospective lenders. How can I ensure that my credit report is accurate? While credit bureaus have a legal responsibility to report accurate information, it’s up to you to make sure the information is correct. This is why it makes sense to check your credit report at least once a year. Each month, credit bureaus receive millions of pieces of credit data, so it’s easy to see how mistakes can be made. Credit bureaus are, however, legally obligated to investigate disputed information and correct errors brought to their attention. That’s why when you receive your credit report you should review it carefully. Along with your report, you may also receive a dispute form. You can use this form to bring any incorrect information to the attention of the credit bureau. The credit bureau will investigate your claim with the creditors or the organization that supplied them with the disputed information. You should also send a copy of the dispute form to the creditor and keep a copy of all the correspondence for your records. The credit bureau has 30 days to investigate and report to you.

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Chapter 2: Review Your Credit Report. If any disputed information on your credit report is confirmed as accurate by the credit bureau, you still have the right to include your side of the story in your credit report. You can send a brief statement of explanation—up to 100 words, which should be included in future credit reports. It’s important to distinguish between incorrect information and negative information. As long as negative information is accurate, it will be part of your credit history and will appear on your credit report. How can I improve my credit report? There is no quick fix in repairing a credit report. The best way to improve your credit report is to use your credit wisely. Once you begin to build a positive bill-paying track record, older negative information will have less of an impact on your creditworthiness. Here are some specific steps you can take: • Pay all your bills on time. This is the most important action you can take to improve your credit report. Also, try to pay more than the minimum required payment. Mail in your payments at least seven days before the due date to ensure your creditors receive them on time. • Keep your debt level low. Set a goal to keep your non-mortgage debt payments less than 20 percent of your take-home pay. Credit grantors don’t always take a positive view of your having lots of credit cards with high credit limits even if you don’t use them. We suggest you apply for reasonable credit limits and keep your debts well below your credit limits. • Correct inaccurate information as soon as possible. If you notice that any information on your credit report is wrong, contact the credit reporting bureaus as soon as you can to correct the information. If there is negative but accurate information on your report, send an up-to-100word explanation to the credit bureaus so your side of the story will be included on all future credit reports. • Make sure old accounts are closed if you requested they be closed. Closing an old account yourself strengthens your credit record. It’s much better for you to close an account instead of a creditor closing one of your accounts. • Ask that positive credit information that isn’t included in your report be included. Sometimes smaller creditors such as local stores don’t send information to credit bureaus. You can request this information be included in your credit report, but be aware it may not be updated regularly.

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Chapter 2: Review Your Credit Report. • Send each of your creditors a change of address card when you move. When you move, bills have to be forwarded. Sometimes they arrive too late for you to pay them on time. If you send a change-of-address card to your creditors, you can minimize the chances of this happening. Complete all credit applications the same. Use the same name on all credit applications to ensure your credit report is as accurate as it can be. For example, if you use your middle initial on one credit application, you should use it on every application you complete. Review your credit report annually. It’s one of the best ways to ensure your report is correct. Negative information such as foreclosures, repossessions and late payments can stay on your credit report for up to seven years, and certain bankruptcy information can remain on your report for up to 10 years. Co-sign a loan for someone only if you are willing and able to take on the debt yourself. If the original borrower makes payments late, it will be reported on your credit record. If the borrower fails to pay, a collection agency may try to collect the debt from you.

“Small things, done well, enable bigger things to become possible.” —Martin O’Malley Summary • • • • • • • • It’s wise to review your credit report annually and take steps to ensure its accuracy. Your credit report is a record of your personal credit history—both positive and negative. You can order your credit report from one or all of the “Big Three” credit bureaus. Your credit report contains the following four categories of information: personal, credit accounts, public record; and inquiries. Your credit score, or rating, summarizes the information on your credit report. Paying your bills on time and controlling your level of debt are the best ways to build a positive credit report. There are no quick fixes; it takes time to build a good report. Co-signing a loan will make you responsible for paying the debt if the borrower fails to do so. There are certain federal laws that protect consumers from abusive and unfair collections practices.

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Chapter 3: Reserves.

Establish A Spending Plan And Set Aside

Before approving a mortgage loan, lenders will review such factors as the amount of money you have available for a down payment and your ability to repay the loan. But once your loan is approved, it’s up to you to make sure that you’ll have enough money set aside to cover closing costs and the expense of home maintenance and repair. The information in this chapter will show you how to track and review your actual spending, figure out reasonable spending/savings amounts and decide on how to best set up a cash reserve account. Section 1, Review Your Spending Habits, will help you answer the following questions: Why is it important to review my spending habits? How can I track my spending? What are the basic spending categories? What can I learn from tracking my spending? How often do I need to review my spending habits? Section 2, Preparing Your Spending Plan, will help you answer the following questions: Why is a spending plan important? What are the steps in developing a spending plan? How do I know if my expense allocations are realistic? How do I keep my spending plan current? Section 3, Setting Up Reserves, will help you answer the following questions: What is a reserve account? Why do I need to keep money in reserve? How do I decide how much money to keep in reserve? What kind of account should I use for my reserve?

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. “More people should learn to tell their dollars where to go instead of asking them where they went..’” —Roger W. Babson Section 1. Reviewing Your Spending Habits. The best time to get your spending and savings habits in order is before you apply for a mortgage loan. Why is it important to review my spending habits? Have you ever been sure you lost a $20 bill…only to stop, add up all your purchases, and find that you spent every penny of it? Knowing how and where you spend can help you take control of and successfully manage your money. It can also help you develop the habit of planning and saving for the purchases you’ll need to make as a homeowner. As a homeowner, your spending and saving needs will vary from those of a renter. The process of closing, moving and settling into your new home will generate immediate costs, so you’ll need to begin planning and saving far in advance of your actual home purchase. By learning to track your spending and making adjustments to increase your savings, you’ll be in a better position to buy a home and to maintain a comfortable, financially sound lifestyle. Periodically reviewing your spending habits and knowing where your money goes helps you to: • Pay your bills. • Figure ways to cut expenses. • Save and invest. How can I track my spending? No tricks here, just write down everything you spend. And to get a real picture of your spending, everyone in your family should track their expenses at the same time. You can keep track of your spending any way you like. For example: • Start with an expense chart and fill in an explanation and amount each time you spend money. • Write down all your purchases, then transfer everything to a chart each evening or every few days. • Use a computer program to help track expenses.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. Whether you use cash, checks or credit cards, be sure to record all your spending. To see where your money’s going, you’ll probably want to monitor your spending for a full month. Don’t worry if you miss a day or so, as long as you don’t get off track for too long. Try to avoid picking a month with a big holiday, planned vacation, or another planned large expense because it can affect your spending records. What are the basic spending categories? Everyone spends money differently. By identifying the categories in which you spend, you’ll be better able to see how you can cut expenses. Here’s a list of common expenses: Housing/Utilities Food (groceries & restaurants) Cars and Transportation Insurance Clothing Savings Health/Medical Personal Gifts Education/Personal Development Charitable Contributions Recreation and Entertainment Penalties and Fees Loans/Debt payment Taxes Cigarettes and Alcohol Professional Dues Children’s Expenses Cable/Satellite/Internet Phone/Cell Phone What can I learn from tracking my spending? • • Chances are you’ll be surprised. You may find you’re spending more than you think on eating out, entertainment, clothes or other things. You’ll discover how well you’re funding your priorities. For example, if your goal is to purchase a house within the next year, you may be spending in other areas instead of applying the money toward saving a down payment. There’s a difference between tracking and reviewing your spending. Detailed, short-term tracking of your expenses can give you the information you need to do a broad review of how you’re spending your money.

How often should I review my spending habits? It’s a good idea to review your spending periodically as part of your overall financial planning. But it becomes especially important under the following circumstances: • You decide to move from renting to buying a home. • You need to make a major purchase. • Your financial priorities change. 15

Chapter 3: Establish A Spending Plan And Set Aside Reserves. • • You’re looking for new ways to save. You want a fresh start in managing your money.

By keeping organized records of your spending, you’ll be able to review and compare past expenditures. Summary Tracking household spending can uncover areas where you can make budget cuts that can be transformed into savings. • • Reviewing your spending habits helps you control your money. Some of the basic spending categories for tracking expenses are housing, transportation, personal items, and debt payments.

Section 2: Prepare Your Spending Plan. The best way to plan and manage your finances is to establish a budget. It can put you in control of your money, help you meet your goals, and help you achieve financial wellness. The first step in creating a budget is comparing your monthly spending habits with your monthly income.

“To acquire wealth is difficult, to preserve it more difficult, but to spend it wisely most difficult of all.” —Edward Day Why is a budget important? A budget can shed light and improve your finances in the following ways: • • • • • • • Reveal your current financial condition by comparing your earnings to your expenses. Help you prepare for the new expenses of owning a home. Help to avoid overspending by identifying items that are costing too much. Break down your expenses into helpful categories. Help establish financial control and direction by showing where you can save. Help budget for emergencies or large anticipated needs. Help you achieve your goals.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. • • • • • • • • A good budget can help identify the following potentially-dangerous financial situations: Too much debt—more than you can pay off in one year. Lack of cash—a habit of using credit for small daily purchases. Emergencies—no available cash or credit to cover emergencies. Making minimum payments—little or no cash to pay down principal balances. Cash advances—a habit of using credit cards to pay other debts. Skipping payments—juggling bills, paying late, or skipping payments. Borrowing from friends and relatives—depending on loans to pay bills.

Steps in creating a budget: Your first step is to list your net income (your take-home pay, or the money you have after taxes have been deducted). This may include: • Full- or part-time job income. • Pension or other retirement income. • Child support or alimony received. • Dividends or interest. • Bonuses, commissions, or tips. • Tax refunds. • Welfare or other government entitlement programs. It’s easy to calculate your disposable income as the following example shows: Table 3-1: Calculating Disposable Income Jenny… Seth and Mary…

Takes home $1,000 after taxes every Seth takes home $1,600 after taxes every two weeks, and earns an annual bonus month. Mary’s take-home pay is $200 worth $500 after taxes. every week. Multiplies $1,000 by 26 (the number of Multiply her take-home pay of $200 by bi-weekly paydays in a year). This 52 (the number of weekly pay days in a amount equals $26,000. Adds $500 year). This amount equals $10,400. from annual bonus to equal $26,500. Divide $10,400 by 12 (months in a year) and get $866 as Mary’s monthly takeDivides $26,500 by 12 (months in a home or disposable income. Seth’s year) and gets $2,208 as her monthly income of $1,600 plus Mary’s income of take-home or disposable income. $866 equals $2,466 in combined monthly take-home income. Begins her spending plan by listing Begin their spending plan by listing $2,208 as her monthly take-home $2,466 as their monthly take-home (disposable) income. (disposable) income.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves.

*Note: Disposable income is defined as the money you have available for spending, saving, and investing. The next step is listing your monthly expenses. There are two types of expenses: fixed and variable. • • Fixed expenses don’t change each month. Examples of fixed expenses are your mortgage or rent payments, auto loans and insurance premiums. Variable expenses can change each month. What you spend for groceries, entertainment, transportation, credit-card bills and utilities, can vary every month.

If you put some money away in savings each month, be sure to include that amount as an expense in your budget. Also, be sure to include in your spending plan monthly amounts for events that may occur infrequently. For example, if you spend $600 a year on holiday gifts, divide that amount by 12 to get a monthly figure of $50. Once you list your income and expenses the next step is to compute the difference between your income and expenses. Add up your income from all sources. Add up your expenses. Then subtract your expense total from your income total. You’ll discover one of the following situations: • • A surplus (“In the black”)—Congratulations! If your net income exceeds your expenses, your biggest worry will be how to handle your savings. A deficit (“In the red”)—You’ll get a negative dollar figure if your expenses exceed your net income. To fix this, first review both your income and expenses making certain nothing has been left out. If you’ve recorded everything and you still show a deficit, you’ll need to balance your budget. You can do this by increasing your income, decreasing your expenses, or doing both.

Now, take a look at the following example of a spending plan to get a good idea of how to list income and expenses—then complete it for yourself.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. Table 3-2: Spending Plan Worksheet
MONTHLY EXPENSES
Housing Rent/Mortgage Fees Maintenance Subtotal Transportation Car payment 1 Car payment 2 Auto insurance Gas Parking Maintenance Subtotal Utilities Telephone Electricity Water Cellular phone(s) Gas Cable/satellite TV Trash service Subtotal Food Groceries Dining out Subtotal Clothing Adults/children

PERSONAL DEBT
Credit cards/loans Card 1 Card 2 Card 3 Card 4 Card 5 Loan 1 Loan 2 Loan 3 Other Subtotal

TOTAL PERSONAL DEBT MONTHLY INCOME
Net (take-home) pay-self Net (take-home) pay-spouse Part-time pay-self Part-time pay-spouse Military retirement pay Child support Social Security income AFDC income Food stamps Other income

Total Monthly Net Income SPENDING PLAN SUMMARY
+ Total Monthly Income

Laundry/dry cleaning Subtotal Health care Insurance Doctor/dentist bills Medication(s) Subtotal Personal Alimony/child support Childcare/eldercare Education Life insurance Vacations Recreation/hobbies Holidays/gifts Alcohol/tobacco Other Subtotal Savings Retirement account(s) Personal savings Investments Subtotal

- Total Monthly Expenses - Total Personal Debt

SURPLUS/DEFICIT

RECOMMENDED EXPENSE ALLOCATIONS
Category Housing Transportation Utilities Food Clothing Health care Personal Savings Personal debt Charities Total Est. % 23%-33% 7%-10% 8%-11% 12%-20% 4%-7% 3%-5% 3%-15% 5%-10% 0-20% 5%--10% 100% Act. %

TOTAL EXPENSES

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. If your income is greater than your expenses, you may want to either increase the amount you put away in savings, or increase the amounts paid toward any of your debts or bills. If you show a deficit there are two things you can do. You can scrutinize your spending for ways to cut costs, or you can consider ways to supplement your earnings. Granted, you may not be able to reduce the costs of your fixed expenses, but you might have some leeway with what’s known as your discretionary income—the money you have left after paying all your bills and fixed expenses. You may find some immediate savings results by cutting costs in discretionary-income areas such as restaurant meals, clothing, and recreation. How do I know if my expense allocations are realistic? As a helpful step, compare your personal expense allocations with the following Expense Allocation Chart. Look to cut back in areas where you’re spending more than what’s suggested on the chart. Table 3-3: Recommended Expense Allocation Chart Expense Category
Housing Utilities Clothing Personal Personal debt

Percent
23%–33% 8%--11% 4%--7% 3%--5% 0%--20%

Expense Category
Transportation Food Health care Savings Charities

Percent
7%–10% 12%--20% 3%--5% 5%--10% 5%--10%

*Note: The chart offers recommended guidelines for expense allocations but may not be appropriate for your financial situation. Use it as a starting point to get a good idea for tracking your own expenses. How do I keep my spending plan up-to-date? It’s smart to review it every month. You should also make adjustments to your budget if you come into some additional income, make large purchases or incur emergency expenses. For example, your refrigerator conks out and you’re forced to spend $800 to replace it. You’ll know to make adjustments in your discretionary spending and make any other modifications you’re able to on your spending plan to stay “in the black.”

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. Each time you make a change in your spending plan, consider how that will affect the achievement of your goals. Summary Preparation and review of your budget will help you as you steer a course toward financial stability. Developing and sticking to your budget can help you achieve your financial goals. • • • • Your spending plan lets you compare your income to your expenses. Include all sources of income when you develop your spending plan. Include all expenses—fixed and discretionary—when putting together your spending plan. Be sure that your spending allocations are reasonable, accurate, and within your means. (Refer to the Expense Allocation Chart.)

Chapter 3, Section 3: Setting Up Reserves. With a reserve account, you’ll be able to take care of major expenses or emergencies as they occur, without delay and without having to use credit. Homeownership involves three types of costs: • One-time costs associated with the down payment, closing cost and moving expenses. • Scheduled monthly costs such as mortgage, insurance payments, utility bills, and taxes. • Unscheduled or occasional costs, such as maintenance, repair or replacement of systems and appliances. By reviewing your household’s spending habits and developing a budget, you’ll be in shape to cover two of these spending categories one-time costs and scheduled monthly payments. However, the third category, unscheduled costs, will require more planning and saving. What is a reserve account? A reserve account is your rainy-day fund. It is money you save to protect your financial well being from the risk of having to pay for major household repairs, replacement or renovations. Whether you use a regular savings account, a mutual fund account, or another form of savings, you’ll add to the account regularly, keep it separate from other savings accounts and use it only for emergencies or major household expenses.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. If you purchase a condominium, the organization’s homeowners’ association will dedicate a portion of your monthly homeowner’s fee to reserve accounts for repair, replacement, or renovation of common elements such as driveways, parking lots, or recreational facilities. Therefore, your private reserve fund will only need to be sufficient enough to cover costs of items inside your unit e.g., kitchen appliance. Why do I need to keep money in reserve? With a reserve account, you’ll have immediate access to money for some or all unforeseen or occasional outlays. You’ll be able to take care of problems as they arise, instead of waiting to get a loan approved. You’ll earn money from interest payments and you’ll also avoid the expense of borrowing because the funds in your reserve account will be available to you interest free. How do I decide how much money to keep in reserve? By simply calculating how much you’ll need for normal upkeep, replacement and repair you can develop a plan for saving that amount. Another factor to consider is the length of time you plan to live in the home. For example, if you purchase a newly-built home, but plan to live in it for less than five years, you can safely forego the need to build up financial reserves to pay for storm window replacements fifteen years from now. Moreover, with careful use and proper maintenance, many items will last far beyond their projected useful lives. Chapter 10, Responsibilities of a New Homeowner, will discuss in detail the type of action you’ll need to take to keep your home and all its components running safely, efficiently, and economically. What kind of account should I use for my reserve? The purpose of a reserve account is to save money for emergencies and large occasional expenses. Therefore, you will need an account that pays you interest while your money is on deposit, yet allows you to withdraw funds on demand--without penalties. You can begin with a regular savings account, money market account or mutual fund. As the size of your reserve fund grows, you may consider investing part of it in a time deposit account that bears higher interest, such as a certificate of deposit or bonds.

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Chapter 3: Establish A Spending Plan And Set Aside Reserves. Summary Keeping a reserve fund separate from your other savings can help to provide peace of mind and financial security for homeowners. • • • A reserve fund is a savings account you establish to pay for household repairs, replacements or renovations. A reserve fund will protect you from the financial consequences of having to pay for major household emergencies. A reserve account will save you time and money because you won’t have to borrow and pay interest.

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Chapter 4: How Much Home Can I Afford?
You should know what you can afford before beginning your search for a home. This enables you to focus on realistic choices and saves you time and effort. This section will show you how to calculate the amount you comfortably can spend for a home. This chapter will help answer the following questions: What is the difference between a front-end and a back-end debtto-income ratio? What is a loan-to-value ratio? How can I calculate my monthly payments? What money can you use for a down payment? What other expenses are there in buying a home?

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Chapter 4: How Much Home Can I Afford? What is the difference between a front-end and a back-end debt-to-income ratio? Before making a loan, the lender wants to be certain the borrower has the ability to repay. Before approving your mortgage loan application a lender will look at several factors to gauge the risk you pose as a borrower. There are two calculations your lender makes when determining your level of indebtedness. The front-end ratio divides your total monthly housing payments by your before-taxes monthly income, expressing the result as a percentage. The following chart gives some examples of how this computation works: Table 4-1: Computing a Front-End Debt-to-Income Ratio If your monthly housing cost is…
$875 rent $1,250 mortgage + $50 condo fee $820 mortgage $550 rent

and each month you earn…
$3,750 (based on $45,000 annual income) $5,000 (based on $60,000 annual income) $3,000 (based on $36,000 annual income) $2,291 (based on $27,500 annual income)

your front-end debt-toincome ratio is…
23% ($875 divided by $3,750) 26% ($1,300 divided by $5,000) 27% ($820 divided by $3000) 24% ($550 divided by $2,291)

A lower percentage means you’re using a smaller portion of your monthly income to housing expenses, while a higher percentage means you’re dedicating a larger portion of your monthly income to housing expenses. For a mortgage loan application, your lender will calculate a front-end ratio for the loan amount you request. Generally, your lender will want to see a front-end ratio below 28 percent. If the ratio is higher, you may have trouble getting the loan approved. The reason is obvious. As you increase the percentage of your monthly income dedicated to a mortgage, you increase the possibility you may have trouble repaying the loan. You can use the following worksheet to compute your own front-end ratio:

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Chapter 4: How Much Home Can I Afford? Table 4-2: Calculate Your Front-End Ratio

My monthly housing cost.

• Mortgage/rent payments • Condo/co-op/community association fees Total monthly housing cost

$ $

An important step in calculating your front-end ratio is figuring your monthly income—what you earn before taxes or other deductions are made.
• If you’re paid every other week, multiply your gross salary by 26, then divide by 12. This is your gross monthly pay. • If your income is inconsistent, estimate your monthly income by dividing last year’s gross annual income by 12.

My monthly income—Remember to include income from all sources
including: • Gross income from job(s) • Alimony and child support • Bonuses, commissions, and/or tips • Dividends and interest • Other income Total gross monthly pay $

$ _____________% My front-end ratio

My front-end ratio is:
$_____________ My total housing cost divided by…

$_____________ My gross monthly income equals…

The back-end ratio compares the amount of your total monthly debt payments to your monthly gross income. When figuring your total monthly debt payments, you should add up your current minimum monthly payments for all credit accounts and loans. Be sure your list of expenses includes: • Housing expenses. • Car payment(s). • Loan payments (for furniture, appliances, etc.). • Bank/credit union loans. • Student-loan payments. • Other loans/credit accounts. • Credit-card payments. • Payment for past medical care.

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Chapter 4: How Much Home Can I Afford? To determine your back-end ratio, simply divide your total monthly debt payments by your total gross monthly income from all sources. Table 4-3: Computing a Back End Debt-to-Income Ratio If your total monthly debt payments are…
$875 rent + $410 debt payments = $1,285 $1,250 mortgage + $50 condo fee + $645 debt payments = $1,945 $820 mortgage + $145 debt payments = $965 $550 rent + $375 debt payments = $925

and each month you earn…
$3,750 (based on $45,000 annual income) $5,000 (based on $60,000 annual income) $3,000 (based on $36,000 annual income) $2,291 (based on $27,500 annual income)

your back end debt-toIncome ratio is…
34% ($1,285 divided by $3,750) 39% (1,945 divided by $5,000) 32% ($965 divided by $3000) 40% ($925 divided by $2,291)

The lower your back-end ratio is, the better your financial condition. You’re probably doing OK if your back-end ratio is under 36 percent. The first step in calculating your back-end ratio is calculating your before-tax monthly income.
• If you’re paid every other week, multiply your gross biweekly salary by 26, then divide by 12. This is your gross monthly income. If your income is inconsistent, estimate your monthly income by dividing last year’s total gross annual income by 12.

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Chapter 4: How Much Home Can I Afford? Table 4-4: Calculate Your Back-End Ratio
Monthly income—Remember to include income from all sources including:
• Gross income from job(s) • Alimony and child support • Bonuses, commissions, and/or tips • Dividends and interest • Other income Total gross monthly income $

$

Monthly debt payments—Use minimum amounts due on credit card and
other loan accounts. • Mortgage/rent payments • Condo/co-op/community association fees • Car payment(s) • Bank/credit union loan • Student loan payment • Other loans/credit accounts • Credit-card payments • Payment for past medical care • Other credit accounts Total monthly debt payments $

$ _____________% My back-end ratio

My back-end ratio is:
$_____________ My total debt payments Divided by… $_____________ My gross monthly income equals…

If your back-end ratio is: • Below 28 percent—Congratulations! Your ratio is in a good range to help you qualify for the best terms on a low-interest mortgage loan. You’ll look even better when you pay off your debt completely. • 28-30 percent—Your ratio is not bad, but as you approach 36 percent, you are placing a greater financial burden on yourself. • 30-32 percent—This may be a signal that your debt has become burdensome. Carefully review your budget to determine if your debt is temporary or a more serious problem. • 34-36 percent—You should look for ways to decrease expenses or increase your income. With a ratio this high, you may not qualify for reasonable mortgage loan terms. If you have had this ratio for over a year, you need to act now to reduce your debt if you really intend to buy a home. • More than 36 percent—Your ratio is too high. Start reducing your debt. At this level you will have difficulty obtaining a mortgage loan or other credit. You may have difficulty paying your bills. Begin by establishing and following a budget designed to reduce your debt as soon as possible.

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Chapter 4: How Much Home Can I Afford? Although each situation is different, a front-end ratio higher than 28 percent, or a back-end ratio higher than 36 percent, signals a need to lower your debt and control your use of credit—before attempting to purchase your dream home. If your ratios are higher than the standard 28/36, a lender may lower the amount of mortgage you qualify for, or deny your mortgage loan application. However, if your ratios are low, a lender may approve a larger mortgage that allows you to buy a more expensive home. If you calculate your front- and back-end ratios before contacting a real estate agent or loan officer, you’ll have an idea of where you stand on getting a loan application approved. And, if you’re thinking about making any major credit purchase, you’ll be better off waiting until after you purchase a home. What is a loan-to-value ratio? A loan-to-value ratio, or LTV, is a comparison of the amount of money borrowed on a mortgage to the appraised value of a home. LTVs are expressed as percentages. For example, a 95 percent LTV means the lender provides 95 percent of the home’s value and the borrower provides a down payment of 5 percent of the home’s value. A high LTV means the borrower is making a small down payment. A lower LTV means the borrower is making a larger down payment. In general, the lower the LTV percentage, the easier it will be to get your loan approved. Lenders prefer to see lower LTVs because borrowers who put down large amounts of their own cash are less likely to default. For a high LTV loan, a lender will require the borrower to purchase mortgage insurance to protect the lender’s investment. This insurance will be included in the monthly mortgage payment and will increase the cost of the mortgage. On conventional mortgage loans, loans not guaranteed or insured by a government agency, lenders are free to set their own LTV guidelines. The standard is 80/20, or 80 percent of the purchase price provided by the lender and 20 percent provided by the homebuyer as a down payment. However, for many federally backed loans such as VA guaranteed loans or Fannie Mae assistance programs designed for low or moderate-income buyer, which offer pre-set LTV’s that range from 100/0 to 95/5. A home seller may also be interested in your LTV if the home is appraised for less than the asking price. The lender will use either the asking price or the appraised value, whichever is lower, to compute the LTV. If the asking price is high, but the appraised value is low and you cannot afford to increase your down payment amount, the deal could fall through.

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Chapter 4: How Much Home Can I Afford? How can I calculate my monthly payments? You can estimate your approximate affordable monthly mortgage payment by reversing the steps used to calculate your back-end ratio. Multiply your monthly gross income by .36 and then subtract your monthly debt payments (not including housing expenses) from the total. This would be the amount you could afford to pay each month on a mortgage. Look at the examples in the following chart. Table 4-5: Estimating an Affordable Monthly Mortgage Payment The Lee family has a gross monthly income of $4,500…
$4,500 Income x .36 Standard ratio $1,620 Total debt payments …and they spend $598 each month on debt payments, other than housing expenses. $1620 Total debt payments - $598 Non-housing debt $1,022 Est. mortgage payment

Kelly McDonald has a gross monthly income of $2,482…
$2,482 Income x .36 Standard ratio $894 Total debt payments …and he spends $312 each month on debt payments, other than housing expenses. $894 Total debt payments - $312 Non-housing debt $582 Est. mortgage payment

Inés Ortiz has a gross monthly income of $3,663…
$3,663 Income x .36 Standard ratio $1,319 Total debt payments …and she spends $610 each month on debt payments, other than housing expenses. $1,319 Total debt payments - $610 Non-housing debt $709 Est. mortgage payment

The Jefferson family has a gross monthly income of $5,252…
$5,252 Income x .36 Standard ratio $1,891 Total debt payments …and they spend $683 each month on debt payments, other than housing expenses. $1,891 Total debt payments - $683 Non-housing debt $1,208 Est. mortgage payment

The amount of your monthly mortgage payments will depend on the size of your loan, your interest rate, and the length of your repayment period. The bigger your mortgage and the higher your interest rate, the more you’ll pay each month. The longer your repayment period is, the lower your monthly payments. On an adjustable-rate mortgage, your monthly payments will vary according to up-or-down changes in the interest rate.

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Chapter 4: How Much Home Can I Afford? You can use the following chart to get an estimate of what you’ll pay each month based on the following: • A fixed interest rate. • The amount you borrow. • A 30-year repayment period. Table 4-6: Approximate Monthly Mortgage Payment Amounts If you and the fixed interest rate on a 30-year loan is… borrow… 7% 7.5% 8% 8.5% 9% 9.5% 10%
$40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000 $266 $399 $532 $665 $789 $931 $1.064 $1,198 $1,330 $280 $420 $559 $699 $839 $979 $1,119 $1,259 $1,400 $293 $440 $587 $734 $880 $1,027 $1,174 $1,321 $1,470 $308 $461 $615 $769 $923 $1,076 $1,230 $1,384 $1,540 $322 $483 $644 $805 $966 $1,126 $1,287 $1,448 $1,610 $336 $505 $673 $841 $1,009 $1,177 $1,345 $1,541 $1,680 $351 $527 $702 $878 $1,053 $1,229 $1,404 $1,580 $1,755

10.5% $366 $549 $732 $915 $1,098 $1,281 $1,464 $1,647 $1,830

11% $381 $571 $762 $952 $1,143 $1,333 $1,524 $1,714 $1,905

These estimates include principal and interest payments only. Your mortgage lender can tell you the total amount of your monthly mortgage payments— called PITI, for principal, interest, taxes, and insurance—once a loan amount has been approved. What other expenses will occur? When you purchase a home, you’ll be required to pay certain one-time costs. These include: • Down payment—The amount of this payment will depend on the type of loan you get and the how much money you have available. • Closing costs—These are costs for a variety of services including fees for the loan application, credit report, appraisal, attorney’s services, document preparation, as well as a title search and title insurance policy. You’ll also pay an amount for escrow deposits to cover pro-rated taxes and insurance. After your loan is approved, but before you go to closing, your lender will provide an itemized list of all the one-time fees you’ll have to pay. • Moving expenses—These include the costs of packing and shipping your household property and paying any required deposits for telephone service or utilities.

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Chapter 4: How Much Home Can I Afford? • • • In addition to your monthly mortgage payments, you’ll have scheduled expenses that may include: Insurance premium payments—for all the personal property in your new home. Monthly utility bills—electricity, gas, water and sewer, telephone, and cable TV.

Although these costs may seem substantial, keep in mind that many of them will be offset by the tax advantages you’ll gain as a homeowner. When you file your income tax return, you may be able to deduct the cost of mortgage interest, and some of the fees you pay at closing. Money you pay for property taxes also will be deductible. That’s why it’s important to keep all records of your home purchase well organized. What money can you use for a down payment? How much money do you have available to buy a home? The following table shows how to list all the resources you can identify to determine how much cash or assets you can convert to cash. Table 4-6: Compute Your Available Cash
Source of Available Funds Checking account—self Checking account—co-borrower Savings account—self Savings account—co-borrower Life insurance policies—cash value Stocks, bonds, or mutual funds—cash value Cash gifts from relatives Other sources Total Available Funds Amount $_________ _________ _________ _________ _________ _________ _________ _________ $_________

Enter your sources of cash including any assets you can convert to cash to cover the one-time costs associated with purchasing your home. Although government-guaranteed loans and private mortgage insurance have made it easier than ever to qualify for a home loan, you’ll save money over the life of your mortgage loan if you can increase the size of your down payment. Plus, you’ll still need to have cash on hand to cover one-time expenses such as closing costs and moving costs.

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Chapter 4: How Much Home Can I Afford? Be realistic when entering your figures. After all, your loan officer will check your bank statements for checking and savings account statements. It’s best not to use all your savings. You should try to maintain enough money in savings to cover three to six months of regular expenses. In addition, you may need funds for emergencies that arise during the first few years in your new home, before you’ve had time to build up a reserve account. Ask your insurance agent about borrowing from your life insurance policies. The interest rate should be low, but the amount of the loan will be deducted from the proceeds of the policy if you should die before the loan is repaid. Your investments in stocks, bonds, or mutual funds can provide another source of ready cash. Also, family can contribute to your home-purchase fund. As you calculate your available cash, always keep in mind that you should be able to provide a reasonable explanation for ALL funds in your possession. Your loan officer will check your bank accounts and credit record to be certain that you aren’t using cash advances on your credit cards to buy your home. Relatives who donate money toward your down payment will have to declare that they don’t expect you to repay their gifts. Deposit Assistance Programs have been a valuable resource for many homebuyers who have a seller that is willing to pay a portion of the buyer’s purchase expenses. Summary A front-end/back-end debt-to-income ratio over 28/36 could make it difficult to get the mortgage loan at terms you can afford. • • • Lenders see a low loan-to-value ratio as support for a less risky loan. The size of your monthly mortgage payments depends on the amount of your loan, your interest rate and the length of your repayment period. Tax advantages for homeowners will offset many costs of buying a home.

“If this world affords true happiness, it is to be found in a home…where luxuries enter only after their cost has been carefully considered.” —A. Edward Newton

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Chapter 5: What Kind of Help Is Available For A New Homebuyer?
Is your financial house in order? Savings, steady employment, good credit—and possibly some outside help—can make it possible for you to turn your dream of homeownership into a reality sooner than you might think. Upon completing this chapter, you will have information about the types of assistance available to low-and moderate-income homebuyers and how much money you need to save to buy a home. This chapter answers the following questions: What kind of help is available for a new homebuyer? How much do I need to have saved? “In any great undertaking it is not enough for a man to depend simply upon himself.” —Native American proverb

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? What kind of help is available for a new homebuyer? Whether this is your first home or your fourth, you may not have to wait until you can save the traditional 20 percent down payment to qualify for a mortgage loan. There are many public and private organizations that will assist you in buying a home, even if you don’t have a lot of cash on hand for a big down payment and closing costs. With insurance and participation in a “low down payment” mortgage program, you may be able to purchase a home with less than 5 percent down. Federal, state and local government agencies, and non-profit organizations now offer advice, counseling, insurance and financial incentives. Support is available for first-time homebuyers, women, low-and moderate-income individuals and workers in certain professions. If you can show your income is high enough to make the monthly payments, you may qualify for a low down payment loan. Take a look at the following descriptions to see which of these programs can help you lower the initial cost of purchasing a home. U.S. Department of Housing and Urban Development (HUD) Housing Counseling Clearinghouse—Through a nationwide network of approved counseling agencies, HUD offers counseling to first-time homebuyers and homeowners. HUD provides grant funds to these agencies that also advise homeowners faced with financial problems to avoid foreclosure. To find the counseling agency nearest you, visit the HUD Website at www.hudhcc.org, or contact: Housing Counseling Clearinghouse P.O. Box 10423 McLean, VA 22102-8432 Phone: 1-800-217-6970 E-mail: info@hudhcc.org Home Investment Partnership Program (HOME)—This is a federal grant program enabling state and local government agencies to form partnerships with community housing groups. Together, they build, purchase, or renovate housing for sale to low-income residents--those families whose income is less than 60 percent of the area’s median family income. HOME allows for converting rental units to owner-occupied homes and requires that these homes remain affordable for 5-15 years. For information on the availability of HOME-funded housing in your area and the qualifications for participation, look in your local white pages directory for the address and telephone number of your local HUD Field Office, or contact Community Connections by calling 1-800-998-9999.

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? HUD Homes—Whenever the owner of a HUD-insured home cannot pay the mortgage payments, the lender will foreclose on the home. HUD then pays off the balance owed on the loan, takes possession of the home, and re-sells it for as close to market value as possible. Homes are sold “as-is,” meaning that you must be prepared to pay for any repairs or renovations needed to make the home safe and livable. Contact a local real estate agency or your local HUD field office for more information. Homeownership Opportunities for Women (HOW)—This partnership between HUD and more than 40 national public, private, and non-profit groups provides counseling to women who want to become homeowners. Participants include the ACORN Housing Corp., Catholic Charities USA, Clearinghouse for Women’s Issues, Habitat for Humanity International, Mortgage Bankers Association, National Council of La Raza, National Council of Negro Women and the YWCA. You can contact HUD for more information and a complete list of participating organizations. Officer Next Door—Law enforcement officers who qualify for this program can purchase homes at a 50 percent discount, or with down payments as low as $100. The homes may be in need of repairs and are in neighborhoods targeted for economic development. If you qualify, you must agree to live in the home for at least three years. Law enforcement officers are encouraged to buy homes in the communities they serve. Details on this program are available by calling 1-800-217-6970. Veterans Administration Home Loan Guaranty Services—The VA provides insurance to guarantee repayment of loans up to $203,000 to build or buy a house, townhouse, condominium, or manufactured home. The VA also insures home improvement loans, and loans to refinance an existing mortgage up to 90 percent of a home’s value. VA’s guaranty encourages lenders to offer veterans loans with favorable terms. You may be eligible for a VA guaranteed loan if you are an Army, Navy, Air Force, Marine, or Coast Guard veteran who received any discharge other than a dishonorable discharge; an active military duty member; or a member of the Selected Reserve. For details on eligibility and loan guaranty terms, contact your lender, visit the VA Website at www.homeloans.va.gov, or look in your local white pages directory for the address and telephone number of the nearest VA office. Fannie Mae (Federal National Mortgage Association) Community Home Buyer’sSM Program—This is Fannie Mae’s primary low down payment program and it allows borrowers to dedicate up to 33 percent of their monthly income to housing costs, which is more than most mortgage programs allow. Your down payment is only 5 percent 36

Chapter 5: What Kind Of Help Is Available for a New Homebuyer? and you don’t need to have one month’s mortgage payment saved at closing. To qualify as a Community Home Buyer, you must meet the following requirements: • Complete a homebuyer education course. • Earn no more than the median income for your area. Some exceptions may be made for high-cost areas. • Plan to purchase a single-family house, condo, or manufactured home as your primary residence. Fannie 97—This is a fixed-rate mortgage, with terms of 15 to 30 years. It’s designed for borrowers with moderate incomes and little money for their down payment and closing costs. Fannie 97 loans require down payments of only three percent and allow borrowers to use up to onethird of their gross monthly income to cover housing expenses. To qualify, you must meet the following requirements: • Complete a homebuyer education course. • Earn no more than the median income for your area. Some exceptions may be made for high-cost areas. • Have at least one month’s mortgage payment in your savings account after you go to closing. • Plan to purchase a single-family house, condo, or manufactured home as your primary residence. Fannie 3/2—This program offers fixed-rate, 15-30 year mortgage loans that require down payments of only 5 percent. Borrowers must provide 3 percent of this amount from their own funds and can get the remaining two percent from a government agency, private foundation, non-profit organization, or an employer. To qualify for the Fannie 3/2 program, you must meet the following requirements: • Complete a homebuyer education course. • Earn no more than the median income for your area. Some exceptions may be made for high-cost areas. • Have at least one month’s mortgage payment in your savings account after you go to closing. • Plan to purchase a single-family house, condo or manufactured home as your primary residence.

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? Flexible 97—If you have an excellent credit rating, but little or no personal savings for a down payment and closing costs, you may qualify for this program. The fixed rate, 15-30 year Flexible 97 loan requires only a 3 percent down payment that can come from a gift, an unsecured loan or a grant from a non-profit or government agency. The home seller can pay up to 3 percent of your closing costs. There are no income restrictions for Flexible 97 borrowers. To learn more about all of Fannie Mae mortgage assistance programs, contact a local mortgage lender or visit the Fannie Mae Website at www.homepath.com. Freddie Mac Affordable Gold—Private lenders who participate in this program can offer fixed-rate, 15-30 year conventional mortgage loans that require very low, or no down payments. Depending on the location, Affordable Gold borrowers may have incomes at or above the area’s median income level. Funds for the down payment and closing costs may come from savings, gifts, grants, or unsecured loans. Affordable Gold mortgages may be used to purchase single-family homes, townhouses, condominiums, or manufactured housing. To qualify for the program, you must meet the following requirements: • Complete a homebuyer education course or have bought a home before. • Have a back-end debt-to-income ratio below 38-40 percent. • Plan to purchase a single-family house, condo, or manufactured home as your primary residence. U.S. Department of Agriculture Rural Housing Service (RHS)—This agency provides loans and grants to increase homeownership among rural Americans. It also helps pay for renovation and repair of existing rural homes. Low-and moderate-income residents may qualify for direct loans or 100 percent loan guarantees to build or purchase single-family homes. No down payments are necessary for these loans. RHS also offers the Mutual Self-Help Program that makes homes affordable by requiring buyers to invest “sweat equity” into their homes. Under the Self-Help program, potential homeowners apply for direct loans, then work in 5-to-12 member teams to help build homes for each other. No team member can move in until all the homes are completed. Eligibility requirements and loan limits vary from state to state. You can get details from your Rural Development State Office or from the RHS Website at www.rurdev.usda.gov.

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? Other Federal Agencies Many other federal agencies acquire residential properties as part of their normal activities These agencies include the Internal Revenue Service, the U.S. Army Corps of Engineers, the Federal Deposit Insurance Corporation, the U.S. Small Business Administration, and the U.S. General Services Administration. The agencies allow the public to inspect the homes, then sell them on an “as is” basis to the highest bidder. If you’re interested in buying one of these homes, visit http://www.hud.gov/homesale.html for a list of links to other government sites, or consult a local real estate agency for information on the sale of government-owned homes in your area. State and local programs Assistance from your state or local government may take the form of advice and counseling, loan or loan guaranty, direct financial assistance, or income tax credits. Funding for these programs can come from the federal government. For information on state housing assistance programs, contact your state’s housing authority. For information on county or municipal housing programs, contact your local housing office. Lease-Purchase It might happen that you find the perfect house, but you can’t, or don’t want to purchase it immediately. You may not qualify for a governmentsponsored homebuyer assistance program. You may need extra time to improve your credit history. Or, you may not be sure that you can handle the responsibility of homeownership. Here’s an alternative: A lease-purchase, also known as a lease option, or rent-with-option-tobuy, may be the answer. This is an agreement between you and the seller that allows you to move in and pay monthly rent plus an additional sum to the seller for a specified period of time—usually one to two years. When the lease ends, you can buy the home for the price set in the leaseoption contract.

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? Your real estate broker can help you locate lease-purchase option homes. Or, you may be able to convince the owner of a rental home to accept a lease-purchase agreement. Just be aware that there are advantages and disadvantages to consider before you sign a lease-purchase contract. The following chart outlines the both the advantages and the disadvantages: Table 5-1: Lease-Purchase Advantages/Disadvantages Chart Lease-Purchase Advantages
• • • • You don’t need to move in; you’re already in the home. You’ll have time to save any money you’ll need to qualify for a loan. You’ll have time to clean up blots on your credit report. A portion of your monthly rent (plus any additional option payments you make to the seller) may be counted as part of your down payment. You’ll have the home’s sale price locked in, even if local housing prices rise. • • • • •

Lease-Purchase Disadvantages
If you don’t buy the home, the seller keeps any additional money you’ve paid towards the purchase. The home’s sale price is locked in, even if the local housing prices fall. Lease options may be hard to find in an active housing market. You’ll get no tax advantages until you actually buy the home. During the lease, you’ll have to live with any restrictions the seller sets (e.g., pets, noise, etc.).

As with any other home purchase, you should carefully negotiate the terms of a lease-purchase contract. You may want to hire an attorney or a real estate broker to write the contract. Include contingencies for a professional home inspection and a title search. Have the home appraised before agreeing on a sale price. Pre-qualify for the loan so you’ll be ready to purchase the home when your lease period ends. Most importantly, if you’re not entirely certain that you’ll buy, be sure to make the option payments as small as possible. How much do I need to have saved? As much as possible, but less than you think, the amount of money you have saved for your down payment will reduce the amount you’ll need to borrow. Reducing the amount you borrow may reduce the interest rate of your loan. It will lower the size of your monthly mortgage payments and the total amount of money you’ll repay over the life of your mortgage loan.

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Chapter 5: What Kind Of Help Is Available for a New Homebuyer? In the past, 20 percent down payments were standard. Lenders viewed such large sums as guarantees against defaulted loans. Unfortunately, for many would-be borrowers, saving a 20 percent down payment was a major obstacle to buying a home. However, government and private mortgage insurance (PMI) programs now exist to assure lenders that loans will be repaid. This PMI allows you to buy a home with much less than a 20 percent down payment. Today, qualified borrowers who have good credit, but limited savings, can purchase homes with five, three, or even zero percent down. Summary There are several federal, state and local government programs available to assist first-time, as well as low or moderate-income individuals to buy a home. • • • If you qualify for participation in any of these programs, you probably won’t need a large down payment. You may be able to consider a lease-purchase agreement if you’re not ready to buy a home immediately. Increasing the amount of money you have saved for a down payment will lower your monthly mortgage payments and reduce your total interest paid.

“Success won’t just come to you. It has to be met at least halfway.” —Frank Tyger

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Chapter 6: Home Selection Compare your housing needs with your housing wants to prepare for house hunting. You’ll know where to look, what to tell your real estate agent, and what compromises your family can accept. A home is a major purchase. Therefore, you’ll want to make sure that any home you buy meets your housing needs and fulfills as many of your housing wants as possible, based upon your budget. "The indispensable first step to getting the things you want out of life is this: decide what you want." —Ben Stein Section 1, Looking for a Home, will answer the following questions: What features do you need in a new home? What features do you want in a new home? Is this home a bargain? Why is the location important? What is a condo? A co-op? What is a homeowners association and how does it operate? What are the advantages and disadvantages of living in an association? What is a manufactured home? How does the neighborhood affect my home’s value? Why choose one real estate agent over another? Section 2, Offering to Buy a Home, will help answer these questions: What is an offer? Who makes it? What is earnest money? What is the difference between an inspection and an appraisal? Why is a home inspection necessary? Why is an appraisal necessary?

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Chapter 6: Home Selection Section 1: Looking for a home Before you begin house hunting, take time to do a “needs vs. wants” assessment. This will enable you to focus your search and avoid viewing homes that are unsuitable or unaffordable. Plus, you’ll be more apt to find the home that’s right for your lifestyle and your budget. What features do you need in a new home? Most people need cost-effective features that provide safety, security and comfort. For example, a family with small children might need a fenced yard, while a rural homeowner might need to supplement his heating system with a wood-burning stove. A person who uses a wheelchair might need access ramps and wide interior doorways. Or, a rural homeowner might need space for his own washing machine, while an urban condo apartment owner might need to save floor space by sharing a common laundry room with others. When determining your own housing needs, you should consider several factors such as your current financial circumstances, your future plans, and the number, health and age of your household members. What features do you want in a new home? Once you decide a home meets your needs, you can look at the amenities it offers to fulfill your wants. Amenities are items that improve the appearance, comfort and convenience of a home for an additional cost. Home sellers want you to believe that many amenities are requirements for comfortable living. For example, the plywood flooring in a new home is usually covered with wall-to-wall carpets, with upgraded carpeting or hardwood flooring offered as higher-priced extras. Or, a family of five may need two bathrooms, then find that a master bath with two sinks and a spa tub could be installed for an added cost. Before you begin house hunting, a good way to decide between needs and wants is to develop a wish list that describes the type of home you need and the features you’d like to have. As you write, you and the members of your household can determine if a feature is a “must-have,” or a “nice-to-have.” With this information, you and your real estate agent can base your search on finding a home with the features you must have to be safe, comfortable, and secure. You’ll also avoid homes that are too far above or below your price range. An example of a “needs vs. wants” wish list follows.

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Chapter 6: Home Selection Table 6-1: Housing Needs vs. Wants
Type of Home: Existing Home __ New Home___ Detached Home___ Apartment Condo___ Town Home___ Floor Plan Price Range Single Level ___

Mfg. Home___ ___

Multi-level

From $__________ to $__________

Indoor Features
Bedrooms Bathrooms Living/dining area Family room and/or basement Kitchen 3

We need…
2 full baths Combined living/dining room Family room Stove, sink, refrigerator, dish washer, disposal Central heating 4 • • • • • • • • • • • • •

We wish to have…
2 ½ baths Spa tub in master bathroom Separate dining room Eat-in kitchen Finished basement Enclosed porch Custom cabinets Built-in water purifier Cooking island Marble counter tops Fireplace on each level Central air conditioning Walk-in closet in each bedroom Built-in shelves and racks Laundry sink Space for ironing board Office space Media center We wish to have… Attached garage Two-car garage Porch and patio Covered deck ½ acre lot Storage shed

Heating and A/C

Storage space Laundry Office/entertainment Outdoor Features Parking Porch/patio Yard Storage space

Closets and pantry Washer and dryer Wiring for computer We need… Off-street parking Back porch or patio Fenced yard Covered storage for lawn and garden equipment • • • • • • • • • • •

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Chapter 6: Home Selection Is this home a bargain? Bargain-price homes may be available when home sellers need to make quick sales. Ask your real estate agent for advice on foreclosure sales, short sales, estate sales or fixer-uppers. However, unless you have experience with home buying and selling, be cautious because the amount of money you save on the purchase could easily be exceeded by the amount you’ll spend on legal fees and repairs. Here are some possible sources for finding bargain home sales: • You can find foreclosure sales through local newspaper legal ad notices or at the FHA and VA Internet sites http://www.hud.gov/homesale.html and http://www.homeloans.va.gov/homes.htm. These sales occur when homeowners fail to make their payments and their lenders foreclose on and resell their homes. Major obstacles to look out for in a foreclosure sale are all-cash sales requiring you to pay the total cost in a lump sum, “as-is” sales that require you to accept the home with no repairs paid for by the seller, or even a need to evict the homeowner whose house was repossessed. In a foreclosure sale, getting a thorough home inspection before you agree to buy is critical. • A short sale is a variation on a foreclosure. If a homeowner is having difficulty paying the monthly mortgage payments, the lender may reduce the loan balance to avoid foreclosure and allow the homeowner to make a quick sale. Before buying a home in such circumstances, get a written statement from the lender agreeing to the sale and get a thorough home inspection identifying any major defects. • In an estate sale, the home of a deceased owner will be sold to settle the estate. The estate executor will look for the best possible price, so you may or may not get a bargain. If the estate’s heirs are disputing their inheritance rights you may not be able to take possession of the home until all lawsuits are settled. • A fixer-upper is a home needs repair. This can be a good deal if the cost of repairs or renovation doesn’t exceed the money you could save by buying a home in better condition. When the problems are cosmetic such as decorating or extensive cleaning, the home could be a bargain, especially if you can do the work yourself. If, however, the problems are structural, such as defective plumbing or electrical systems, or a leaking foundation, you’ll need to hire contractors to make the home meet housing codes. Such repair costs quickly transform a seeming bargain into a pink elephant. As with other types of bargain sales, you should have the home carefully inspected before you buy.

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Chapter 6: Home Selection No home purchase is a bargain if you can’t afford to make repairs. Before borrowing money for repairs, do the math to see how an additional loan will affect your budget and saving plans. Make sure you can pay your monthly mortgage note, other credit accounts, and other expenses before you buy any of these bargain homes. Moreover, if you plan to live in the home while it’s being repaired, make sure the members of your household are prepared to put up with the inconvenience. Why is the location important? Shopping, transportation, convenience, safety and schools are important consideration when buying a home. Take a walk through the area and talk to residents to find out what they think of the neighborhood. Contact the school board and ask how the neighborhood schools compare with other schools in the district. Make daytime, evening, and weekend visits to the neighborhood to judge its friendliness, cleanliness, safety and traffic. Figure out what your commuting routes will be to and from work. Find out how close you’ll be to grocery stores, shopping malls and entertainment. Ask your real estate agent about any planned road or housing construction or zoning changes affecting the area. What is a condo? A co-op? With either a condo or a co-op you’ll share property ownership with a group of other homeowners. However, there is a major difference between owning a home and a condo or co-op. The word condominium describes a form of property ownership that gives you exclusive use and ownership of the space inside your home, as well as joint use and ownership of common areas of the condominium property. Your condo may be an individual apartment in a larger building, a single home in a row of townhouses, or one half of a duplex. As a condo owner, each month you’ll make a payment to your mortgage lender to pay for your home. You may sell or rent your condo whenever or to whomever you choose. Condo owners are members of an association that manages day-to-day operations. Each owner pays a set monthly fee to the condominium’s governing association to pay for maintenance and repair of common property. Ownership in a co-operative gives you exclusive use of an apartment unit and shared ownership of the apartment building and all shared areas of the co-op property. In exchange for monthly payments to the corporation that owns the property, you’ll hold a lease for exclusive use of the apartment in which you live. Because you do not own the apartment, you cannot sell it and you may not rent or sub-lease it without the approval of the corporation.

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Chapter 6: Home Selection Co-op owners are shareholders in a corporation that manages operations for the entire co-op property. What is a homeowners association and how does it operate? A homeowners association is a form of government that manages the common property and enforces regulations called bylaws concerning many public activities of homeowners. A board of directors elected by association members runs the association. These directors determine when and how the common property will be cleaned, repaired, or replaced. To pay for these services, the association collects a monthly fee called an assessment from each homeowner in the group. You should carefully consider the advantages and disadvantages of living in a community controlled by a homeowners association before you buy. Do you like the consistency of a neighborhood where parking is carefully assigned and all the shrubbery is clipped to a precise height? Or do you prefer a neighborhood where you can paint window shutters in your favorite color and build a kennel for three dogs and a tree house for your kids in the side yard? If you are interested in living in an association community, read the bylaws carefully and make your offer to purchase based on accepting the association’s rules. What are the advantages and disadvantages of living in an association? The association’s purpose is to preserve a style of living that maintains property values and appearances. This is accomplished by enforcing rules that affect how you can behave as an association member. These rules can affect anything from the color you paint your home to the number of pets you keep. Some homeowners find it comforting to be in an environment where specific standards are maintained, while others chafe at the thought of being under their neighbors’ control. Therefore, before purchasing a home in a neighborhood governed by an association you should read all the bylaws, covenants and restrictions. Also pay careful attention to the association’s budget. It shows how money is collected and used for the good of the homeowners. You’ll want to be sure the association is on sound financial footing so you can avoid paying special fees if emergency repairs are needed on common property.

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Chapter 6: Home Selection

Unless they conflict with state or local laws, bylaws, covenants, and restrictions are usually enforceable in court. Therefore, you need to understand these rules because violating them could cost you time, money, and the goodwill of your neighbors. You also need to understand how to work with your neighbors to change rules that are ineffective, unnecessary, or detrimental to your common desires. If you choose to be a member of an association, give some thought to becoming active by attending association meetings and voting in board elections. One way to make sure that things are run effectively is to work on the board of directors or one of the association’s operating committees. What is a manufactured home? A manufactured home is a dwelling that is partially or completely constructed in a factory, then transported to the housing site. Decades ago, these were called trailers or mobile homes, but today those terms no longer apply because these homes are seldom moved from the original site. Today, a homebuyer can choose from modular homes, panel homes, and pre-cut homes. The U.S. Department of Housing and Urban Development sets standards for plumbing, heating and air conditioning, electrical systems, structural design and construction, fire safety, and transportation. However, onsite additions such as garages and decks must comply with local or state building codes. Over 19 million people live in manufactured homes and manufactured housing now accounts for about 20 percent of all new housing starts in America. While many manufactured homes are placed in clustered communities the majority are located on privately owned lots. The chief benefit of manufactured housing is its low cost. In 1998, the average price for a manufactured home was $43,800, not including the cost of land on which the house sits. Because components are mass-produced and assembly takes place in a central location, the cost per square foot is lower, and you can find the same amenities that you’ll find in site-built homes. You can find a wide range of sizes, floor plans and exterior finishes. In addition, for a new home, there are no costs associated with weather delays during construction. You’ll also receive the same tax benefits as owners of traditional homes. A manufactured home may be financed as personal property if you lease the land on which it sits. If you purchase land along with the home, you can use a traditional mortgage loan. If you already own the land, you can use it as collateral to secure a mortgage loan. Typical terms for a new manufactured home call for a 5 to 10 percent down payment on a 30-year loan with a balance up to $150,000. Typical terms for an older home call for 5 to 10 percent as a down payment on a 25-year loan with a balance up to $60,000.

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Chapter 6: Home Selection If you are considering the purchase of a manufactured home, the AARP Website, www.aarp.org, provides a comprehensive checklist of factors to consider concerning the layout, size, construction, and durability of your home. The American Homeowners Association (www.ahahome.com) also offers a Top Ten Tips on Buying a Manufactured Home checklist for potential owners. In any case, have the home inspected before you move in. The manufacturer may provide a “punch list” of items to look at, but don’t overlook the services of an independent home inspector who can protect your investment by identifying problems or construction defects. How does the neighborhood affect my home’s value? Location, location, location is the real estate agent’s slogan when it comes to selling a home. When you find a home you like, you’ll need to know the basics—schools, shopping, commuting, and safety issues. But you’ll also need to know about: • Planned changes in zoning. • Major construction. • What’s going on in neighborhoods nearby. For example, auto and homeowner insurance rates can vary from neighborhood to neighborhood, depending on traffic patterns and police activity. Property values in a quiet suburban housing development might drop drastically if an eight-lane thruway is slated for construction in the next two years. Or, a house with a riverfront view might have a low price because it’s built on a floodplain. And you might reconsider buying an urban townhouse if you learn that the city is selling construction bonds to build a casino or a sports facility two blocks away. On the other hand, finding out that a run-down apartment complex will be replaced by luxury condominiums may be an incentive for you to buy in the neighborhood.

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Chapter 6: Home Selection Remember, you don’t just purchase the home; you purchase the neighborhood. Find out all you can about commercial activity, land use restrictions, and the responsiveness of local government to activities in the neighborhood before you buy. That way, you will minimize surprises and disappointments after you’ve signed the mortgage. Why choose one real estate agent over another? Wherever you live, you’ll find real estate agents who are eager to sell you a home. A safe assumption is that these agents are working for the home sellers. So, how do you find an agent to work for you and protect your interests? For a purchase as important as this you’ll want to be treated fairly and kept informed of all the rules and regulations that affect you. You’ll also want to be sure that you get a fair price on the home you buy. Begin by asking for recommendations from friends and relatives who have purchased homes. Don’t be swayed by an agent’s number of years in business, or high sales volume. Instead, ask for recommendations from friends and family members who have purchased homes. Ask the recommended agents for lists of their past clients and talk with those clients to learn how well they were served. Ask for a written statement telling whom the agent represents—you, the buyer, or a seller. Discuss fees, so you’ll have a clear understanding of how, and how much, your agent will earn. If you have a deadline by which you must buy, let your agent know. Also make it clear that you want the agent, not his or her assistants, to represent you. Present your list of housing wants and needs so your agent can narrow the search for your perfect home. Discuss your target home price to avoid wasting time on homes that are too far outside your price range. If you haven’t already been pre-approved for a home loan, ask your agent to identify possible lenders. Expect to answer personal questions about your finances

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Chapter 6: Home Selection Section 2: Offering to buy a home After you’ve located the right home, you’ll want to make an offer to buy it. You’ll be involved with several real estate professionals throughout the negotiation process. Your objective will be to purchase a home that meets your needs and wants at the fairest possible price. What is an offer? Who makes it? Once you’ve found a home you want in a neighborhood you like, at a price you can afford, the offer is your first step toward making the actual purchase. This is where the services of a buyer’s agent really become invaluable because your agent has experience and can guide you past possible pitfalls and hazards in purchasing a home. The posted sale price is only the seller’s suggested price. Your agent will prepare a written offer that describes precisely what you want to buy, when you intend to buy it, and how much you want to pay. A standard written offer will contain: • Your name. • A description of the property. • The amount you want to pay. • A time limit for the seller to accept, decline, or make a counteroffer. • A list of contingencies, or statements to protect you if things go wrong. If there is more than one buyer, both, or all, your names will be listed. Items you want the seller to include in the sale such as fixtures, appliances and decorations should all be listed. Your agent can search records of recent sales for similar homes in the same area to help you decide on a reasonable amount to offer. The date and time you make the offer and a deadline for the sellers to make up their minds are important. You’ll want to allow enough time for reasonable decision making, but not so much time that the sellers can keep you hanging while they wait for better offers. The contingency list should allow you to have the home inspected and make sure the seller has a clear title to the home before the sale becomes final. If the inspection uncovers a need for expensive repairs, you’ll probably want to lower your offered price or have the seller complete the work before you buy. The title search will assure you that the seller can deliver the property free and clear of liens. If there is a homeowner’s association involved, include a contingency for reviewing and accepting its bylaws and covenants. A loan contingency will void the offer and return your deposit if your unable to get a mortgage. Make sure your agent understands your concerns and that the offer protects your interests.

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Chapter 6: Home Selection If the sellers make a counteroffer it should also be in writing. It should clearly state any difference in price or items to be included in the sale. You can then accept, decline or negotiate further. The most important point about your offer is that everything must be in writing. If there is any part of the process you don’t understand, don’t hesitate to ask your real estate agent for clarification. What is earnest money? When you make an offer, you’ll have to deposit money as a show of good faith. That way, the sellers will know that your offer is a serious one. The money you pledge becomes part of your down payment if your offer is accepted. If your offer is declined, you’ll get the earnest money back. However, if you change your mind about the purchase after your offer is accepted, the sellers legally may be entitled to keep your earnest money. Never make an offer unless you’re certain about making a purchase. What is the difference between an inspection and an appraisal? Before you agree to purchase a home, you should have it inspected and appraised. A home inspection provides information on the condition of the home. An appraisal tells you how much the home is worth. They may seem similar, but the following chart briefly outlines how they differ: Table 6-2: Inspection vs. Appraisal The Home Inspector
• • • Represents the homebuyer. Makes a hands-on examination of the entire home. Rates the home’s physical condition. • • •

The Home Appraiser
Represents the mortgage lender. Compares the sale prices of similar homes sold in the neighborhood. Rates the home’s market value.

The inspection helps protect your interests and the appraisal helps protect your lender. Remember, however, that inspections and appraisals are merely professional opinions, not guarantees. Why is a home inspection necessary? You can’t always depend on the seller or real estate agent to disclose every problem in a particular home, especially if they are not aware that problems exist. For any home you consider buying, be sure to look closely at items in the following chart:

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Chapter 6: Home Selection

Table 6-3: Homebuyer’s Do-It-Yourself Inspection Item
Structural defects Water damage Water pressure Water pipes Electrical wiring Electrical problems Energy efficiency

What to look for
• • • • • • • • • • • • • • • • • Are the floors level? In the basement, are there cracks or water marks? Does the roof sag? Is there a mildew odor in the basement? Is paint uneven on walls or ceilings? What happens when you flush toilets and turn on hotand cold-water faucets at the same time? Ask what kinds of pipes are installed and how old they are. PVC? Copper? Lead (a health hazard)? Is it sufficient for your appliances (220 Amps)? Do any lights flicker? Are there at least two outlets in each room? Ask to see last year’s heating and cooling bills. How thick is insulation in the walls, under the floor, and in the ceiling? Do you see any small piles of sawdust (termites)? Do you see droppings or traps for rodents, roaches, or ants? If the home was built before 1978, ask if there is any lead paint. Older homes may have insulation or flooring that contains asbestos. Has the home been tested?

Pest infestation Paint Asbestos Radon gas

When you carry a list like this one to visit a home, you can ask the seller or real estate broker about these items and make notes on what you learn. This information can help you narrow your list of potential purchases. However, keep in mind that even your best observations won’t substitute for an indepth examination by a professional home inspector. A home inspection performed by a qualified professional provides an objective assessment of the condition of a home. Depending on the size of the property, an inspector can take two or three hours to examine a home completely. The inspector will then prepare a written report that provides detailed information on the home’s structural components, fixtures, and appliances. This information can influence your decision to buy, as well as the price of your purchase offer. If an inspection discloses a major defect or shows that a home was constructed with roofing, siding, or plumbing materials that have been shown over time to deteriorate at a faster-thannormal rate, you might not want to purchase the house. If the examination finds electrical wiring that violates residential housing codes, you could

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Chapter 6: Home Selection decide to make your purchase dependent on having that wiring repaired at the seller’s expense. Or, you could lower the price of your offer by an amount sufficient to pay for the repairs. In addition, a home inspection can judge how well a home has been maintained and estimate when you might need to make repairs and replacements. For example, if you learn that the hot-water heater is in good condition, but not large enough to serve your family of five comfortably, you can consider replacing it. An inspection report that estimates a 10-year useful life for kitchen appliances would let you know that setting up a reserve fund to replace them is not a priority, if you plan on moving in five years. You can also use the inspection report as a guide for establishing periodic indoor and outdoor maintenance schedules. Life-long apartment dwellers might not realize how much exterior maintenance a detached house requires until they see an inspection report that lists gutters, downspouts, eaves, sloped grading, drainage ditches, septic systems, and driveways. If the property inspection doesn’t include termites and radon gas, consider getting separate inspections. Termites can cause hidden damage that will be costly to repair and radon, which is a naturally occurring gas known to cause certain cancers, can endanger the health of all members of your household. Termites can be exterminated and radon gas can be safely vented, but both procedures are expensive. If either is found, you may choose not to purchase the home, reduce your offered price, or delay the sale until the current homeowners correct the problem. Why is an appraisal necessary? Your lender will hire an appraiser to determine the proper sale price for your home. The lender will use this appraised value to determine how much money to offer you for a mortgage loan. The appraisal assures that the amount of your loan will not exceed the value of your home. The collateral that secures your mortgage loan is your home. A lender will seldom issue a mortgage loan that exceeds the appraised value of a home. If you fail to repay the loan, your lender wants to know that foreclosure and resale of your home will pay back the loan. Lenders don’t want to provide more money than they can hope to get back if a foreclosure becomes necessary.

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Chapter 6: Home Selection

Summary Knowing what you need and want in a home will make your home search easier, faster, and more effective. List your needs and wants and share this information with your real estate agent. • • • • • Bargains do exist, but look carefully at bargain homes before you buy. Remember that when you buy a home, you also buy an interest in the neighborhood where it’s located. Condos, co-ops, and community associations can impose legally binding rules that affect a homeowner’s behavior. When you decide to buy a home, make sure your offer contains contingency statements that protect you if the sale falls through. Have a professional inspector examine any home you intend to buy.

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Chapter 7: Who’s Involved In The Buying And Selling Of A Home?
When you’re ready to make the move to homeownership, you’ll work with several business professionals. It’s important to understand what they do because they’re interests can differ from your own. You can use this chapter to familiarize yourself with business professionals you’ll encounter in the home buying process. This section of the course will provide answers to the following questions: Who will you meet during the home buying process? What are the responsibilities of each individual? Who represents whom, and what difference does it make to you? What information does each require from you? What questions should you ask each of these individuals?

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Chapter 7: Who’s Involved In The Buying And Selling? Who will you meet during the home buying process? Once you’ve decided to become a homeowner, developed your budget and saving plans and evaluated your financial situation, you’ll find several different business professionals are part of the home buying experience. You’ll be the star in this performance, with a varied cast of supporting players. You may not meet each of them face-to-face, but they all play important roles. Table 7-1: Who’s Involved In Home Buying and Selling?
A financial professional who will determine approximately how much money you’ll be able to borrow for a mortgage loan. The business person or financial institution that provides the money you’ll use to purchase your new home. An individual or organization that brings together mortgage lenders and borrowers. An organization that handles the day-to-day management (i.e., collecting, billing, and record keeping) of your loan. Trained professionals who are licensed to negotiate the sale and purchase of real estate. The property owner who puts a home up for sale. An individual who provides a trained, professional opinion of the physical condition of a home and its components and systems. An individual who provides a trained, professional opinion of the market value of a home. A financial professional who provides protection against the risk of monetary loss. A company that examines public records to determine that rights to a property can legally be transferred from one owner to another.

Loan officer Mortgage lender Mortgage broker Loan servicer Real estate agents, brokers, and Realtors Home seller Home inspector Home appraiser Insurance agent Title company

Please note that in some of the different legal documents that are part of the purchasing process, you may be referred to as the Grantee, or the Mortgagor. The home seller may be referred to as the Grantor, and your mortgage lender may be called the Mortgagee. Although the names may be different, the roles remain the same in each case. In any great undertaking, it is not enough for a man to depend simply upon himself. —Native American proverb.

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Chapter 7: Who’s Involved In The Buying And Selling? What are the responsibilities of each individual? The loan officer will determine if you qualify for a mortgage loan. You’ll have to provide personal financial information, but the result will make your home search easier. The loan officer also can help you get pre-approved for the actual loan by gathering more financial information and examining your credit report. A pre-approval is a written commitment from a lender to grant a mortgage loan based on the value of the house you intend to buy. You’ll have to pay a fee for this service, but pre-approval encourages real estate agents and home sellers to see you as a serious shopper. If negative information shows up on your credit report, the loan officer can tell you what you must do to correct it. If your loan is not approved, the loan officer can tell you what you should do to repair your credit rating so you can qualify for a loan in the future. Although loan officers work closely with you to get a loan approved, remember that they work for lenders who pay them to determine that you can and will repay your loan. The mortgage lender provides money to individuals who want to buy real estate. Your lender could represent a commercial bank, savings and loan institution, credit union, or other type of financial institution. The lender’s primary goal is to earn money by charging interest on your loan. To do this, the lender will rely on the judgment of the loan officer that you can and will repay your loan. If you fail to repay the loan according to the terms of your loan agreement, your lender is entitled to take possession of your home and resell it. A mortgage broker represents several lenders and earns a fee by matching an available lender with a qualified borrower. To maintain good relationships with mortgage lenders, the broker must be assured borrowers are likely and able to repay any loans that are arranged. A loan servicer may be the lender who makes a loan, a financial professional hired by the lender to manage a loan, or an independent agency that buys loans from the original lenders. If your property taxes and hazard insurance are included in your monthly mortgage payment, your loan servicer will set up a special account to handle these payments for you. In addition, the servicer will notify you at year’s end of the total amount of interest you paid during that year. Federal law requires your loan servicer to answer any questions you may have about your loan. Once a mortgage loan is made, it may be sold to different loan servicers many times. Although the mailing address for your monthly payments may change, loan terms such as the due dates, length of the repayment period and the original amount of the loan cannot be changed. Federal law requires both the old and new loan servicers to notify you in writing before any change takes place. They are required tell you the name, address, and telephone number of the new loan servicer. The real estate agent is a business professional who will show you homes, assist you in negotiating a purchase price and guide you through the legal 58

Chapter 7: Who’s Involved In The Buying And Selling? requirements for completing your purchase. You’ll find two different types of agents: a buyer’s agent and a seller’s agent. The buyer’s agent works for you to locate the most appropriate home and negotiate the lowest possible price. The seller’s agent works for the seller to make a sale as quickly as possible for the highest possible price. Individual agents work for a real estate broker. Realtors are members of the National Association of Realtors and state or local realtors associations. These organizations set codes of ethics and performance standards and provide continuing education for professionals in the real estate industry. Agents, brokers and realtors can assist you in prequalifying for a mortgage loan. Similar to a lender, they will ask for detailed personal financial information to estimate how much you can borrow; how much you can afford in monthly mortgage payments; and if you have credit problems that must be solved before you apply for a loan. They can also recommend lenders who will likely approve your loan request. These real estate professionals often use a multiple listing service of homes for sale in your area to quickly identify homes that meet your needs and financial situation. The home seller owns a property such as a house, townhouse, condo, or other type of housing that is for sale. The seller’s goal is to get the best possible price as quickly as possible for the property. The seller may be an individual, a family, a financial institution, a homebuilder, or housing development company--or even a government agency. Usually, the seller will employ an agent to show the property to prospective homebuyers. Sometimes an individual owner acting alone will advertise a property as “For Sale By Owner, or FSBO. By handling the sales themselves, owners can avoid paying the 5 to 7 percent real estate agent’s commission. As a buyer, your major concern with a property being sold by an owner is to make sure the home is not overpriced. Hire a buyer’s agent who can perform a comparative analysis of recent similar home sales and make sure the FSBO sale procedures and contract terms comply with all applicable laws and regulations. “We know a subject ourselves or we know where we can find information on it.” —Johnson

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Chapter 7: Who’s Involved In The Buying And Selling? A home inspector will make a detailed physical inspection of any home you want to buy. Whenever you make an offer to purchase a home, your written offer should be contingent on the results of a complete home inspection by an independent expert. You pay for the service, so the inspector works directly for you. The inspector will examine the home’s construction including its major systems such as electrical, plumbing and heating and cooling. The inspector will also examine the property’s structural components such as roof, walls, floors, doors and windows. Based on this examination, the inspector will give you a comprehensive report on the condition of the house. When you hire an inspector, ask for this report to be in writing and arrange to be at the home during the inspection. By accompanying the inspector, you’ll be able to ask questions about construction, maintenance, and upkeep of the home. You also may get some useful guidance on any replacements or repairs the home may need. If the inspection uncovers problems that will require costly repairs, you may want to decrease the amount of your offer, have the seller correct the problem—or cancel it entirely. A home appraiser is an individual hired by your lender to determine the current market value of a home. The appraiser’s opinion may be based on several factors including: • Market value—A comparison of the home with similar homes in the area that have recently been sold. • Cost—A calculation of the value of the land, plus the cost of building the home and making other improvements, minus depreciation of the home and other improvements. • Income—An estimate of rental income that the property can produce. The appraiser will consider the home’s size and general condition, as well as the general condition of the surrounding neighborhood, before looking at home sales in the area. The appraiser’s report to the lender will summarize all this information and set a price for the property. In most cases, you will pay for the appraisal as part of your closing costs, so ask for a copy of the report for future comparison. Different insurance agents will be involved to protect different interests. Your lender will need protection against risks to the collateral, associated with your timely repayment of the loan. You will need protection against risks to your new home and its contents, your ability to repay the loan, and any claims against your ownership of the property. You, the homebuyer, will pay for all of this. Insurance for your lender will be included in your monthly mortgage payments. The price of title insurance will be included in your closing costs and you’ll purchase and pay for your own insurance.

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Chapter 7: Who’s Involved In The Buying And Selling? Individuals you’ll probably never meet work for the title company. The title company is responsible for providing the following services: • Provide a legal description of the property. • Identify the legal owner of the property. • Identify any encumbrances, or “clouds,” which are defects in past changes of ownership on the property. The legal description may require a survey to determine the precise location and boundaries of the property. The legal owner is the person, or group of persons, named on a deed that has been recorded by the local government. Examples of possible encumbrances include liens such as unpaid property taxes, mortgage loans, or court judgments the owner must pay before the property can be sold. Additionally, restrictions on the use of the property such as a historic or wetland designation affecting, how you can build or remodel on the property and easements such as roads or rights-of-way that guarantee other people will have access to the property are also investigated by the title company. Moreover, “clouds,” or defects are possible claims that people besides the seller such as a former spouse, heirs to an estate that has not yet been settled may be discovered during a title search. Once again, your written purchase offer should contain a contingency to cancel if the title cannot be transferred quickly. A good way to remember your contact with different business professionals is to keep a log of meetings and telephone calls. This sample address book shows how you can write brief notes about the date, place, and purpose of each contact. Table 7-2: Sample Home Buyer’s Address Book Page Date
Feb 1 Feb 8 Feb 10 Feb 10 Feb 11

I talked with…
Ms. H. Penny, Loan Officer Ms. H. Penny Jack Black, Real estate broker L.B. Blue, Real Estate Agent L.M. Sunshine, Real estate agent

Address and Phone
Free State Bank 202/555-8888 Same as above 123 Pine St. 202/555-9999 456 Ash Lane 202/555-7777 789 Mulberry St. 202/555-6666

What we discussed…
Mortgage loan pre-application My credit report data Search for 3bedroom home Search for 3bedroom home Search for 3-BR homes in Blueberry Hill/ Eden Village/ Wonderland

We’ll talk next on…
Feb 8 Feb 12 No more meetings No more meetings Feb 16

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Chapter 7: Who’s involved in the buying and selling?

Use the worksheet below for your own log of real estate contacts. Table7-3: Real Estate Contact Log Sheet Date I talked with… Address & phone number What we discussed… We’ll talk next on…

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Chapter 7: Who’s involved in the buying and selling?

Never buy through your ears but through your eyes. —Irish proverb

What information does each require from you? Your loan officer will require honest, provable information on the employment history, income, expenses, debts, and credit history of you and your copurchaser, if there will be. You’ll be asked to provide the following information: • Income—pay stubs, W-2 forms, and past tax returns. • Savings—bank account numbers and bank statements. • Debts—names of all your creditors and credit account numbers. • Housing expenses—canceled checks or money order receipts for rent or mortgage payments. • Down payment and closing costs—the amount and source of funds. If questionable or negative information shows up in any of these areas, you’ll be asked for additional information and explanations before your loan application can be approved. When you’ve found the house you want, your loan officer will ask for a copy of your final purchase offer. A mortgage lender working through your loan officer will ask you for the following information: • Capacity to repay the debt, based on your earnings and employment history, expenses, number of dependents and other obligations you have. • Credit history of how much you owe, how often you borrow, if you pay your bills on time, and if you’re living within your means. • Capital or the amount of cash you have for a down payment and settlement costs, as well as cash reserves to deal with repair or replacement expenses that may arise after you’re in the home. • Collateral to protect the lender’s investment if you can’t repay your loan. The home you buy must be worth enough to back up your loan. The lender will also want to know that the amount of your loan request does not exceed the value of the home you intend to buy. You or the lender will hire an appraiser—at your expense—to provide an objective, professional opinion on the proper price of the home. The cost of the appraiser’s service will be included in the items you’ll pay for at closing.

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Chapter 7: Who’s involved in the buying and selling? The interests of the mortgage broker are the same as your loan officer and lender. More than likely, these three will share all information you provide to any one of them. Your loan servicer will stay in touch with you from the moment you accept your loan until the day you make your final payment. You should provide your loan servicer with any information that concerns your ability to repay your debt such as a reduction in income or loss of a job as soon as possible. You must also inform your loan servicer when you’re ready to resell the property and pay off the balance due on the loan. Basically, all you’ll have to tell the home inspector and the home appraiser is the location of the home and when it will be available for inspection. From there, you will be getting more information than you’ll have to give. Important information for the insurance agent will include the price, location, size, age and construction materials of the home. With this data, the insurance agent will issue hazard insurance and home owners policies. Your insurer will also need to have a list of any possessions you intend to insure, along with their condition, cost and possible replacement cost. This information should be updated annually to keep your policy current. Depending on the size of your down payment, you may be required to pay for mortgage insurance. You’ll pay for it as part of your monthly mortgage payments, but it will cover your lender’s investment in case you fail to repay the loan. The title company, like the inspector and the appraiser, will need to know the address of the property you intend to purchase. With that information, the title company will complete a search of legal records and provide information to you. “Success is simple. Do what’s right, the right way, at the right time.” —Arnold Glasgow What questions should you ask of each of these individuals? Your loan officer, as your probable point of contact with the mortgage broker or mortgage lender, will be the most likely source of information about the type and terms of the loan you’ll need. Once you describe your household’s general financial situation, be ready to take notes and ask the loan officer the following questions: • Pros and cons of fixed rate, ARM, or balloon mortgage loans. • For ARMs and balloons, rate and payment caps and adjustment dates. • How interest rates are calculated for ARMs. 64

Chapter 7: Who’s involved in the buying and selling? • • • • • • • • • • • • • • Converting an ARM to a fixed-rate loan. Conventional or government-backed loans. Loan approval time. Interest rates and annual percentage rates (APRs). Locking in the interest rate. Loan processing fees and points. Closing costs. Down payment requirements. Private mortgage insurance (PMI). Escrow accounts for taxes and insurance. Loan terms (repayment periods). Prepayment penalties or balloon payments. Selling your loan on the secondary market. Selling your loan to another servicer.

If you’re aware of blemishes on your credit history, ask how to clear them up. If your real estate agent or homebuilder recommends a certain lender, you don’t have to accept that lender’s terms if you can qualify for a better deal elsewhere. Talk to more than one loan officer, take careful notes, compare fees, terms and conditions, then choose the loan that suits you best. You should ask your real estate agent the following questions: • • • • • • • • • • • • • Will you be working to get a low price for me, or a high price for the seller? Do you use a multiple listing service (MLS) to identify homes for sale? How many homes can you show me that meet my list of needs and wants? What can you tell me about the neighborhoods you show me? What construction projects (roads, schools, etc.) are planned for the area? Are more homes being built in the area? What can you tell me about government-supported homebuyer assistance programs? Can you pre-qualify me for a mortgage loan and figure out what a good price range for me would be? What commission do you charge? Who pays it—the seller or me? Will you work with me personally or turn me over to an assistant? Can you help me identify a mortgage lender or mortgage broker? Can you help me identify a good, professional home inspector? How will you help me during negotiations with a home seller?

Your questions for the homeseller should focus not only on price, but also on the condition and maintenance of the home. Except in FSBO sales, you’ll 65

Chapter 7: Who’s involved in the buying and selling? deal with the seller’s agent, not the homeowner, but you should expect prompt, complete answers to all your questions. If you’re interested in an older home, you’ll need to know how much you can reasonably expect to spend while living there. Ask to see maintenance records, past utility bills and past property tax bills. Your state laws may require sellers to disclose information on known defects that could affect the cost or living conditions of the home. If not, be sure to ask about potential hazards such as radon, asbestos and lead paint, as well as past problems with leaks, fires, etc. If you’re buying a newly built home, ask about the availability of a homeowner’s warranty and find out what it covers. Find out what guarantees the builder offers to repair construction defects that appear after you’ve moved in. If your home is being constructed as part of a new housing development, ask about everything that’s not completed, from the landscaping to street paving to the community pool and tennis courts, to find out when they will be completed—and what you can do if they aren’t finished on time. A home inspector can be one of the most valuable contacts you’ll ever meet when purchasing a home. So, what do you ask when interviewing possible candidates for the job of inspecting your future home? You can start with the following questions and add others: • • • • • • • • • • • Are you a member of a home inspection association? American Society of Home Inspectors, National Association of Home Inspectors, Society of Professional Real Estate Inspectors, or others? What kind of formal training have you had? Are you licensed, bonded, and insured to perform inspections in my state? When can you do the inspection? What home systems and components are included in your inspection? Can you test for radon and termites? If not, can you recommend someone? Can you test the sewage system (for septic tanks) and water quality? What about lead paint and asbestos (for older homes)? How long will the inspection take? Will you provide a written inspection report? When will I get it? How much will the inspection cost?

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Chapter 7: Who’s involved in the buying and selling?

Keep sight of the fact that the home inspector will not give you any guarantees. The inspection is basically a visual examination; it does not include destruction of any part of the home to uncover hidden problems. Therefore, even the most complete inspection may not bring some serious faults to light. Is a home inspection still worth the cost? Certainly. The information it provides can help you make reasonable decisions on several of the following important questions: • Should you buy the home? • How high—or low—should your purchase offer be? • What kind of maintenance expenses can you expect? If the home appraiser says that a home’s market value is much lower than the seller’s asking price, you’ll want to ask how the appraiser arrived at that decision because your lender won’t want to grant a mortgage loan for more money than the home is worth. • What is the appraisal based on? • What recent sales did the appraiser use as a price comparison? • Are there improvements to the home that the appraiser did not see? Of course, if the appraiser says the home is worth a little more than the seller is asking, your lender will probably be happy to issue you a loan. Your questions for the insurance agent will revolve around the type of coverage you need and what the insurance policy will cover. If you have a low down payment mortgage loan, each of your monthly payments will include a sum to cover mortgage insurance, but this protects your lender, not you. You will need your own insurance to protect you against the risk of losing your home and possessions. There are three types of homeowners insurance available for your home and possessions: • Cash value—This pays you the replacement value of your damaged property, minus an allowance for wear-and-tear (depreciation). • Replacement cost—This pays you the replacement value, with no deduction for depreciation, but it will be limited to a dollar amount set by the insurer. • Guaranteed replacement cost—This pays you the replacement value, with no allowance for depreciation, and no pre-set dollar limit. Unless you ask for replacement cost, your policy will be for cash value only. You should consider purchasing guaranteed replacement cost insurance if it’s available in your state, or basic replacement cost insurance. Even though these policies are more expensive than plain cash value insurance, they will protect you from depreciation, inflation, and increases in construction costs. If you have extremely valuable items in your home computer equipment, 67

Chapter 7: Who’s involved in the buying and selling? furs, jewelry, etc.), ask about getting additional coverage for those items. Depending on where your home is located, ask about flood insurance or earthquake insurance. Also ask about: • Discounts for insuring your home and car with the same company. • Discounts for safety devices (burglar and smoke alarms, and sprinkler systems or fire extinguishers). • Discounts for paying higher deductibles. Shop around, compare prices, compare coverage, and then choose carefully so you’ll pay the least amount for the most coverage. If the title is clear and has no defects, you shouldn’t have any questions for the title company. If there are problems with the title, you’ll need to know what should be done to clear the title and how long the process will take. If you’ll need considerable time and expense to clear the title, you may want to cancel your offer and look for another home. Summary Different business professionals are responsible for different aspects of a home sale. • • • Not everybody in the process will represent your financial interests. Be prepared to provide detailed personal information to your lender. Be prepared to ask detailed questions of your lender, the home seller, the home inspector, and many others.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks?
In the world of mortgage lending, there are many different types of loans and loan terms. How can you decide which loan best fits your financial circumstances? Knowing what goes into your loan application and what happens when you submit it will help you become a more knowledgeable participant in the lending process. You’ve determined what you need and want in a home and you have a “ballpark” figure on how much you can afford to spend. Now it’s time to ask a loan officer exactly what you’re worth as far as a home loan goes. Let’s peek inside the loan officer’s magic bag of tricks. This section of the course will provide answers to the following questions: What types of home mortgages are available? What type of loan is best for me? What goes into a loan application? What does the loan officer do with my application? Why did I get turned down and what do I do next? Can I really get a home loan online? What is predatory lending?

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks?

Money talks but credit has an echo. —Bob Thaves What types of home mortgages are available? The home-mortgage process can be complex and filled with pitfalls for uninformed consumers. The lender and the type of loan you choose will affect your upfront costs as well as your monthly payments. Before you choose a home, take time to explore the different types of financing so you can choose one that will best fits your needs. You can begin by looking at the differences between a fixed-rate and an adjustable-rate mortgage. A fixed-rate mortgage will have the same principal and interest payment amounts throughout the life of the loan. Most fixed-rate mortgages can be repaid in 30 years or less. An adjustable-rate mortgage, or ARM, will have interest rates and payments that change from time-to-time over the life of the loan. Depending on the type of ARM, your interest rate may increase gradually every couple of years until it reaches a preset ceiling. Or, your rate may stay level for a short time, then have a large final payment known as a “balloon payment” at the end. When you apply for an ARM, you’ll be told how, when and why the rates may change. An assumable loan is an existing mortgage loan that a buyer takes over or assume from a seller. Assumable loans may be fixed-rate or adjustable and are more common when high interest rates make homes difficult to sell. You may also find an assumable loan when a seller is having difficulty making mortgage payments and needs to be relieved of the mortgage debt. If you are thinking of assuming a loan, first do your homework. Read the mortgage contract to be sure you understand and can accept its existing terms. Contact the lender or loan servicer to find out the current loan balance and make certain that loan payments are current. Also find out if the lender will allow an assumption. The lender may be able to call the loan, which means he can demand immediate payment of the entire balance if you try to assume it without permission. There are advantages and disadvantages to fixed-rate mortgages and ARMs. Take a look at the chart on the following page to compare the two.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? Table 8-1: Fixed- and Adjustable-Rate Mortgages—Pros and Cons Rate
• Fixed •

Advantages
Your monthly principal and interest payment will never change, but your cost for taxes and insurance may increase. Your monthly principal and interest amount will be lower when the loan is new; however, your cost for taxes and insurance may increase. Interest rates sometime decrease. If the index that your ARM is based on goes down, so will the amount of your monthly mortgage payments. •

Disadvantages
Fixed-rate loans do not take into account any anticipated increases in your earning power. Be prepared to factor increases into your budget after two, three, or five years if interest rates increase. Take care to avoid loans that offer extremely low “introductory” rates. When the discount rate changes, you could be stuck with a much higher full rate – and monthly payments you can’t afford.

ARM

Another area to explore is the availability of government-sponsored loans vs. conventional, or privately insured loans. Many forms of government-sponsored loans are offered by federal or state government agencies. These loans help specific groups of people to become homebuyers by providing insurance to protect lenders against default. For example, FHA offers loans to meet the needs of low-and moderate-income buyers: VA loans help active duty and former members of the nation’s armed forces and RHS loans are geared towards serving rural populations. In general, these federal loan programs require low or no down payments from buyers. The programs offer advice and counseling services to guide buyers through the entire process of purchasing a home. They also provide counseling and intervention services to assist program participants who have difficulty repaying their mortgage loans. Conventional loans are available from traditional lenders such as banks, savings and loan institutions, or credit unions. These loans are available to any borrowers who meet the lending institution’s qualifications. Unlike the government, conventional lenders don’t limit the size of individual loans. However, they protect themselves from default by requiring borrowers to make larger down payments.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? What type of loan is best for me? Before you answer this question, you need to look at your personal financial situation, your long-term goals and the needs of your household. Where do you plan to be living in the next few years? How secure is your job? Where will the money come from for your down payment and closing costs? There are trade-offs when choosing between a government-backed loan and a conventional loan. The low- or no-down payment government-sponsored loans may be less expensive initially. This allows buyers who have steady incomes with little or no personal savings and other assets to become homeowners. Many of these buyers have been shut out of the conventional market because they couldn’t make large down payments or couldn’t obtain private mortgage insurance. However, over time, the cost of these loans may be higher because of insurance premiums and interest paid on higher loan amounts. On the other hand, a conventional loan that requires a 20 percent down payment and all closing costs paid upfront may cost less over time. Less interest will be paid on the lower loan amount and mortgage insurance may not be required. Plus, the government-backed programs don’t permit wealthier buyers to obtain “jumbo” mortgage loans. The following tables 8-2 and 8-3 offer some basic guidance to help you make this choice. Table 8-2: Fixed Rate or Adjustable—Which Is Better? A Fixed-Rate mortgage might be better if…
• • • You plan to live in your home for many years. You believe your income will remain level for many years. • •

An Adjustable-Rate mortgage might be better if…
You plan to stay in your home for only a few years. You have good reason to believe your income will rise steadily over the years. You intend to refinance at a lower fixed rate once you reach the ARM’s interest cap.

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Table 8-3: Government-Backed or Conventional—Which Is Better? A Government-Backed loan might be better if…
• • • You qualify for a governmentbacked loan (e.g., veteran status, low-income, etc.). You have a steady income, but not much money for a down payment. Affordable conventional loans aren’t available in your area. • • • •

A Conventional loan might be better if…
You can afford to make a large down payment. The home you want to buy costs several hundred thousand dollars. You don’t want to pay for private mortgage insurance. You don’t want to finance fees or closing costs.

Once committed to purchasing a home, your decision for a fixed-rate mortgage or an ARM, and your choice of a government-backed loan or a conventional loan, should be based on your personal needs and financial situation. A bank is a place that will lend you money if you can prove that you don’t need it. —Bob Hope

What goes into a loan application? Remember, you must meet certain financial standards to qualify for a mortgage. Most lenders will want to see that your monthly mortgage payment including taxes, insurance, and all other fees, does not exceed 28 percent of your gross or before-tax monthly income. Generally, lenders will want you to have your monthly mortgage payment and other debt payments under 36 percent of your gross monthly income. You may find a lender who will let you exceed this guideline if you have an excellent credit history or can make a large down payment. Your ability to qualify for a loan will depend on the “Four C’s” of credit: • Capacity to repay the debt. • Credit history of how much and how often you borrow, whether you pay bills on time, and whether you’re living within your means. • Capital, or the amount of cash you have for a down payment, settlement costs, and cash reserves. • Collateral to protect the lender’s investment.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? The language of mortgages may seem foreign at first, but you can learn to speak and understand the basic terms that your loan officer will use. Before you meet with a loan officer, refer to the Glossary for definitions of these terms:
• • • • • • • • • • • Adjustable-Rate Mortgage (ARM) Amortization Appraisal Cap Cash reserve Closing Closing Statement (Settlement) Equity FHA-Insured loans Floor Graduated-payment mortgage • • • • • • • • • • • Good faith estimate Interest Market Value Mortgage PITI Points Principal Private mortgage insurance Settlement Title VA Loan

You’ll be able to complete a loan application quickly when you arrive with the following documents: • W-2 forms for the past two years, or tax returns for the past two years if you’re self employed. • Earnings statements or pay stubs for the past two months. • Bank statements for the past three months for savings, checking, mutual funds, and other accounts. Self-employed homebuyers will need to provide additional documentation including signed copies of their business tax returns, W-2 forms and 1099 forms for the past two years. The lender may ask for statements to verify retirement accounts, or funds received from an annuity or alimony. Without this type of documentation, the self-employed buyer may need to make a larger down payment. You’ll be asked to sign an authorization form that allows the loan officer to get your credit report. If you’ve identified the home you want to buy, you’ll sign another form to authorize a property appraisal. If you’ve been divorced, you may need to show your divorce decree to prove that you’re now legally single. If you’re not a United States citizen, you may need to provide proof of residency such as a green card, or visa. The Equal Credit Opportunity Act ensures that you will not be subjected to discrimination based on your race, color, religion, national origin, sex, marital status, age, or reliance on public assistance for any part of your income. As part of the act’s compliance measures, your lender must ask for and report information on your race, sex, marital status, and age when you submit your loan application.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? What does the loan officer do with my application? Your loan officer will use the documents you provide to verify your employment history and income and the market value of the home you want to buy. The loan officer will examine your assets such as cash or stocks to make sure you have money for a down payment and closing costs. While your application is under review, you shouldn’t deposit or withdraw any large sums of money without telling the loan officer and providing proof of where the money comes from or where it goes. You should also avoid any large credit purchases that would adversely affect your debt-to-income ratios. You may be asked to provide additional documents. Respond as quickly as possible to avoid delays or denial. Your loan officer will also use your application as a basis for developing a list of costs and fees that you’ll pay over and above the sale price of the home. When you apply for a mortgage loan, RESPA, the Real Estate Settlement Procedures Act, requires your lender to provide the following documents when you apply for a mortgage loan: • Information booklet that describes various real estate settlement services. • Good Faith Estimate of closing costs the buyer can expect to pay. • Mortgage Servicing Disclosure Statement that tells if the lender will service the loan or transfer it to another loan servicer. The Good Faith Estimate will give you a detailed list and explanations for closing costs—amounts you’ll pay over and above the sale price of your new home. The number and dollar amount of these costs may vary according to the size and type of loan you have. Your lender will tell you which costs are exact and which are estimates. They may include the following: • Loan fees—Origination, appraisal, administrative, credit report, survey attorney fees and fees for discount points. • Title fees—Insurance, document preparation, escrow, and recording fees. • Escrow accounts—Prepaid mortgage insurance premiums, taxes, and interest. You can pay these costs at closing from your personal savings, gifts, contributions from the home seller or government grants. Some of these costs will be deductible from your income when you prepare your tax return.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? RESPA allows your lender up to three business days after you submit your application to mail these documents to you. However, if your loan is denied within three days, the lender is not obligated to provide this information. RESPA entitles you to obtain certain facts about your closing costs beforehand. It also protects you against unfair referral fees such as kickbacks, which plagued home buying transactions in the past. The U.S. Department of Housing and Urban Development (HUD) enforces RESPA provisions for loans on one-to-four-family residential properties. This includes purchase loans, refinancing loans, assumptions, home improvement loans and home equity lines of credit. You may also receive an Affiliated Business Arrangement Disclosure notice from the individual handling the closing. Federal law requires you to get this notice whenever the closing agent refers you to any service provider such as a lender, or attorney with whom the closing agent has any kind of business relationship. The notice must describe the business relationship and provide an estimate of the second service provider’s charges. Your loan officer will also explain the value of points. Basically, the more money you pay at settlement, the less money you pay in monthly repayments. A point is a percentage of your loan amount that when paid at closing can be used to lower your interest rate and reduce your monthly payments. Should you pay discount points? As with so many other home buying matters, the answer depends on your plans and your financial situation. In general, paying discount points is a good idea under the following circumstances: • • You have the money available at closing. You can quickly make up in monthly savings the extra amount you pay out.

For example, on a $100,000 loan with a 10 percent APR, and no discount points, you would pay about $880 each month in principal and interest. However, if you can pay one discount point an extra $1,000 at closing which lowers your APR by one-half of a percent, you would pay about $840 each month in principal and interest. In about two years, the monthly savings would allow you to recover the extra amount you paid out at closing. Before you say yes or no to paying discount points, figure out if you can afford the extra money required to pay points. Then, ask how much each point would reduce your monthly payments. Finally, find out how long it would take you to recover the cost of paying points. Keep in mind that your lender is not required to offer discount points. Also, if your lender offers points, the offer may be structured in a way that takes you a long time to

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? recover the extra money you pay out at closing. If the numbers are in your favor, consider paying the points. Your loan officer will also explain how prepaid expenses are paid. Costs that are collected at closing include the following: • Pro-rated interest. • Homeowner’s insurance. • Pro-rated property taxes. • Mortgage insurance. If your LTV is over 80 percent, you’ll also pay a portion of these expenses as part of your monthly mortgage payment. These partial payments will be collected in an escrow account that your lender will use to make periodic payments for these expenses. If you borrow less than 80 percent of the home’s value, you’ll most likely be able to pay your property taxes and homeowner’s insurance on your own. Why did I get turned down and what do I do next? Having your loan application rejected might be disappointing, but it’s not the end of the world. Before you think of giving up on your goal of homeownership, talk to your loan officer to find out why your request was turned down. Most applications are denied for the following reasons: • Bad credit rating—You can challenge any errors and possibly explain other negative information on your credit report. • Too much debt—You may have to pay off some of your debts, or look for a less expensive home before your loan can be approved. • Insufficient income—If your current rent is almost the same as your proposed mortgage payment, ask your loan officer to reconsider. Also, different lenders use different formulas to calculate how much they think you can afford. Another lender may be more accepting. • Insufficient down payment—You may be eligible for a governmentbacked low- or no-down payment loan. Or, you may be able to use cash gifts from relatives to pay all or part of your closing costs. • Low appraisal price—If your written purchase offer includes a contingency covering a low appraisal, you may be able to negotiate a lower selling price the lender will finance. If your loan application is denied, your loan officer must explain the denial in writing. The problems may be real, or you simply may need to provide additional information. Depending on the reason for rejection, you may be able to provide information or explanations that convince your loan officer to reconsider the loan denial. If that fails, your choice is to search for another lender who will accept your application. Or, you can use the loan

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? officer’s explanation as guidance to take the necessary steps that will improve your financial situation so you CAN get the loan approved. Can I really get a home loan online? Although most steps in the home buying experience are still “face-to-face,” there are many steps in the process that you can do from your home or office. Getting a home loan certainly is one of them. Before you fill out an online application, however, you’d be wise to first review various online resources.. Start by looking at online information resources that can help you work through the maze of financing a new home. Many public and non-profit organizations are waiting to hear from you. • • • The U.S. Department of Housing and Urban Affairs offers a homebuyer’s kit that contains valuable information about finding, financing, and keeping a home. Go to www.hud.gov/buyhome.html. Fannie Mae provides education and counseling to help consumers prepare for homeownership. Call the Fannie Mae HomePath Hotline at 1-800-7FANNIE (1-800-732-6643) for details. Cogent Financial Solutions counsels potential homebuyers, educates and prepares them for the purchasing process. Visit Cogent’s Website at www.cogentfinancialsolutions.org or call (866) 3COGENT for assistance.

Once you familiarize yourself with the process and terminology, you’ll be better prepared to look at the private lenders’ websites. Online lenders will tell you if they participate in government-backed lending programs. You can usually get interest rate quotes and loan pre-qualifications very quickly. However, you’ll still have to provide the same detailed financial information to a virtual lender that a brick-and-mortar lender would require. And you’ll have to use the same caution in rating online loan offerings that you would use when applying face to face. There are a few important financial safety points to remember before you apply online for a loan: • Limit the number of applications you make. It’s easy to fill out applications and submit them with the click of a mouse. But be aware that too many applications in a short period of time may hurt your credit rating. Unfortunately, you’ll seldom get a rate quote until you submit an application, but instead of seeing the rates go down, you may see them go up after you’ve submitted loan requests to several lenders. • Watch out for “bait and switch” offers. As it sometimes happens face-toface, you may be offered a great low interest rate online, only to see the low rate disappear just before you go to closing. While you may qualify for better terms elsewhere, the cyber-lender is betting that you 78

Chapter 8: What’s In A Loan Officer’s Bag Of Tricks? won’t have time to search, apply and get approved before your closing date. Make sure your online rate is locked in, the same as you would when dealing with a lender face-to-face. Make sure you know where your financial data goes. Online fraud gets more creative everyday and it’s not difficult for con artists to create attractive, professional-looking websites. Don’t be fooled by offers of unbelievably low rates from unknown lenders. Identity theft really happens and online lending often makes it easy. If you submit a loan application but don’t receive a response, what can you do? Before you transmit your social security number, bank and credit account numbers and other personal information online, be sure the “lender” is real.

What is predatory lending? Any lender who makes a loan at far less than the best terms you qualify for is engaged in predatory lending. Although predatory lending happens most often to homeowners seeking second mortgages or debt consolidation loans, it occurs with first-time mortgage applicants too. The easiest targets are borrowers with less than perfect credit ratings or borrowers who have very limited experience with using credit. They are frequently the elderly, female heads of households, members of racial or ethnic minority groups, or residents of certain neighborhoods. In fact, the U.S. Department of Housing and Urban Development has identified specific “hot spots” in several cities where predatory lending has become almost epidemic. How can you protect yourself from predatory lending? First, be aware that it exists. Take time to read the real estate section of your local newspaper to see what interest rates local lenders are charging. When you are considering a loan, ask if the loan terms being offered are the best terms for which you qualify. Above all, learn to recognize predatory lending practices. • • • • • • • Avoid lenders who call and offer to send a “loan officer” to your home. Examine fees and charges. A loan origination fee higher than 1 percent of the loan is a red flag! Ask your local Better Business Bureau if complaints have been filed against the lender. Don’t accept costly pre-paid credit insurance and disability insurance that you’ll have to finance. Avoid long-term prepayment penalties. If you can refinance at better terms, those prepayment penalties can cost you up to 5 percent of the original loan amount to do so. Demand to know exactly what your monthly payments will be. If you can’t afford the payments, don’t accept the loan. Remember you have three days after you sign the loan contract to change your mind.

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Chapter 8: What’s In A Loan Officer’s Bag Of Tricks?

Victims of predatory lending can find themselves locked into high-fee mortgage loans with steep variable interest rates, costly pre-paid credit insurance, huge balloon payments, and severe prepayment penalties. When a borrower fails to make timely payments, the predatory lender will “flip” the loan. This means the lender will refinance the loan with additional high fees or foreclose and seize the borrower’s home. In the end, the borrower gets a damaged credit rating, loses equity in the home or loses the home. Table 8-4: Warning Signs of Predatory Lending The Promise
“Bad credit? Use the equity in your home to get the cash you need.” Low payments, low fees and low interest rates Low-cost insurance to protect you in case you can’t pay •

The Reality
Even with an imperfect credit history, you can usually find better loan terms elsewhere if you look. The interest rates and loan processing fees are 3-4 times higher than honest lenders charge. The total cost for years of credit and disability insurance is added to the loan principal. • • •

The Result
Your credit rating suffers even more when you fall behind on payments. You lose your home to foreclosure. These higher rates and fees lead to higher monthly payments than you expect. You pay finance charges and interest on insurance policies, as well as on the loan.

If you’re still not sure that you need the loan or that it’s a good deal—or that you can even afford it—call Cogent Financial Solutions at 866-345-0245 and talk to a mortgage counselor before you possibly sign your way into foreclosure and credit dismay. Summary Consider government-sponsored programs for first-time homebuyers, lowerincome purchasers, and military veterans, as well conventional mortgage programs. • • • • • Examine and compare interest rates. Take time to understand how loan costs, insurance, and other fees will affect your repayment amount. Don’t be afraid to ask questions about anything you don’t understand. Be prepared to negotiate—with real estate agents, lenders, and sellers. Be aware of predatory lending practices and take care to avoid them.

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Chapter 9: Loan Closing
You’ve waited and worked so hard and the big day is here at last. You’ll sign lots of papers, hand over lots of money, and finally get the keys to your new home. Closing will complete the sale and make you a homeowner. Let’s look at what actually happens when you go to closing. This information in this chapter will help you identify the major steps and the business individuals involved in a closing, or settlement. You’ll also look at the various forms of homeownership and how they can affect the sale or inheritance of your home. This section of the course will provide answers to the following questions: Who will be involved in closing? What will happen? What are the different types of homeownership?

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Chapter 9: Loan Closing

“One right and honest definition of business is mutual helpfulness.” —William Feather Who will be involved in closing? Many people may be involved in a home sale, but the number of people who attend the closing will vary according to state law and local customs. You’ll probably see the seller, the seller’s real estate agent, your real estate agent and the person handling the closing such as an attorney, an escrow agent or a closing officer. The seller may have a real estate attorney present. If you are buying the property with a partner such as a spouse, other relative, or friend, then everyone whose name will be on the mortgage loan documents must be present or represented by an authorized agent. If you’re buying a home in a brand-new development, such as a new condominium apartment complex, you may be part of a group closing ceremony where the developer settles with several new homeowners at one time. Or, the closing may be private with just you and the closing agent. You may also decide to have a real estate attorney assist you at closing. If you’re wondering why you’d need your own attorney, consider that there may be legal questions that your real estate agent simply cannot answer. If you’re buying a FSBO, you’ll want to be sure that all legal requirements have been satisfied. If you’re buying a home in a brand-new housing development, you may have dealt with only the developer’s agents throughout the entire purchase. Plus your real estate agent will not receive a commission until the closing is completed, so your real estate agent’s interests may not entirely agree with your own on settlement day. The attorney’s fees you pay at closing may well be offset by avoiding more expensive problems later on. Your closing may be so uncomplicated that you won’t need an attorney, but you should weigh the value of having one. The following table provides a brief look at who is involved and what each person does at closing.

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Chapter 9: Loan Closing Table 9-1: Who’s Involved in Closing? The people
Buyer

What they do
• • • Deliver down payment. Pay transaction fees. Give up property ownership. Pay transaction fees. Instruct closing agent on closing requirements. Fund the mortgage loan. Explain closing documents to buyer or seller. Advise or represent buyer or seller. Serve as the closing agent. Provide proof and insurance that title is clear and transferable. Serve as the closing agent. Accept funds from the buyer and seller to be set aside for taxes, assessments, or other fees. Serve as the closing agent. Ensure that needed documents are prepared, signed, and recorded. Collect and pay out fees, payments, and commissions.

What they get
• • • • • • • • • Deed to the property New or assumed mortgage loan Keys to the home Existing mortgage is paid off or assumed Profits from the sale Loan processing fees Loan interest payments Collateral (the home) Commission (percentage of sale price) Legal fee

Seller • • Lender Real estate agent(s) Real estate attorney(s) • • • • • Title attorney/ Title company • • Escrow agent • • Closing agent •

Legal fee

Fee

Fee

What will happen? The closing, or settlement, is a legal process that completes the transfer of property ownership from seller to buyer. It secures the mortgage lender’s interest in the property as collateral for the loan, and ensures that the change of ownership is properly entered into public records.

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Chapter 9: Loan Closing Once the process of closing on your home purchase begins, be sure to take the time to read each document and ask questions about anything you don’t understand. You’ll need to make sure of the following important points: • The interest rate and other loan terms are what were promised to you when your loan application was approved. • The names and addresses on all documents are correct. • No unexplained fees have been added to your closing costs. • The sale price, your earnest money deposit and all down payment amounts are correct on all documents. • Fees already paid such as the credit report and appraisal are listed as “paid outside of closing” on closing documents so you don’t pay twice for the same services. • The numbers add up correctly. More than likely, the documents you get will be correct, but, in case they are not, it’s up to you to point out errors, so go ahead and request copies of all documents a day or so before the closing takes place. You may decide to have a real estate attorney assist you. You will receive copies of each document for your personal records. Keep these documents together in a safe place for future reference. You’ll need to know the amounts of taxes and mortgage interest you’ve paid when you file your annual income tax return. “A knowledge of details has often caught an error before it became a catastrophe.” —Aimee Buchanon The basic process—You’ll make your down payment, accept responsibility for the mortgage loan and receive title to the property. You and the seller will pay all fees and charges associated with the transaction, the real estate agents/brokers and attorneys will receive their commissions or fees. The seller also will receive any profits due from the sale. The seller’s mortgage loan will be paid off, unless you are taking over an assumable loan. A new deed that names you as the property owner will be filed with the proper local and state government agencies. Finally, you’ll get the keys to your new home.

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Chapter 9: Loan Closing Your payment to the closing agent should be made with a cashier’s check; a personal check is not acceptable. If you have your bank make the certified check payable to you OR the closing agent, either of you can sign and deposit it. That way, if something goes wrong and the settlement isn’t completed, you can deposit the check into your account. Please don’t have the check made out to you AND the agent because both of you would have to sign the check before it could be deposited. Setting the date—The closing usually takes place 30 to 60 days after the seller accepts your offer. Your real estate agent can help negotiate a convenient closing date that allows time for the seller to perform any cleaning, maintenance or repairs you included as part of your offer. If the home is newly built, it will allow you to make a final inspection and identify problems the builder must correct before you take possession. You’ll have time to order your homeowner’s insurance policy and send the policy to your settlement agent’s office before closing. Take care to check with your lender before accepting a closing date. If your loan approval has a low interest rate locked in for a specific period of time and mortgage interest rates are rising, you’ll want to close before the rate expires. If interest rates are falling, you may feel less pressure to hurry the closing along. This 30- to 60-day period will also provide time for you and the seller to make moving arrangements. You can give your landlord the customary 30day notice to vacate and get back any security deposit you’ve made on rental housing. The seller will also be able to arrange for new housing. In some areas, it may be customary for the seller to keep possession of the property for two or three days after closing, but it’s not required. As the closing date approaches, if the seller appears unable or unwilling to move out, you may need the advice of a real estate attorney. Your seller may have problems with closing on another home to replace the one you’ve just bought. A real estate attorney can explain your options, including: • Delay the closing. • Delay taking possession of the property. • Force the seller to vacate the property. If you choose to delay the closing, be sure that your mortgage rate lock-in won’t expire and that you’ll have no problem remaining in your current housing. If you choose to settle, then delay taking possession of the property, you’ll need to negotiate with the seller on exactly how long the delay will last. You’ll also need to decide what the financial consequences of this delay will be. Will the seller pay you rent? If so, how much? You may decide to hold back some money in an escrow account at closing so the seller will not get all the profits from the sale until the property is vacant. You may also want to negotiate an additional inspection of the property before you take possession. If you choose against delay and force the seller to vacate, be prepared to deal with an unhappy seller at closing.

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Chapter 9: Loan Closing Try not to schedule your closing for a Monday. Your loan interest charges usually begin on the business day before closing. If your loan documents are printed on a Friday in anticipation of a Monday settlement, you’ll pay interest for three days—the weekend—instead of one. Some people will choose a closing date near the end of the month because the prorated interest they pay at settlement is less at the end of the month than the beginning. However, other people will choose a date near the beginning or middle of the month because the closing agents will be less busy and less likely to make mistakes. Your real estate agent or your loan officer should be able to tell you when and where the formal closing will take place. It could be in the lender’s office, an attorney’s office, a closing agent’s office or elsewhere. Closing Documents—You’ll come away with a thick folder of documents, many with strange-sounding names. Each document serves a specific purpose and is required by the lender, the federal government or your local government. The following documents should be included: HUD-1 Statement—This statement provides the buyer and the seller with summaries and itemized lists of all costs involved in the sale. Ask for this the day before so you’ll know, to the penny, the amount of money you’re required to pay by certified check at closing--see line 303 on Table 9-2. In addition, by getting the HUD-1 Statement a day in advance, you’ll be able to compare the itemized costs to the costs provided in your Good Faith Estimate and ask for clarification on anything you don’t understand. The HUD-1 Statement takes several things into account: • Terms you negotiated and described in your purchase contract. • Requirements set forth by your lender. • Applicable state and local laws. Take a look at the sample HUD-1 Statement to see how it separates costs according to their purpose and according to who has responsibility for payment. “Mid pleasures and palaces though we may roam, Be it ever so humble, there’s no place like home. —John Howard Payne

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Chapter 9: Loan Closing Table 9-2: HUD-1 Settlement Statement (page 1)
A.

Settlement Statement

U.S. Department of Housing and Urban Development
OMB No. 2502-0265 (Exp. 12-31-86)

B. Type of Loan 1. ___FHA 4. ___VA 2. ___FmHA 3. ___Conv. Unins. 5. ___Conv. Ins. 6. File Number 7. Loan Number 8. Mortgage Insurance Case Number

C. Note: This form is furnished to give you a statement of actual settlement costs. Amounts paid to and by the settlement agent are shown. Items marked “(p.o.c.)” were paid outside the closing; they are shown here for informational purposes and are not included in the totals. D. Name and Address of Borrower E. Name and Address of Seller F. Name and Address of Lender

G. Property Location

H. Settlement Agent Place of Settlement I. Settlement Date

J. Summary of Borrower’s Transaction 100. Gross Amount Due From Borrower 101. Contract sales price 102. Personal property 103. Settlement changes to borrower (line 1400) 104. 105. Adjustments for items paid by seller in advance 106. City/town taxes 107. County taxes 108. Assessments 109. 110. 111. 112. 120. Gross Amount Due From Borrower 200. Amounts Paid By Or In Behalf Of Borrower 201. Deposits or earnest money 202. Principal amount of new loan(s) 203. Existing loan(s) taken subject to 204. 205. 206. 209. Adjustments for items unpaid by seller 210. City/town taxes 211. County taxes 212. Assessments 213. 214. 215. 220. Total Paid By/For Borrower 300. Cash At Settlement From/To Borrower 301. Gross amount due from borrower (line 120) 302. Less amounts paid by/for borrower (line 220) 303. Cash __From __To Borrower to to to to to to

K. Summary of Seller’s Transaction 400. Gross Amount Due To Seller 401. Contract sales price 402. Personal property 403. 404. 405. Adjustments for items paid by seller in advance 406. City/town taxes 407. County taxes 408. Assessments 409. 410. 411. 412. 420. Gross Amount Due To Seller 500. Reduction In Amount Due To Seller 501. Excess deposit (see instructions) 502. Settlement charges to seller (line 1400) 503. Existing loan(s) taken subject to 504. Payoff of first mortgage loan 505. Payoff of second mortgage loan 506. 509. Adjustments for items unpaid by seller 510. City/town taxes 511. County taxes 512. Assessments 513. 514. 515. 420. Gross Amount Due To Seller 600. Cash At Settlement To/From Seller 601. Gross amount due to seller (line 520) to to to to to to

(

)

602. Less reductions in amt. due seller (line 520) 603. Cash __From __To Seller

(

)

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Chapter 9: Loan Closing Table 9-2: HUD-1 Settlement Statement (page 2)
L. Settlement Charges 700. Total Sales Broker’s Commission based on price: Division of Commission (line 700) as follows: 701. $ 702. $ 703. Commission paid at settlement 704. 800. Items Payable In Connection With Loan 801. Loan Origination Fee 802. Loan Discount Fee 803. Appraisal Fee -04. Credit Report 805. Lender’s Inspection Fee 806. Mortgage Insurance Application Fee to 807. Assumption Fee808. 808. 811. 900. Items Required By Lender To Be Paid In Advance 901. Interest from to @$ /day months to years to years to % % to to to to @ %= Paid From Borrower’s Funds at Settlement Paid From Seller’s Funds at Settlement

902. Mortgage Insurance Premium for 903. Hazard Insurance Premium for 904. 905. 1000. Reserves Deposited With Lender 1001. Hazard Insurance 1002. Mortgage Insurance 1003. City Property taxes 1004 County property taxes 1005. Annual assessments 1006. 1007. 1008. 1100. Title Charges 1101. Settlement or closing fee. 1102. Abstract or title search 1103. Title examination 1104. Title insurance binder 1105. Document preparation 1106. Notary fees 1107. Attorney’s fees 1108 Title insurance 1109. Lender’s coverage 1110. Owner’s coverage 1111. 1112. 1200. Government Recording and Transfer Charges 1201. Recording fees: Deed $ 1202..City/county tax/stamps: Deed $ 1203. State tax/stamps: Deed $ 1204. 1205. 1300. Additional Settlement Charges 1301. Survey to ; Mortgage $ $ Mortgage $ $ Mortgage to to to to to to to to $ $ months @% months @% months @% months @% months @% months @% months @% months @%

per month per month per month per month per month per month per month per month

; Releases $

1302. Pest inspection to 1303. 1400. Total Settlement Charges (enter on lines 103, Section J and 502, Section K)

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Chapter 9: Loan Closing
The person who prepares your closing documents may be an attorney, realtor, escrow agent, settlement attorney or other individual.

Check to be sure the seller’s name and address are correct before you sign the document.

Table 9-2: HUD-1 Settlement Statement (page 3)
U.S. Department of Housing and Urban Development

This tells if your loan is backed by the federal government or not governmentbacked (conventional).

A. Settlement Statement
B. Type of Loan 1. ___FHA 4. ___VA 2. ___FmHA 3. ___Conv. Unins. 5. ___Conv. Ins.

OMB No. 2502-0265 (Exp. 12-31-86)

6. File Number

7. Loan Number

8. Mortgage Insurance Case Number

Check to be sure your name and address are correct on this and all other documents.

C. Note: This form is furnished to give you a statement of actual settlement costs. Amounts paid to and by the settlement agent are shown. Items marked “(p.o.c.)” were paid outside the closing; they are shown here for informational purposes and are not included in the totals. D. Name and Address of Borrower E. Name and Address of Seller F. Name and Address of Lender

Check to be sure the lender’s name and address are correct on all documents you see at closing.

G. Property Location

H. Settlement Agent Place of Settlement I. Settlement Date

Make sure each closing document shows the accurate address of the property for which you’re signing a mortgage loan.

Double check the date and time so you’ll be sure to show up when you should for the closing.

J. Summary of Borrower’s Transaction 100. Gross Amount Due From Borrower 101. Contract sales price 102. Personal property 103. Settlement changes to borrower (line 1400) 104. 105. Adjustments for items paid by seller in advance 106. City/town taxes to to to

K. Summary of Seller’s Transaction 400. Gross Amount Due To Seller 401. Contract sales price 402. Personal property 403. 404. 405. Adjustments for items paid by seller in advance 406. City/town taxes 407. County taxes 408. Assessments 409. 410. 411. 412. 420. Gross Amount Due To Seller to to to

Double check the address with your lender or realtor so you’ll know where to appear for the closing.

Items listed on the left side of the HUD-1 concern the buyer. Items listed on the right concern the seller.

107. County taxes 108. Assessments 109. 110. 111. 112.

120. Gross Amount Due From Borrower

This is the total amount you’ll pay for your new home.

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Chapter 9: Loan Closing

Table 9-2: HUD-1 Settlement Statement (page 4)
Lines 200-209 show the amount(s) of your down payment—the difference between the home’s sale price and the amount of your mortgage loan. Here you’ll see funds from your personal savings, gifts or grants to you, or funds you have borrowed.

200. Amounts Paid By Or In Behalf Of Borrower 201. Deposits or earnest money 202. Principal amount of new loan(s) 203. Existing loan(s) taken subject to 204. 205. 206. 207. 208. 209.

500. Reduction In Amount Due To Seller 501. Excess deposit (see instructions) 502. Settlement charges to seller (line 1400) 503. Existing loan(s) taken subject to 504. Payoff of first mortgage loan 505. Payoff of second mortgage loan 506. 507. 508. 509.

This is a breakdown of local government fees that must be paid before property ownership can change hands. These charges will be prorated up to the day of settlement.

Adjustments for items unpaid by seller 210. City/town taxes 211. County taxes 212. Assessments 213. 214. 215. 216. 217. 218. 219. to to to

Adjustments for items unpaid by seller 510. City/town taxes 511. County taxes 512. Assessments 513. 514. 515. 516. 517. 518. 519. 420. Gross Amount Due To Seller 600. Cash At Settlement To/From Seller 601. Gross amount due to seller (line 520) to to to

If these fees have been paid in advance, the seller may be due a refund. If they have not yet been paid, the seller may have to pay prorated amounts at closing.

220. Total Paid By/For Borrower 300. Cash At Settlement From/To Borrower 301. Gross amount due from borrower (line 120) 302. Less amounts paid by/for borrower (line 220) 303. Cash __From __To Borrower

(

)

602. Less reductions in amt. due seller (line 520) 603. Cash __From __To Seller

(

)

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The seller usually pays this amount, a percentage of the home’s sales price, to the real estate agent/broker.

Table 9-2: HUD-1 Settlement Statement (page 5)
L. Settlement Charges

Points 700. Total Sales Broker’s Commission based on price: are
Division of Commission (line 700) as follows: 701. $ 702. $ 703. Commission paid at settlement 704. to to

Known as “points,” the loan origination fee covers your lender’s administrative costs. generally a percentage of the loan amount and usually paid by the buyer. @ %=
Paid From Borrower’s Funds at Settlement Paid From Seller’s Funds at Settlement

Items 800-811 are fees lenders charge to evaluate, approve, and fund the mortgage loan.

800. Items Payable In Connection With Loan 801. Loan Origination Fee 802. Loan Discount Fee 803. Appraisal Fee 804. Credit Report 805. Lender’s Inspection Fee 806. Mortgage Insurance Application Fee to 807. Assumption Fee808. 808. % % to to

A “discount point” is a one-time charge (one percent of the loan amount) that lowers the interest rate a lender offers. In other words, discount points you pay upfront will lower the total interest amount you’ll pay over the length of the loan.

A fee charged when you agree to take over responsibility for payment, or “assume,” the seller’s existing mortgage loan.

Compare items 803-806 with amounts listed on your Good Faith Estimate. Ask you lender to explain any differences you don’t understand.

811. 900. Items Required By Lender To Be Paid In Advance 901. Interest from to @$

Amounts that your lender requires in advance for accrued interest or insurance /day premiums will be listed here on lines 901-905.
months to years to years to

902. Mortgage Insurance Premium for 903. Hazard Insurance Premium for 904. 905. 1000. Reserves Deposited With Lender 1001. Hazard Insurance 1002. Mortgage Insurance 1003. City Property taxes 1004 County property taxes 1005. Annual assessments 1006. 1007. 1008. months @% months @% months @% months @% months @% months @% months @% months @%

Lines 1001-1008 show amounts deposited in escrow accounts to pay insurance per property taxes. Escrow amounts are limited by law and your loan premiums and month per month servicer must tell you periodically how much money is held in escrow.
per month per month per month per month per month per month

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Table 9-2: HUD-1 Settlement Statement (page 6)
The fees listed on lines 1101-1113 cover services performed by a variety of real estate experts. You may see fees for the listed items or other costs.

1100. Title Charges 1101. Settlement or closing fee. 1102. Abstract or title search 1103. Title examination 1104. Title insurance binder 1105. Document preparation 1106. Notary fees 1107. Attorney’s fees 1108 Title insurance to to to to to to to to $ $

Depending on your state laws, you may not be charged for all these items. Prior to closing, you can negotiate with the seller on who will pay fees listed on lines 1201-1205.

1109. Lender’s coverage 1110. Owner’s coverage 1111. 1112. 1113.

1200. Government Recording and Transfer Charges 1201. Recording fees: Deed $ 1202..City/county tax/stamps: Deed $ 1203. State tax/stamps: Deed $ 1204. ; Mortgage $ $ Mortgage $ $ Mortgage ; Releases $

If your lender requires a land survey, or inspections for pests, lead-based paint, or other potential hazards, you can negotiate with the seller to determine who will pay the fees.

1205. 1300. Additional Settlement Charges 1301. Survey to

1302. Pest inspection to 1303. 1304. 1305. 1400. Total Settlement Charges (enter on lines 103, Section J and 502, Section K)

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Chapter 9: Loan Closing In addition to the HUD-1 Statement, you’ll sign and receive many other documents. The following are some of the most common documents you’ll see: • Deed—This document transfers or conveys ownership of the property. • Initial Escrow Statement—A portion of each monthly payment will be set aside into an escrow account to pay your local real estate taxes and your insurance premiums. • Truth-In-Lending Statement—Federal law requires your lender to provide this statement when you submit a loan application. If there are significant changes between the rates, terms and amounts quoted when you submitted the application and the actual mortgage note you receive at closing, your lender must provide a revised Truth-in-Lending Statement to explain the differences. • Mortgage Note—This is a legal contract you sign to accept responsibility for repaying the amount of money provided by the lender, plus interest and fees. The note describes when and in what amounts you’ll make repayments. It also describes penalties for failure to pay and steps your lender can take to recover the investment. You must make payments— even if you do not receive billing statements or a coupon book. Your payments are due on the first of each month; payments arriving after the 16th are considered late. If there is no early penalty in your note, you can pre-pay your loan by writing a separate check for an additional amount over your monthly payment. Specify on the memo line of the check FOR PRINCIPAL ONLY, and mail this separate check to your loan servicer. • Mortgage (Deed of Trust)—This document establishes an “encumbrance” on your title by giving your lender part ownership of the property until the mortgage loan has been repaid. The mortgage describes in exact detail the amount of money you borrow and the terms by which you agree to repay it. The document lists payment amounts and due dates. It also describes what the lender may do if you fail to make the agreedupon payments. This includes acceleration of the loan, foreclosure and resale of the home, and getting a legal judgment against you. • Deed of Trust Rider—This is an addition or an amendment to a contract. An ARM may have riders attached to establish terms and conditions outside of those normally contained in a mortgage transaction. • Title insurance policies—Your closing costs will include payment for the policy that protects the lender’s investment against claims against your ownership of the property. This will repay the lender for the amount of your mortgage loan if, for any reason, your ownership is legally declared void. You should seriously consider a title insurance policy to protect your personal investment also. If your title is voided, an owner’s title insurance policy will repay the amounts of your down payment and other costs.

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Chapter 9: Loan Closing • Hazard insurance policy—You’ll also pay for this insurance that protects the lender’s investment in case your home is damaged or destroyed by fire or storm. To protect yourself, make sure the policy covers the home’s contents and provides liability coverage. Flood insurance policy—Your lender may require this insurance if the home is located in an area subject to flooding when a nearby stream or river is at flood stage. Termite inspection (wood infestation) certificate—This inspection and certification is required for many federally backed mortgage loans. Your state or local government may also require it. Survey certificate/plat—These documents show the precise location, size, and boundaries of the property as well as any existing easements (someone else’s legal right to use the property), or encroachments (someone else’s illegal use of the property). Certificate of Occupancy—This is a statement by the local government that your home meets local building code specifications. For new homes, this certificate is required before you may move in. For existing dwellings, the certificate may be required to ensure the building meets local building codes. Payment for the certificate is open to negotiation between buyer and seller

• • •

You can ask the closing agent for copies of all documents a day or so before the scheduled closing. This way, you can read everything and note items you don’t understand. You’ll have time to ask your realtor, the closing agent, or an attorney for complete explanations. No matter how many documents are handed to you at closing, read everything carefully and do not sign anything you don’t understand. Some documents may set up residency requirements, carry criminal penalties or allow the lender to call the loan if you make false statements. Look carefully to make sure that dollar amounts are correct and add up properly. Ask questions until the entire process is clear to you. Don’t allow anyone to rush you or insist that you sign now and read later. As the buyer, you’re in the driver’s seat at closing because there is no deal unless you’re satisfied enough to sign. What are the different types of homeownership? There are many ways to own, or hold title to a home. The way you hold title will matter if you die, get sued, decide to resell or get married or divorced. Your choice is voluntary and there is no single “best” title to choose. Depending on your personal circumstances and the desires of any co-owners, you’ll need to decide whose names will be on the property title and which form of ownership you’ll hold. Your lender, realtor or closing agent will ask before the settlement date which form of ownership you’ve selected so the closing documents can be prepared correctly.

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Chapter 9: Loan Closing Take a look at the following table to see what some of the most common forms of property ownership mean: Table 9-3: Titling a Home Title
Individual Joint tenancy • • • • • • • •

Ownership
100% to the person holding the title For married couples Both spouses own the entire property. For married couples Both spouses own the entire property. No partition of the property is allowed. For married couples or unmarried partners Each tenant in common will own a portion of the property (e.g., 20%, 40%, or 60%), but have use of the entire property. Owners can create a partnership to give children (or others) limited ownership rights.

Tenancy by the entirety

Tenancy in common

Tenancy in partnership

There are different consequences to choosing one form of ownership over another. Survivorship—what happens to the jointly owned property when one owner dies—and legal liability may be different. The type of title you hold should be carefully considered when you purchase insurance and write your will. And, depending on the type of title, your behavior could have positive or negative effects on anyone else who holds the title with you.

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Chapter 9: Loan Closing Chart 9-4: Title Pros and Cons Title
• Individual •

Advantages
The owner can will the property to whomever she or chooses. The owner can sell the property whenever and to whomever she or he chooses. If one spouse dies, the other immediately inherits the dead spouse’s share of the property If one spouse dies, the other immediately inherits the dead spouse’s share of the property A judgment against one spouse would not affect the other’s owner-ship. To collect, a creditor must wait until the marriage ends, the spouse accepts the claim, or the home is sold. Tenants in common may sell their share of the property whenever and to whomever they choose. This will reduce estate or gift taxes for remaining partners when one partner dies. •

Disadvantages
A judgment against the individual owner could result in a lien on the property. A judgment against one spouse could result in a lien against the title of both. Both spouses must agree to sell the property.

Joint tenancy

• •

• •

• •

Tenancy by the entirety

The property cannot be divided between owners. In a change of ownership (e.g., sale), the property must be transferred as a whole parcel.

Tenancy in common

A judgment against any owner would result in a lien against only that owner’s portion of the property. There may be too many owners with opposing views on how the property should be used.

Tenancy in • partnership

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Chapter 9: Loan Closing Summary What occurs at closing—settlement—will affect you and your household for a long time. Take your time, ask questions and make sure everything that happens is clear to you. • • • There are many different real estate professionals involved in closing. Not all of them will attend the settlement. Closing is the process of transferring property ownership, funding your mortgage loan, paying professional fees, and recording the change of ownership. There are many different ways to hold title to your home, with advantages and disadvantages to each.

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Chapter 10: Responsibilities Of A New Homeowner
Now that you own it, upkeep and maintenance of your home are your responsibility. What does it take to keep your home comfortable, tidy and safe, while also protecting your investment? This chapter will help you to understand some of the things you must do to keep your home in good working order. It will also show you how to create a periodic maintenance schedule. This section of the course will answer the following questions: What maintenance tasks should be done periodically? What major systems need to be monitored? How long should the fixtures, major components, and appliances last? What basic tools will I need? Why do I need a reserve fund? Where can I go for more information?

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Chapter 10: Responsibilities Of A New Homeowner What maintenance tasks should be done periodically? As a homeowner, it’s up to you to do all you can to maintain your investment. Periodic maintenance will go a long way toward ensuring that your home maintains or increases in value. By conscientiously following a maintenance schedule, you’ll stay on course for holding your repair and replacement costs to a minimum. Some activities such like mowing the lawn and picking up litter should be done as frequently as needed in order to keep your property attractive. It’s reasonable to perform other tasks, such as replacing furnace/air conditioning filters and checking ground-fault interrupter circuit breakers each month. However, there are many important tasks that call for advance planning to make sure that you’ll have the resources you need to get them done. Many jobs can become household projects and some will require outside help. By developing a list, you’ll see the difference. You’ll also give yourself lead time for setting aside the money you’ll need to get them done. Your goal should be to do the maintenance that will keep your home safe, secure, comfortable and attractive. You’ll need to look out for weather and water damage, fire, electrical, safety hazards and problems in major systems such as plumbing, heating and cooling. A practical approach is to list tasks on a seasonal basis and divide them into indoors vs. outdoor work. Begin your maintenance schedule by reviewing your home inspection report. The suggested Periodic Maintenance Schedules that follow (Tables 10-1a through 10-1d) are examples of what we’re talking about. The house-roof fights with the rain, but he who is sheltered ignores it. —Wolof proverb

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Chapter 10: Responsibilities Of A New Homeowner Table 10-1a: Periodic Home Maintenance Schedule (Spring) Spring Indoor Tasks
Clean, patch, and repair: • windows and screens. • window and doorsills. • walls, ceilings, and wood trim. • wood-burning stoves/ fireplaces. Sweep, mop, vacuum, and dust:: • floors, walls, closets. • attic, basement, and garage. Check and clean A/C system, filters, and vents. Clean blinds, curtains, and drapes. Clean kitchen appliances inside and out; clean dust off refrigerator coils.

Spring Outdoor Tasks
Check and repair snow/ice damage: • roof, gutters, downspouts. • window and door frames. • walls, and siding. • brickwork, walks, and driveways. Check roof and foundation for damage and leaks; make repairs. Check yard for winter damage: • fences, compost, mulch.. • remove dead leaves. • trim trees and shrubs. Plant flower and vegetable gardens. Check and repair outdoor leaks: • faucets and hoses. • pools.

Table 10-1b: Periodic Home Maintenance Schedule (Summer) Summer Indoor Tasks
Replace batteries in smoke and carbon monoxide detectors.

Summer Outdoor Tasks
Major repairs or renovations of structural components. Check and exterminate: • ants, wasps, and hornets. • termites. • rodents and other pests. Repair and paint or stain: • fences and storage sheds. • porches and decks. Check and repair lawn and garden tools and equipment. Clean, repair, and set out lawn furniture and grills.

Major repairs or renovations, such as: • room additions. • rehabs.

Major painting and renovation: • walls and wood trim • wallpaper and carpets • major redecoration and renovation.

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Chapter 10: Responsibilities Of A New Homeowner Table 10-1c: Periodic Home Maintenance Schedule (Autumn) Autumn Indoor Tasks
Check and clean heating system, filters, and vents. Winterize: • remove and store screens. • caulk and weather strip windows. • caulk and weather strip doors. • check/replace foam and fiberglass insulation, if needed

Autumn Outdoor Tasks
Clean gutters and downspouts. Prepare lawn and garden for winter: • rake and mulch/compost leaves. • trim trees and shrubs. • fertilize lawn. Clean and store: • lawn and garden tools and equipment. • outdoor sports equipment. • outdoor furniture and grills. Check and repair chimneys and flues. Shut off outdoor faucets and hoses.

Cover or remove window A/C units.

Tablet 10-1d: Periodic Home Maintenance Schedule (Winter) Winter Indoor Tasks
Replace batteries in smoke and carbon monoxide detectors. Add insulation: • put plastic sheeting over windows. • wrap water heater. • wrap exposed pipes. Review and update maintenance and repair schedule for next year.

Winter Outdoor Tasks
Wrap outdoor faucets and pipes.

Snow removal: • check shovels and snow blowers. • stock up on sand and de-icer.

It’s up to you to decide which of these tasks are “do-it-yourself,” which are group projects for the family and which will require professional assistance. If you have the skills, tools and time, you can often do it yourself. You can find supplies and equipment, as well as guidance and professional support at local home improvement stores. You can also consult your local library or the Internet for “how-to” information. No matter how you manage the tasks, you will save money in the long run by having the work done regularly.

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Chapter 10: Responsibilities Of A New Homeowner What major systems need to be monitored? You’ll need to pay attention to how your electrical, plumbing, and heating/cooling systems function. Not only is their efficient operation vital to your safety and comfort, but any malfunctions that aren’t quickly corrected can be costly. During the pre-purchase inspection, your home inspector should test each electrical outlet and tell you if any are not in working order. The inspector can also say if you have ground fault circuit interrupters in areas where electrical outlets and plumbing fixtures are close together. These are designed to protect you from accidental electric shock and should be tested monthly. For safety’s sake, you should be familiar with the location of your main power panel, which contains your circuit breakers or fuses. Circuit breakers and fuses are designed to protect your home from accidental electrical overloads and possible fires. You should also know the locations of all smaller panels that distribute electricity to separate sections of your home. If all or part of your house goes dark, you’ll know where to check for a tripped circuit breaker or blown fuse. It’s important to know where your water cut-off valves are located. Your main valve is usually located where the water supply enters your home. If a pipe cracks or bursts, you’ll be able to shut off the incoming water supply and avoid possible water damage to your property and possessions. There should also be separate cut-off valves for each sink, bathtub or shower, toilet, water heater and appliance that uses water. That way, if any of these develops a leak, you can turn off the water supply at a specific location and make repairs without having to turn off the water supply for the entire house. You’ll want to look out for minor problems such as dripping faucets, low water pressure and slow-flowing drains that you can fix inexpensively yourself. Otherwise, they may become major problems that require expensive plumbing repairs. If your home is in an area where winter brings very low temperatures, you’ll also want to make sure that all exposed pipes are well insulated before cold weather arrives in order to prevent freezing and bursting. If your home has a septic tank, familiarize yourself with its operation. Learn what you can and cannot send down the drains or flush down the toilets and add septic tank cleaning, which is done by professionals to your maintenance schedule every one to three years.

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Chapter 10: Responsibilities Of A New Homeowner Your heating and air conditioning system will require regular attention to function economically and efficiently. You’ll find do-it-yourself maintenance information on the Internet or at the library. However, some maintenance and repair work is best left to professionals. Whether you have oil, electric, or gas, heat with steam, hot water, or forced air heat, you’ll need to schedule monthly checks for the following items: • Thermostat. • Gas or oil burner or electric heating element • Steam heat boiler • Ducts, pipes or radiators Check your central air conditioning system monthly for leaks and clogs in the drain hose and evaporator unit. Make sure the filter, condenser, and evaporator are clean and not blocked by anything that prevents air from circulating freely. Each monthly heating, ventilation, and air conditioning check should include a look at your home’s ventilation system. This may include attic fans and exhaust fans in your kitchen and bathrooms. Proper ventilation will help keep odors, moisture and excess heat from becoming problems inside your home. If you have an attic fan, annual maintenance includes cleaning of the blades, screen and attic vent, tightening all bolts and screws, and oiling the fan bearings. For exhaust fans, clean the screen grills and blades at least once or twice each year. For your range hood fan, wash the grease filter once each month. How long should the fixtures, major components, and appliances last? If your home is new, you’ll get this information from the owner’s manuals that come with your new fixtures and appliances. If you purchase an older home, ask the previous owner for the manuals. If you cannot get manuals, you can contact the appliance manufacturers or use the following chart as a rough guide. A man’s home is his hassle! —Anonymous

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Chapter 10: Responsibilities Of A New Homeowner Table 10-2: Expected Useful Life Appliance/Item
Clothes washer or dryer Water heater Furnace Furnace with heat pump Central air conditioner Humidifier Dishwasher Range Freezer Disposal Paint – interior Paint – exterior Wallpaper Carpeting

Years it should last
10 11-14 18 15 15 8 10 18-20 16 10 5-10 7-10 7 8-12

What basic tools will I need? Your basic set of hand tools for most tasks should include the following: • Flashlight and batteries. • Work gloves and safety goggles. • Claw hammer. • Wire cutter. • Pliers. • Adjustable wrench. • Socket wrench set. small home repair and maintenance • • • • • • • Flat-head screwdrivers. Phillips screwdrivers. Metal rasp Plunger. Sanding block and sand paper. Handsaw. Nails, screws, bolts, and other fasteners in various sizes.

If you’re more than a weekend handyman, you may have a selection of power and other specialized tools to make your work faster and easier. Whatever your skill level, make sure you have a basic first aid kit to take care of minor accidents in your home and garage. Keep in mind the need to have working smoke alarms and fire extinguishers in your home. If your home has gas or oil heat, a fireplace or a woodburning stove, you may also want to install a carbon monoxide detector.

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Chapter 10: Responsibilities Of A New Homeowner Why do I need a reserve fund? Having a healthy cash reserve will allow you to make major repairs and replacements without postponing necessary work until money becomes available or taking on additional debt. You can use the Expected Useful Life chart or your owner’s manuals to determine approximate timelines for replacing appliances and other components in your home. Sales inserts in your weekend newspapers will give you approximate replacement costs. With this information, you can figure out how much money to save in a reserve account. For example, in a five-year-old house the expected useful life for the roof may be 20 years, but for the dishwasher it’s 10 years. If a roof replacement will cost $6,000, the homeowner would have 20 years to put as much as possible of that amount into a reserve. For a dishwasher that costs $350, the homeowner would have 10 years to accumulate the replacement cost. While it may not be practical or possible to save enough money to cover replacement costs for everything, by saving even a portion of the amount you’ll have to borrow less money when you need to make replacements. Where can I go for more information? You can find advice, printed material and weekend workshops at the local outlets of many major hardware chain stores such as Lowes or Home Depot. You can also find how-to manuals at your local library. The following websites offer a wealth of information on home maintenance and repair: • www.allabouthome.com • www.hometime.com • www.bobvila.com Summary The careful upkeep and maintenance of your home are ongoing activities that will protect your comfort, safety and financial commitment. • • Set a maintenance schedule and stick to it. Plan for replacement and repair of your appliances and systems.

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Chapter 11: Help! Whom To Contact If A Payment Will Be Late
If you’re having financial trouble, contact your mortgage lender at once! Cogent Financial Solutions and a variety of government-sponsored programs are available to assist you in keeping your home—and your good credit rating. Upon completing this section of the course, you will have knowledge of steps to take to safeguard your mortgage if you face financial hardship. You’ll have knowledge of possible sources of advice and assistance to avoid foreclosure. This section of the course will provide information to help you answer the following questions: Whom should you contact if you know a payment will be late? How can your lender help when you’re having a problem? What are some signs of financial difficulties that might lead to foreclosure? Who can provide assistance to you if you’re in real distress?

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Chapter 11: Help! Whom To Contact If Payment Will Be Late Whom should you contact if you know a payment will be late? Your mortgage payment is due to your lender or loan servicer on the first day of each month. A mortgage payment that arrives after the 16th is considered late. Some things in life are beyond your control. A divorce, a salary cut, the loss of a job, medical expenses, an involuntary relocation or other major event might make it impossible to meet your mortgage obligations. If so, contact your lender immediately to show that you intend to tackle the problem head-on. If your lender contacts you first, cooperate to avoid foreclosure. Remember, your lender can’t help you if you don’t explain that you have a problem. Write to your lender before the payment is due and explain what the problem is, why it’s affecting your mortgage payment, when you’ll be able to make a complete or partial payment and how long you think the problem may persist. To avoid confusion, mail this information to the address your lender specifies for problems or questions about your account. This address will probably be different from the address where you mail your monthly payments. If you use a payment coupon book or receive monthly statements in the mail, you should find an address listed there. If you don’t see an address for problems or questions, call your lender and ask where to send your letter. Do not delay seeking help. Your lender can begin foreclosure 90 days after you miss a payment and a foreclosure can hurt your credit record for up to seven years. Most lenders will not approve a mortgage loan if your credit report includes a past foreclosure. How can your lender help when you’re having a problem? There are several things your lender can do to assist you through financial trouble. You may have options because lenders generally don’t want you to lose your home. Foreclosures are expensive and time-consuming for lenders. Many lenders will view foreclosure as a last resort if you sincerely attempt to work out another solution. The following are some possible alternatives: • Pre-foreclosure Sale – If the market value of your home is lower than what you owe on your mortgage loan, you may be able to list your home for sale, then negotiate with your lender to discount your loan so the sale of your home will discharge your debt. This is called a “short sale” and can help if your house loses value because of changes in the local real estate market. Talk to a tax accountant so you’ll know if there will be any income tax liabilities from a short sale. Be aware that you may have to pay additional income taxes on the monetary difference between your mortgage balance and the actual sale price of your home.

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Chapter 11: Help! Whom To Contact If Payment Will Be Late • Forbearance – If a temporary financial setback causes you to miss your mortgage payments, you and your lender may be able to work out a repayment plan that lets you catch up on missed payments and avoid foreclosure. You’ll have to show proof of your financial crisis and a realistic spending plan to get up-to-date on mortgage payments. Mortgage Modification – If your income drops substantially, don’t wait until you go into default before asking your lender for help, such as modifying your loan to lower your interest rate, extending the duration of your loan, or adding delinquent amounts onto the principal. You’ll pay more money over time but lower your monthly payments to an amount you can handle. Partial Claim – Your lender may help you qualify for an interest-free loan from HUD. This loan could allow you to make your mortgage current under the following circumstances: - You’re delinquent for more than four months, but less than one year; - You’re not yet in foreclosure; and - You’re able to begin making full payments again. Deed-in-lieu of Foreclosure – If all else fails, you may be able to give your home back to your lender. You’ll lose the home, but do less damage to your credit rating.

“Beware of little expenses; a small leak will sink a great ship.” —Benjamin Franklin

What are some signs of financial difficulties that might lead to foreclosure? There are several signs to indicate you may be on the road to financial disaster. If you see any of the following warning signs, you probably need to re-evaluate your spending and saving patterns to avoid future difficulties. You’ll find more help in Chapter 3, Establish a Spending Plan and Set Aside Reserves.

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Chapter 11: Help! Whom To Contact If Payment Will Be Late Table 11-1: Financial Warning Signs You may be headed toward financial difficulties if you:
• • • • • • • • • Are living from paycheck to paycheck. Are unsure or unaware of the total amount of debt you owe. Have paid late fees and/or over the limit fees at least twice in the past year. Have debt payments (other than your mortgage) that are more than 20 percent of your pre-tax income. Have received telephone calls from creditors about overdue bills more than once during the past six months. Are struggling to pay more than the minimum payment on your credit card accounts. Would be unable to meet your financial obligations for three months following a decrease in income or a costly emergency purchase. Have money problems that cause distress or conflict at work or at home. Are at or near your credit card limits. Have borrowed from one credit card or taken a cash advance to help pay off another credit card at least once in the past year.

If you recognize fewer than five of these signs, your debt may be within manageable limits. When paying off your non-mortgage debt, be sure to make more than the minimum monthly payment so that more money can be applied toward the principal of your debt. Also, try to achieve a debt-to-income ratio of less than 20 percent. You can determine this ratio by dividing your total monthly debt payments, excluding your mortgage by your gross monthly income. For example, if you earn $2,000 each month before taxes and your monthly debt payments total $200, your debt-to-income ratio is 10 percent. If you recognize more than five of these signs, you’ll need to take immediate steps to reduce your total debt before you end up facing foreclosure. First, add up all your bills to determine how much you owe. Then set up a budget to track your monthly income and expenses. Identify as many ways as possible to decrease your expenses and increase your income. Consider contacting your creditors to explain your situation. They may be able to lower your interest rates, suspend fees, or offer you some other short-term relief. Who can provide assistance to you if you’re in real distress? A foreclosure is something you definitely want to avoid. It legally allows your lender to take back your home and resell it if you fail to make your mortgage payments. If the resale value is lower than the amount you still owe on your mortgage, you could end up owing the difference. This is called a deficiency judgment. A foreclosure can have long-term, damaging effects on your credit history because a foreclosure becomes a matter of public

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Chapter 11: Help! Whom To Contact If Payment Will Be Late record and can stay on your credit report for up to seven years. Fortunately, there are many public and private organizations that are eager to help you get through a financial crisis and hold on to your home investment. You can find help by taking the following steps: • Call Cogent Financial Solutions mortgage counselors toll free at (866) 3COGENT for help, or visit www.cogentfs.org for assistance. • If you have trouble making your payments on a VA loan, you can visit the U.S. Department of Veterans Affairs at http://homeloans.va.gov/veteran.htm for information. • Visit the U.S Department of Housing and Urban Development Website at http://www.hud.gov/foreclos.html to locate a HUDapproved housing counseling agency that can work with you to avoid foreclosure. “It takes just as long to get out of any trouble as it took to get into it. And sometimes longer.” —J. Kenfield Morley

Be on the lookout for foreclosure scams as well. Avoid paying so-called “buyers” or “specialists” who claim they can help you escape foreclosure. At best, they charge money to do things you could do yourself. At worst, they could be scam artists intent on squeezing a few bucks from you. A few of the most common scams—and their disastrous results—are described in the following table.

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Chapter 11: Help! Whom To Contact If Payment Will Be Late Table 11-2: Typical Foreclosure Scams The Promise
“Sign this paper and I’ll pay your past-due mortgage payments.”

The Reality
The paper is a deed that transfers ownership from you to the scam artist who never pays your lender a cent. The paper is a deed and the new loan has a much higher interest rate than the one you’re already having trouble paying. The “great price” turns out to be far less than you’d earn on a short sale arranged by your lender. Your “renter” lives rent-free and never pays your lender.

The Result
You lose the home and any equity you’ve built up AND you’ll still owe the unpaid balance of your mortgage loan. You lose the home and get saddled with debt for a first AND second mortgage loan. You lose the home and still have to pay off the unpaid balance of the mortgage loan. You lose the home and end up in foreclosure AND bankruptcy because of the accumulated non-payment.

“Sign this paper and I’ll get you a new loan.”

“I’ll sell your home fast for a great price.” “I’ll rent your house and pay your lender directly instead of paying you.”

If you’re in a bad financial situation, no one can guarantee that you will avoid foreclosure, but you CAN avoid making your situation worse by: • Including your lender in all negotiations. • Informing your lender of any attempt to sell your home. • Making sure your lender will release you from all liability for your debt before you accept any offer to assume (take over payments) your loan. • Being wary of people who offer help in exchange for money. If you get an offer that sounds good, but want to be sure it’s legitimate, talk to your lender before you sign anything. Make sure that your lender will agree to release you from liability for your mortgage debt. Whatever you do, don’t abandon your home. You could lose eligibility for HUD and VA mortgage assistance programs. Summary If financial difficulties threaten, seek help before foreclosure happens to you. • • Talk to your lender about working out possible payment alternatives. Avoid foreclosure scams.

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Glossary of Terms and Links This Glossary contains terms you should know to make your home buying experience easier. We’d like to thank the Mortgage Bankers Association for their valuable assistance in providing the definitions for these terms.
• payments that change from time-to-time over the life of the loan. Depending on the type of ARM you have, your interest rate may increase gradually every few years until it reaches a preset ceiling. When you apply for an ARM, you’ll be told how, when, and why the rates may change. Agent. An agent is a person who legally represents another, called a principal, and from whom they derive express or implied authority. In other words, an agent is someone who acts on behalf of another person such as a real estate agent. Amortization. Amortization is the process of paying off a loan through a series of periodic payments to a lender. The payments include two items: interest, which is what it costs you to borrow the money, and principal, which is the amount of money you borrowed. Annual Percentage Rate (APR). The APR, shown on your mortgage papers, is a standardized way of showing you the total cost of borrowing money. The APR is a combination of the interest rate charged by the creditor along with any fees they might charge. The fees are expressed in percentages and added to the actual interest rate to come up with the total APR. Appraisal. An appraisal is a written estimate of the value of something. In real estate, it is a professional opinion of the market value of property (such as a home) as of a given date. Assessment. An assessment is a value assigned to real property (your house and land) that is used to determine real property taxes. Assessment can also refer to the process of reaching an assessed value of real property. Additionally, it can be an add-on tax to raise money for a special purpose. In other words, an assessment is the way governments determine how much property tax you have to pay. Assumable Loan. An assumable loan is one where the buyer assumes responsibility for repaying the unpaid balance of the original loan. Back-End Debt-to-Income Ratio. Your debt-to-income ratio compares your monthly debt payments to your monthly income, and is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments, excluding your rent or mortgage, by your monthly take-home pay. Balloon Mortgage. This is a mortgage with a low interest rate that stays level for a short time (typically five to seven years), with a large, final “balloon payment” that you will either refinance or pay off in full.

Adjustable-Rate Mortgage (ARM). An ARM will have interest rates and

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Balloon Payment. This is a scheduled payment (usually the last payment) on a secured loan that is larger than any of the previous payments. Lenders do this to make the regular monthly payments more affordable. Carefully check any lending agreement to ensure you can afford to pay any balloon payments. Buyer’s Agent. A buyer’s agent is someone who acts on behalf of, and represents a buyer is a real estate transaction. If you plan to buy a house, it may be wise for you to contact a real estate agent to act as your buyer’s agent who will have your best interests in mind and to ensure you are treated fairly throughout the home buying process. Cap (Interest). An interest cap is a consumer safeguard on an ARM that limits the amount the interest rate can change per year and over the life of the loan. Cap (Payment). A payment cap is a consumer safeguard on an ARM that limits the amount monthly payments can change. Cash Reserve. A lender’s requirement that the borrower have, after settlement, at least two month’s mortgage payment saved. Closed-Ended Credit. This is a loan of a specific amount of money for a specific period of time. You repay this type of loan in a set number of equal payments, which are usually made monthly. A mortgage and a home equity loan are examples of closed-ended credit. Closing. In real estate, closing is the delivery of a deed, financial adjustments, the signing of a note, and the disbursement of the funds necessary to consummate, or close, the sale or loan transaction. “Settlement” is another term for closing. Closing Costs. These are costs outside a property’s sales price that must be paid to cover the cost of the transaction, such as a loan origination fee, discount points, insurance fees, survey fees, and attorney’s fees. Closing costs vary from location to location, but must be described to you when you submit your mortgage loan application. Closing (Settlement) Statement. See: HUD-1 Statement. Comparable Market Analysis. This is an analysis done during the appraisal process. Properties with similar characteristics are compared to the property you want to buy to determine how much the home you want to buy is worth. Condominium. A form of homeownership in which the home buyer receives exclusive title to the interior space of a multi-unit structure (usually an apartment building or a townhouse), and shares title to the common areas of the residential property (for example, parking lots or a swimming pool). Contract of Sale. A contract of sale is a contract between a buyer and seller of real property to convey title after certain conditions have been met and payments have been made. Conventional Loan. A loan that is not guaranteed or insured by a government agency. Co-operative Housing. In real estate, co-operative housing is a form of multiple ownership where a corporation or business trust entity holds title to a property (usually an apartment complex) and grants occupancy rights to shareholder tenants through proprietary leases.

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A credit bureau or credit reporting agency is an organization that compiles the data contained in a consumer's credit report based on information provided by creditors, financial institutions, public records, and businesses. Credit Bureau Scoring/Credit Rating. Your credit rating is a numerical index used by credit grantors to decide if you are a good credit risk. The information is based solely on your past credit performance and not on your race, gender, or other factors. When you get your credit report, you won't receive this rating. Remember, the credit bureaus don't extend credit; they provide credit information to prospective lenders. Credit Limit. Your credit limit is the maximum amount of money that can be loaned to you or the maximum amount of credit you can use in an openended credit account. Credit Report. A credit report is a record of your personal credit history. It is compiled by credit bureaus/credit reporting agencies based on information submitted by lenders and contained in public records. It contains very extensive information on your credit history and is probably the single most important document creditors use when deciding whether to grant you credit. Deed. This document shows that an owner of a piece of real property has title to that property. Once a deed is filed and recorded by your local government, the deed becomes a public record. Deed of Trust. A deed of trust is a document showing that a borrower conveys title to real property to a third party (trustee) to be held as security for a lender, with the provision that the trustee will return the title once the debt is paid. The trustee will sell the property and pay the debt if the borrower defaults. In other words, when you buy a house, a trustee will hold your Deed of Trust for your lender until you pay off your mortgage or default on the loan. Department of Housing and Urban Development (HUD). HUD is a governmental entity responsible for the implementation and administration of housing and urban development programs. Default. Default is the failure to make payments on a timely basis or in accordance with the terms of your promissory note. Default may also result from failure to submit requests for deferment or cancellation on time. The consequences of default are severe. Delinquency. This is the failure of a borrower to make timely payments under a loan agreement. Discount Point. A discount point is an amount of money a borrower pays to a lender, or seller pays to a lender, to increase the lender’s effective yield. One point is equal to one percent of the loan. What a discount point effectively does is pay the lender up front in exchange for a reduced interest rate. Down Payment. A down payment is a portion of the sales price you pay to the seller to close a sale, with the understanding that the balance will be paid at settlement. It is also the difference between the sale price of real estate and the mortgage amount.

Credit Bureau.

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Due-on-Sale. Due-on-sale is a clause in a mortgage contract that states that if the mortgagor sells, transfers, or in any other way encumbers the property, then the mortgagee has the right to implement an acceleration clause making the balance of the mortgage due. In other words, if you sell your home, you have to pay off the mortgage immediately, and then any money that’s left over you can use any way you choose. Earnest Money. Earnest money is a deposit you pay to the seller of real property to show your good faith and intentions of getting a mortgage to buy the property. Depending on circumstances, you may or may not be able to get this money back if you decide not to complete the purchase. Encumbrance. An encumbrance is anything that affects or limits the fee simple title to property, such as mortgages, leases, easements, or restrictions. Equal Credit Opportunity Act (ECOA). The ECOA is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs. It is also called “Regulation B.” Equity. Equity is net ownership. In other words, it’s the difference between how much your property is worth and how much you still owe on your mortgage (Market value – Mortgage balance = Equity). Equity is also sometimes called owner’s interest. Escrow. Escrow is a deposit made by a borrower to their lender to pay taxes and insurance premiums when they come due. Escrow is also a deposit made by a borrower to an attorney or escrow agent to be disbursed upon the closing of a sale of real estate. In some areas, escrow accounts are called impounds or reserves. Fannie Mae. Fannie Mae is the nation’s largest mortgage investor. It is a private, stockholder owned company. The U.S. President appoints some of the members of its Board of Directors. It supports the secondary residential mortgage market. Federal Housing Administration (FHA). The FHA is a federal agency in the Department of Housing and Urban Development (HUD) that provides mortgage insurance for residential mortgages and sets standards for construction and underwriting. The FHA DOES NOT lend money or plan or construct housing. FHA-Insured Loans. Home mortgage loans insured by the Federal Housing Administration are referred to as “FHA or FHA-Insured Loans.” First Mortgage. A first mortgage gives the lender a security right over all other mortgages on the mortgaged property. Fixed Interest Rate. A fixed interest rate is one that never changes over the life of a loan. For example, if you have a fixed rate, 30-year mortgage, you will pay the same interest rate for the entire 30-year repayment schedule. Floor. This is the minimum interest rate on an ARM. Forbearance. Forbearance is a lender’s act of not taking legal action despite the fact that a loan is delinquent. It is usually granted only when a borrower makes satisfactory arrangements to pay the amount owed at a future date.

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Foreclosure. A foreclosure is a legal proceeding that allows your creditor to sell your house to pay off your unpaid mortgage. Your house can be foreclosed on if you don’t make your required house payments. Freddie Mac. Freddie Mac is a stockholder-owned corporation that supports the secondary market in mortgages on residential property with mortgage purchase and securitization programs. The President of the United States appoints a portion of its board of directors. It is also known as the Federal Home Loan Mortgage Corporation (FHLMC). Front End Debt-to-Income Ratio. Your debt-to-income ratio compares your monthly debt payments to your monthly income, and is a widely used measure of your creditworthiness. You compute your debt-to-income ratio by dividing your monthly minimum debt payments, including your rent or mortgage, by your monthly take-home pay. FSBO. For Sale By Owner is a term used to describe a home that is being sold by the owner, without assistance from a real estate agent or a broker. The seller is attempting to save money by avoiding agent’s and broker’s fees, but the buyer should be careful to make sure that the terms of sale comply with all applicable federal, state, and local regulations. Good Faith Estimate (GFE). This document tells borrowers the approximate costs they’ll pay at or before closing, based on common local real estate practices. Under RESPA, your mortgage lender or mortgage broker must deliver the GFE to you within three days after accepting your mortgage loan application. Graduated-Payment Mortgage. A type of flexible payment mortgage where the payments increase for a specified period of time, then level off. This usually results in negative amortization. Gross Income. This is your total income before any deductions such as taxes, 401(k) contributions, Medicare, or Social Security contributions. Hazard Insurance. Insurance coverage that provides compensation to the insured in case of property loss or damage. Home-Equity Line of Credit. A home-equity line of credit is a revolving loan where your home is used as collateral. You are given a credit limit and can borrow as much or as little as you want against the limit. This type of loan acts much like a checking account. Your lender provides you with checks and you can draw on the account any time you like as long as you don’t exceed your credit limit. Home-Equity Loan. A home-equity loan, also known as a second mortgage, is a closed-ended, secured loan with your home used as collateral. It can have fixed or adjustable (ones that fluctuate based on a key index) terms, interest rates, and payments. You usually borrow a prearranged amount from your lender and pay it back in installments (usually monthly). Home Inspection. A close physical examination of a home to evaluate its plumbing, electrical, and heating and cooling systems, as well as its appliances, roof, foundation, and structural stability. The inspection should be completed before you purchase a home and your offer contract should state that purchase would be contingent on the home inspection results.

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nonprofit corporation or association that manages the common areas and services of a planned unit development or condominium project. In a condominium project, it has no ownership interest in the common areas; in a planned unit development, it holds title to common areas. Homeowner’s Warranty (HOW) Program. The HOW program is an insurance program through which participating builders provide homebuyers with a warranty on the workmanship and materials of a home, and warrant against major structural defects. Inspection Certificate. An inspection certificate is a document that verifies that a property is as described. The inspection is usually performed by a designated agent and may be accepted in place of a survey. Interest. 1) Interest is the cost of money. It is usually stated as an annual percentage (e.g. 7.5 percent). You either pay interest when you borrow money, or are paid interest when you save and invest money. 2) Interest is a right, share, or title in property. Interest Rate. An interest rate is the percentage of the outstanding balance of a loan that you are charged for borrowing money, usually expressed as an annual percentage rate. Jumbo Loan. A jumbo loan is a loan that exceeds the statutory size limit eligible for purchase or securitization by federal agencies. Lease-Purchase. This is a method of purchasing property by making gradual payments over the required rent for a set period. At the end of this period, the renter uses a mortgage loan to finance the purchase of the property. Lender. A lender is a financial institution or agency that loans you money. Lien. A lien is a legal hold or claim of a creditor on the property of another as security for a debt. Liens are always against property, usually real property. Loan Origination Fee. This is a fee charged by lenders to prepare documents, make credit checks, inspect, and sometimes appraise property. It is usually stated as a percentage of the face value of the loan. Loan Servicing. Loan servicing, simply stated, is the management of a loan. It includes collection of loan payments, management of escrow accounts, and disbursements from escrow accounts. Loan-to-Value Ratio (LTV). LTV is the ratio of the amount borrowed compared to the appraised value or sales price of real property. LTVs are expressed as percentages. Lock-In Period. The number of days during which a lender guarantees a borrower a specific interest rate and terms on a mortgage. Market Value. The highest price that a buyer—ready, willing, and able, but not compelled to buy—would pay, and the lowest price a seller—ready, willing, and able but not compelled to sell—would accept. Market value is the basis for the “listing price” or the “asking price” of a home. Manufactured Housing. Factory-built or prefabricated housing, including mobile homes. Mortgage. This is a legal document that pledges real property (such as a home) to the lender as security for the repayment of a debt. Mortgage Banker. An individual, firm, or corporation that originates, sells, and/or services loans secured by mortgages on real property.

Home or Condominium Owners’ Association (HOA). A HOA is a

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borrowers and lenders. A mortgage broker takes applications and sometimes processes loans, but generally doesn’t use its own funds for closing. Mortgagee. The mortgage loan lender. Mortgagor. The mortgage loan borrower who pledges property as a security for a debt. Multiple Listing Service (MLS). A service provided by the Board of Realtors® which renders access to real estate listings of properties for sale or lease. Net Income. Your net income is your after-tax pay. It is the money you receive after all tax withholdings, including Social Security, have been made from your gross income. (See Disposable Income..) Open-Ended Credit (Non-Installment or Revolving Credit). This is a pre-approved loan of a specified amount of money for an unlimited period of time. You can use as little or as much of your credit line whenever you want. However, if you reach your credit limit, you must pay off some of your balance before you can charge any more to the account. A home equity line of credit is an example of open-ended credit. PITI. PITI is an acronym for principal, interest, taxes, and insurance. Most monthly residential mortgage payments include these items: Point. A point is one percent of the dollar amount of the mortgage loan. For example, if your loan amount is $150,000, a point is $1,500. By paying points, you can generally lower the loan’s interest rate, however, not all lenders allow this. Points may be paid by the buyer or the seller, or split between them. Pre-approval. A written agreement from a mortgage lender to grant a loan for a home purchase. The pre-qualification is based on the lender’s careful investigation and evaluation of the potential homebuyer’s income, credit history, employment history, personal assets, and debts. Pre-approval assures the seller that a buyer’s offer is valid. It also speeds up the buying process because, once an offer is made, there is no need to wait while the buyer finds a loan. Pre-qualification. An informal calculation to estimate the approximate amount of money a homebuyer can afford to spend on a home purchase. The pre-qualification, performed by a realtor or a potential homebuyer, compares the potential buyer’s income and assets to the buyer’s debts. A pre-qualification helps the realtor focus the home search on homes within a certain price range. Prepaid Items. Costs paid at closing for taxes, interest, and insurance. Because prepaid items are recurring costs that don’t relate to the acquisition of the property itself, they can’t be financed. Prepayment Penalty. This is a fee that may be charged if you repay all or part of your mortgage loan before the due date. FHA insured loans and some loans made by state chartered banks do not allow prepayment penalties. Pre-qualification. An evaluation of a potential borrower’s financial status to determine the size and type of mortgage available to him/her.

Mortgage Broker. A firm or individual who, for a commission, matches

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Interest is charged based on the unpaid principal of a loan or credit account. 2) The remaining balance of a loan, excluding interest. Private Mortgage Insurance (PMI). Insurance written by a private company protecting the mortgage lender against financial loss occasioned by a borrower defaulting on the mortgage. Property Tax. Property tax is the money you pay to your local and state government for the pleasure of owning property within their jurisdiction. Qualifying Ratios. Calculations that are used in determining whether a borrower can qualify for a mortgage. They consist of two separate calculations: a housing expense as a percent of income ratio, and total debt obligations as a percent of income ratio. Real Estate Settlement Procedures Act (RESPA). RESPA is a federal law that requires disclosure of all known and/or estimated settlement costs a homebuyer will have to pay. You’ll get this information after you apply for a loan and again when you go to settlement. Real Property. Land and objects permanently attached to it, such as buildings and fences. In some states, this term is synonymous with the term “real estate.” Refinancing. Refinancing is defined as repaying a debt with the proceeds of a new loan, using the same property as collateral. For example, you pay off your original mortgage with a new one. Most of the time, people refinance to take advantage of a lower interest rate to lower their monthly payments. RHS Loan. This is a home mortgage loan that is guaranteed by the Rural Housing Service. Second Mortgage. A second mortgage is a mortgage that has rights subordinate to a first mortgage. A home-equity loan is an example of a second mortgage. Secured Debt. A secured debt is one that is tied to a specific piece of property, such as a house. The property, called collateral, guarantees repayment of the debt. If you don’t pay, the creditor can take the property back (see Foreclosure). Seller’s Agent. An agent who acts on behalf of the seller of real property. Settlement. Please see “Closing.” Site-Built Housing. Housing that is built on the construction site. Although some of the house may be prefabricated off-site, the house is assembled on-site. Spending Plan. A spending plan is a tool you can use to help you manage your money. It lists your monthly expenses and monthly income, and is often referred to as a budget. Your spending plan shows you where to make adjustments to keep you expenses below – or in line with – your income. You should monitor your spending plan often to see if you are staying within your spending goals. Title. Written evidence of the right to or ownership in property. In the case of real estate, the documentary evidence of ownership is the title deed that specifies in whom the legal estate is vested and the history of ownership and transfers. Title may be acquired through purchase, inheritance, devise, gift, or through foreclosure of a mortgage.

Principal. 1) Principal is the original amount of a loan, excluding interest.

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insured a specific amount for any loss caused by defects of title to real estate, wherein the insured has an interest. Homebuyers usually must purchase lender’s title insurance to protect the lender’s interest and may choose to purchase buyer’s title insurance to protect their own interest. Townhouse. A two- or three-story house that shares a common wall with at least one other house. Rows of townhouses that are clustered in urban or suburban areas may also be called “rowhouses.” Trust. A fiduciary relationship whereby legal title to a property is transferred to a trustee with the intention that such property be administered by the trustee for the benefit of another, the beneficiary, who holds equitable title to such property. Underwriting. Mortgage underwriting is the analysis of the risk involved in making a mortgage loan to determine whether the risk is acceptable to the lender. Underwriting involves the evaluation of the property as outlined in the appraisal report, and the borrower’s ability and willingness to repay the loan. Upfront Costs. Upfront costs are fees and other costs that a buyer must pay before closing on a home. These fees can include an appraisal fee, credit report fee, hazard insurance, flood insurance, and other inspection fees. VA Loan. A mortgage loan made by an approved lender and guaranteed by the Department of Veterans Affairs. VA loans are made to eligible veterans and those currently serving in the military, and can have a lower down payment than other types of loans. Variable Interest Rate. A variable interest rate is one that is adjusted, usually quarterly, based on an economic indicator. They are commonly based on an economic index such as the prime interest rate, Treasury Bill rate, or the Federal Funds rate.

Title Insurance Policy. A contract by which the insurer agrees to pay the

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This list of Links contains Website addresses for organizations that offer advice and assistance on various aspects of finding, buying, and maintaining a home.
Condominium Housing
• www.ourfamilyplace.com www.coophousing.org www.seniorco-opnet.org www.ncba.org www.equifax.com www.transunion.com www.experian.com www.hud.gov/buyhome.html www.hudhcc.org www.homeloans.va.gov www.homepath.com www.rurdev.usda.gov www.cogentfs.org http://homeloans.va.gov/veteran.htm http://www.hud.gov/foreclos.html www.cogentfs.org www.ourfamilyplace.com www.homeadvisor.msn.com www.hudhcc.org www.homeowners.com www.privateMI.com www.gsa.gov/staff/pa/cic/housing.htm http://homeloans.va.gov/veteran.htm www.hud.gov/homesale.html www.homeloans.va.gov/homes.htm

Co-operative Housing
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Foreclosure

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Government Home Sales

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Home Inspectors
• • • • www.inspectamerica.com www.ashi.com www.nahi.org www.nabie.org www.allabouthome.com www.homeadvisor.com www.hometime.com www.bobvila.com www.todayshomeowner.com www.pueblo.gsa.gov/housing.htm www.suncommunities.com www.ahahome.com www.aarp.org www.rurdev.usda.gov

Home Maintenance
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Manufactured Housing
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Rural Housing

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Certification Worksheets
The worksheets in this section are based on material you’ve seen in the preceding pages. Please fill in the worksheets with your personal financial information and have them ready for reference when you call Cogent Financial Solutions at 866-345-0245. A Cogent mortgage counselor will talk confidentially with you with you about home mortgage and personal finance, then ask questions to evaluate your understanding of the information provided in Charting a Course to Home Ownership. By answering these questions satisfactorily, you will be eligible for first-time homebuyer loan programs offered by Fannie Mae, Freddie Mac, HUD and other lending institutions.

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Spending Plan
MONTHLY EXPENSES
Housing Rent/Mortgage Fees Maintenance Subtotal Transportation Car payment 1 Car payment 2 Auto insurance Gas Parking Maintenance Subtotal Utilities Telephone Electricity Water Cellular phone(s) Gas Cable/satellite TV Trash service Subtotal Food Groceries Dining out Subtotal Clothing Adults/children

PERSONAL DEBT
Credit cards/loans Card 1 Card 2 Card 3 Card 4 Card 5 Loan 1 Loan 2 Loan 3 Other Subtotal

TOTAL PERSONAL DEBT MONTHLY INCOME
Net (take-home) pay-self Net (take-home) pay-spouse Part-time pay-self Part-time pay-spouse Military retirement pay Child support Social Security income AFDC income Food stamps Other income

Total Monthly Net Income SPENDING PLAN SUMMARY
+ Total Monthly Income

Laundry/dry cleaning Subtotal Health care Insurance Doctor/dentist bills Medication(s) Subtotal Personal Alimony/child support Childcare/eldercare Education Life insurance Vacations Recreation/hobbies Holidays/gifts Alcohol/tobacco Other Subtotal Savings Retirement account(s) Personal savings Investments Subtotal

- Total Monthly Expenses - Total Personal Debt

SURPLUS/DEFICIT

RECOMMENDED EXPENSE ALLOCATIONS
Category Housing Transportation Utilities Food Clothing Health care Personal Savings Personal debt Charities Total Est. % 23%-33% 7%-10% 8%-11% 12%-20% 4%-7% 3%-5% 3%-15% 5%-10% 0-20% 5%--10% 100% Act. %

TOTAL EXPENSES

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Front-End Ratio This is one of the measures your lender will use to rate your eligibility for a mortgage loan. A front-end ratio simply compares your monthly housing cost to your monthly gross income. An important step in calculating your front-end ratio is figuring your gross monthly income—what you earn before taxes or other deductions are made. If you’re paid every other week, multiply your gross salary by 26 (number of bi-weekly paydays in a year), then divide by 12 (number of months in a year). This is your gross monthly income. If your income is inconsistent, estimate your gross monthly income by dividing last year’s total gross annual income (as reported on your tax return) by 12. Calculate your monthly housing cost by adding: • Mortgage/rent payments • Condo/co-op/homeowners association fees • Total monthly housing cost Calculate your gross monthly income by adding: • Gross income from job(s) • Alimony and child support payments • Bonuses, commissions, or tips • Dividends and interest • Other income • Total monthly gross income Compute Your Front-End Ratio My monthly housing cost… $_____________ …divided by my gross monthly income… $_____________ …equals my front-end ratio. _________% __________ __________ __________ __________ __________ __________ __________ __________ __________

A front-end ratio below 26 percent is considered very acceptable.

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Back-End Ratio This is another measure your lender will use to rate your mortgage loan eligibility. Your back-end ratio compares the total amount of your monthly debt payments—including monthly housing costs—to your monthly gross income. When figuring your total monthly debt payments, you should add up your current minimum monthly payments for all credit accounts and loans. Be sure your list of expenses includes: Housing expenses. Car payment(s). Loan payments (for furniture, appliances, etc.). Bank/credit union loans. Student-loan payments. Other loans/credit accounts. Credit-card payments. Payment for past medical care. To determine your back-end ratio, simply divide your total monthly debt payments by your total gross monthly income from all sources. Compute Your Back-End Ratio My total monthly debt payments… $_____________ …divided by my gross monthly income… $_____________ …equals my back-end ratio. _________%

Generally, the lower your back-end ratio is, the better your financial condition. A back-end ratio under 36 percent is considered very acceptable.

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Available Cash List all the following: • Checking and savings account balances. • Cash value of life insurance policies. • Cash value of investment accounts (stocks, bonds, and mutual funds). • Cash value of retirement accounts. • Cash gifts you’ve received. • Cash you have available from other sources. You’ll use this cash use for your earnest money deposit, down payment, closing costs, and moving expenses. Try not to drain all your savings for these up-front costs. Aim to keep enough saved to cover three-six months of regular expenses or for emergencies that might arise during the first few years in your new home. Be realistic when listing amounts because your loan officer may check to see that this money is available and actually belongs to you. Compute Your Available Cash Sources of Available Cash • Checking account—self • Checking account—co-borrower • Savings account—self • Savings account—co-borrower • Life insurance policies—cash value • Stocks, bonds, or mutual funds—cash value • Cash gifts from relatives • Other sources Total Available Cash Amount $_________ _________ _________ _________ _________ _________ _________ _________ $_________

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Loan Application Checklists When you apply for a mortgage loan, you’ll usually need to provide proof of income, employment, indebtedness, and assets. Use the following checklists to make sure you have all the necessary information available before you visit the loan officer. 1. Personal Information Checklist Information Legal name Current address From_____ to the present Telephone SSN Previous address From_____ to ______ Previous address From_____ to ______ Previous address From_____ to ______ Self ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ Co-borrower ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________

______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________

2. Available Cash Information Checklist Account Checking account number(s) Savings account number(s) Other account number(s) Self ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ Co-borrower ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________ ______________________

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3. Proof of Income Information Checklist Item W-2 forms or tax returns • Last year • Year-before-last Pay stubs (last two months) Bank statements (last three months) • Savings • Checking • Mutual fund • Other Self ____ ____ ____ ____ ____ ____ ____ Co-borrower ____ ____ ____ ____ ____ ____ ____

4. Employment History Information Employer Self Current employer Address and telephone: name: __________________ ___________________ ___________________ ___________________ Current salary: $_________ Employment Dates: From____ to the present Previous employer Address and telephone: name: ___________________ __________________ ___________________ ___________________ Salary: $_________ Employment dates: From____ to ______ Previous employer Address and telephone: name: ___________________ __________________ ___________________ ___________________ Salary: Employment dates: $_________ From____ to _____ Co-borrower Address and telephone: ___________________ ___________________ ___________________ $_________ From____ to the present Address and telephone: ___________________ ___________________ ___________________ $_________ From____ to _____ Address and telephone: ___________________ ___________________ ___________________ $_________ From____ to _____

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Credit Account Checklist Credit Accounts Credit-card issuer Balance due Credit-card issuer Balance due Credit-card issuer Balance due Credit-card issuer Balance due Auto loan Balance due Auto loan Balance due Student loan Balance due Other credit account Balance due Other credit account Balance due Other credit account Balance due Self $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________ Co-borrower $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________ $__________

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