Loans by Zach

What to Expect After the Mortgage Meltdown

In nearly eight years that I’ve been in this industry, the mortgage process has become infinitely more complicated, regulated, and difficult. We are dealing with less loan options, more regulations, much tougher appraisal rules, and strict underwriting guidelines that seem to change daily. Today even the best quality loans are being scrutinized, reviewed, and occasionally experience delays in underwriting and closing. It has never been so important for you to work with an expert in the field!

Why, you ask? Well our industry has been turned upside down, its taken mammoth losses on bad loans and today the industry is trying to find the correct balance. But balance for an industry as big and complicated as ours is tough to find. So sometimes underwriters are too tough on one borrower and other times they are not tough enough.

Don’t take it personal! Chances are, at some point during your loan process you will be asked for some additional documentation, or the appraiser will have to go back to work to justify the property value – this is NORMAL in today’s market. Getting a loan today is just going to be a little more work than it was before the meltdown.

HERE’S THE GOOD NEWS! You’ve chosen a team that is absolutely dedicated to getting you through this process on time and with as little stress as possible. We dedicate a huge amount of time and energy to create systems that prevent you from having any major problems. We’re going to get you through this safe and sound, just don’t panic if there’s a little turbulence along the way.

What’s going on with my loan?

Week one, gathering documentation: You will receive your loan application, disclosures, and list of items needed for underwriting. It’s of paramount importance that you quickly get all of these documents back to us within 48 hours. We are ordering your appraisal, title, and any verifications we need to get your loan closed.

Week two, processing the loan: We should be getting your appraisal and title reports, processing your application and all of the documents we’ve requested from you.

Week three, underwriting the loan: Your loan is presented to an underwriter for approval. It’s typical that the underwriter might want clarification or even additional documentation for one thing or another. We will contact you immediately once we have the approval, especially if we need something else from you.

Week four, clearing conditions and closing the loan: Any final underwriting questions or documentation will be handled and the loan moves on to the closing department and is finally sent to the title company, where you will go to sign the final documents.

You can expect weekly updates and if we need anything from you, we will call or email you. The best advice we can give you is to quickly as possible get any documentation back to us, so we can review it and pass it along to an underwriter.

So that’s it, sit back, relax, and enjoy the ride. We’ve got you covered!

Thank you very much for your business, we appreciate you putting your trust in us. We won’t let you down!

Sincerely,

Zach Harkness
Home Loan Professional
Cell: 801-898-0680
Fax: 801-303-7001
Email: zach.harkness@chl.cc

Kathy Harkness
Loan Officer Assistant
Email: kathy [at] loansbyzach [.] com
Website: http://loansbyzach.com

Articles about credit reports and credit scores:

Free Annual Credit Report
Your Credit Score: How It All Adds Up
Does Checking Your Credit Report Lower Your Score?
Tips to raise your credit score
Credit Suicide
Self-help Credit Repair – How to improve your score
How credit report gets affected by credit history
Credit Scores – What are the types and why do they vary?

AnnualCreditReport.com is the official site to help consumers to obtain their free credit report. This central site allows you to request a free credit file disclosure, commonly called a credit report, once every 12 months from each of the nationwide consumer credit reporting companies: Equifax, Experian and TransUnion.

Frequently Asked Questions

What is a credit file disclosure or a credit report?
A credit file disclosure, commonly called a credit report, provides you with all of the information in your credit file maintained by a consumer reporting company that could be provided by the consumer reporting company in a consumer report about you to a third party, such as a lender. A credit file disclosure also includes a record of everyone who has received a consumer report about you from the consumer reporting company within a certain period of time (”inquiries”). The credit file disclosure includes certain information that is not included in a consumer report about you to a third party, such as the inquiries of companies for pre-approved offers of credit or insurance and account reviews, and any medical account information which is suppressed for third party users of consumer reports. You are entitled to receive a disclosure copy of your credit file from a consumer reporting company under Federal law and the laws of various states.

How do I request my free credit report through the Annual Credit Report Request Service?
Please click here to order your free annual credit report by secure website, phone or mail

Am I entitled to a free credit report under state law?
In addition to consumers who are eligible for a free credit report through the Annual Credit Report Request Service; consumers in some states are eligible for a free credit report under state law. The following states have laws that make free credit reports available to consumers: Colorado, Georgia, Maine, Maryland, Massachusetts, New Jersey and Vermont.

How often can I request a free credit report through this website?
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. This free credit report can be requested through this website, by phone or by mail.

Should I order all my credit reports at one time or space them out over 12 months?
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies through the Central Source. It is entirely your choice whether you order all three credit reports at the same time or order one now and others later. The advantage of ordering all three at the same time is that you can compare them. (However, you will not be eligible for another free credit report from the Central Source for 12 months.) On the other hand, the advantage of ordering one now and others later (for example, one credit report every four months) is that you can keep track of any changes or new information that may appear on your credit report. Remember, you are entitled to receive one free credit report through the Central Source every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion – so if you order from only one company today you can still order from the other two companies at a later date.

How else can I request my free annual credit report?
If free credit reports are available in your state through the Annual Credit Report Request Service, you can request a free annual credit report by phone or mail and it will be mailed within 15 days. However, you can receive a report immediately by using this secure website. Click on this link to find information on how to request a free annual credit report by phone or mail. Deaf and hard of hearing consumers can access our TDD service by calling 7-1-1 and referring the Relay Operator to 1-800-821-7232.

How do I request a credit report by mail for a child under 13 years of age?
The credit reporting agencies do not knowingly maintain credit files on minor children. If you suspect that your minor child’s information has been used fraudulently, you should contact the credit reporting agencies directly and report the illegal use of your child’s information to law enforcement. Please supply each credit reporting agency with your child’s complete name, address, date of birth and a copy of the minor child’s birth certificate and social security card. Additionally, please provide a copy of your driver’s license or other government-issued proof of your identity, which includes your current address, and a current utility bill containing your current address so the credit reporting agencies may promptly respond to your request. The addresses for the credit reporting agencies are listed below:

Equifax
P.O. Box 740256
Atlanta, Georgia 30374

Experian
P.O. Box 9554
Allen, Texas 75013

TransUnion
P.O. Box 6790
Fullerton, CA 92834
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Where can I find information on disputing or correcting information in my credit file?
Please contact the nationwide consumer credit reporting company that provided the credit report

Equifax – www.investigate.equifax.com
Experian – www.experian.com
TransUnion – www.transunion.com

What is a credit score?
A credit score is a complex mathematical model that evaluates many types of information in a credit file. A credit score is used by a lender to help determine whether a person qualifies for a particular credit card, loan, or service. Most credit scores estimate the risk a company incurs by lending a person money or providing them with a service –– specifically, the likelihood that the person will make payments on time in the next two to three years. Generally, the higher the score, the less risk the person represents.

How can I get my credit score?
You can purchase a credit score by contacting one of the nationwide consumer credit reporting companies.

Equifax – www.equifax.com
Experian – www.experian.com
TransUnion – www.transunion.com

You can also purchase a credit score when you request your free annual credit report through this website.

Where can I find out more about credit reports, my rights as a consumer, the Fair Credit Reporting Act and the FACT Act?
Please visit www.ftc.gov/credit

What about companies that claim they can improve my credit report for a fee?
The Federal Trade Commission (FTC) cautions consumers to be wary of companies that make claims regarding credit repair. These companies, commonly called credit clinics, don’t do anything for consumers that consumers cannot do for themselves at little or no cost. Beware of any organization that offers to create a new identity and credit file for you. The FTC and state attorneys general have filed actions against those who pursue these fraudulent practices. Here are some warning signs that the FTC and others say consumers should look out for to determine if they might be dealing with a credit clinic:

* An organization that guarantees to remove late payments, bankruptcies, or similar information from a credit report
* An organization that charges a lot of money to repair credit
* A company that asks the consumer to write to the credit reporting company and repeatedly seek verification of the same credit account information in the file, month after month, even though the information has been determined to be correct
* An organization that is reluctant to give out their address or one that pushes you to make a decision immediately

For a helpful brochure about credit clinics, you can write to the Federal Trade Commission, Sixth and Pennsylvania Avenues, N.W., Washington, D.C. 20004 and request a brochure titled “Credit Repair: Self Help May Be Best.”

Where can I find out more about credit repair?
Please visit the Federal Trade Commission Credit Repair information at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm

Where can I find out more about identity theft?
Please visit the Federal Trade Commission Identity Theft Center at http://www.consumer.gov/idtheft/

How secure is my information?
The Annual Credit Report Request Service recognizes the importance of secure online transactions, and takes steps to safeguard the privacy of information you provide through online forms. For your online requests for free credit reports, programs encrypt the information you provide on the request form before transmission to the selected nationwide consumer credit reporting company(ies). This information is decrypted only upon receipt by the selected credit reporting company(ies). Physical, electronic and procedural safeguards designed to guard your personally identifiable information are maintained.

To help ensure the privacy and protection of your personal information, it is recommended that you do not access the Annual Credit Report Request Service through links from unfamiliar websites. We recommend that you access the Annual Credit Report Request Service directly at www.annualcreditreport.com.

Further, the site’s security protocols and measures are designed to protect the personally identifiable information you provide from unauthorized access or alteration. These measures include physical security, technological security measures and encryption of certain information.

There is a new $4,000 grant (Home Run 2 Grant Program) to assist home buyers who are:

1. Hiring a builder to build a new personal residence,
2. Purchasing a partially-finished residence and contracting to have it completed, or
3. Purchasing a newly-built, never-occupied, completed residence.
4. Income restictions-Single person max income $75,000 and married couples max income $150,000.
5. Must be primary residence.

As with the original Home Run program, the Home Run 2 Grant will be administered by Utah Housing Corporation. Grant funds will be wired to the settlement agent closing the home purchase transaction. Funding will be available for approximately 1,950 grants. The approximate number of remaining grants may be viewed at all times on the Utah Housing website at www.utahhousingcorp.org.

For more details, read the FAQS for homebuyers and real estate professionals.

Program ends November 30, 2009 or when grants are gone.
As of 09 November 09, there are 1,947 grants left.

We are an approved lender for this grant. So call me now and let me help you!

Your Credit Score: How It All Adds Up

1. Introduction
2. New Rights to Credit Scores
3. Who’s Keeping Score?
4. The Tally – When Points Are Added or Taken Away
5. Do Credit Report Inquiries Lower Your Score?
6. You Have to Play to Score
7. Scores for Sale – Proceed with Caution
8. Tips for Improving Your Score
9. References

1. Introduction

For a three-digit number, your credit score packs a big wallop. A low score can thrust you into the financial abyss of the sub-prime market, costing you thousands of dollars in added interest over the life of a car loan or mortgage. Consumers who have a very low score –or no score at all– may not get credit on any terms.

A quick glance at this single bit of information gives creditors all they feel they need to make judgments about whether you will repay a car loan, mortgage or credit card debt. Your score is a snapshot of your credit report, giving creditors instant clues about how you pay your bills, how you’ve handled credit over the years and even whether financial troubles have led you into the courts.

Born as a mortgage underwriting tool in the mid 1990s, credit scores are now commonly used by all lenders. Your credit report and/or your credit score may also be seen by employers, landlords, or cell phone and utility companies. The insurance industry has developed its own highly controversial credit-based scoring system. For more on insurance scores, see PRC Fact Sheet 25, CLUE and You: How Insurers Size You Up, www.privacyrights.org/fs/fs26-CLUE.htm.

A credit score is cold-hearted. It says nothing about unexpected medical bills or loss of a job. Proponents of the credit scoring system claim the process is fair to everyone since neither race, sex, nor age are considered. (For more on the factors that make up your credit score, see Part 4 of this guide.)

Others are skeptical of the claimed nondiscriminatory effects of scoring. Consumer advocates worry, for example, that low-income workers, minorities, or segments of the population that do not have access to traditional credit sources like major credit cards or mortgages may score lower than others. Another major concern, documented in various studies, is the accuracy of data in the underlying credit report. (See the References section at the end of this guide for links to studies on accuracy in credit reporting and credit scoring.)

Potential discrimination in credit-based scoring and accuracy in reporting are ongoing consumer concerns. The Fair and Accurate Credit Transactions Act of 2003 (FACT Act, PL 108-159), which amended the Fair Credit Reporting Act (15 USC §1681) (FCRA), requires the Federal Trade Commission and other federal financial agencies to study and report to Congress on both credit scoring and accuracy. For further reading on the ongoing FACT Act studies, see the FTC’s FCRA section, www.ftc.gov/os/statutes/fcrajump.htm.

Consumer awareness of credit scoring has increased dramatically since the late 1990s. Federal law now gives you the right to get some scores for a “reasonable” fee. (See Part 2.) However, a September 2005 study released by the Consumer Federation of America jointly with Providian concluded that while public knowledge of credit scoring has improved, the majority of consumers still have limited understanding of credit scores. www.consumerfed.org/pdfs/Providian_Press_Release_9_05.pdf

The purpose of this guide is to acquaint you with the basics of scoring, offer tips on how to improve your score, and give you additional resources for further information.

2. New Rights to Credit Scores

Credit scores have been available for some time. Some states – California led the way — passed laws to require score disclosures. Even without the legal requirement, scores soon became available as industry practice. Recent amendments to the FCRA created a national standard allowing access to credit scores for a “reasonable fee”. However, the “reasonable fee” access only applies to “educational” credit scores compiled by the three national credit bureaus – Experian, TransUnion, and Equifax.

What is a credit score?

FACTA defines a “credit score” as:

A numerical value or a categorization derived from a statistical tool or modeling system used by a person who makes or arranges a loan to predict the likelihood of certain credit behaviors, including default (and the numerical value or the categorization derived from such analysis may also be referred to as a ‘risk predictor’ or risk score’Ö(FCRA §609(f)(2))

In short, a credit score is a grading system that adds or subtracts points based on select data in your credit report. Late payments, maxed out credit cards, and bankruptcies are negative factors that take points away. A solid payment history and prudent use of available credit add points. Your final grade — your credit score — is said to measure how likely it is that you will repay a loan. (For more on the factors that go into calculating your credit score, see Part 4.)

Do I have a right to free credit scores?

No. FACTA says you can get your score at a ìreasonableî fee to be determined by the FTC. As of this writing, the FTC has not issued a final regulation on reasonable fees for credit scores. (The FTC’s proposed regulation on fees and public comments received can be accessed at http://www.ftc.gov/opa/2004/11/factafrn.htm.)

FACTA does, however, give everyone the right to a free credit report from each of the three national credit bureaus. Free reports can be obtained once every 12 months. Since information included in your credit report is the basis for all scoring models, errors in the report can translate to a lowered credit score. For more on free credit reports, see www.ftc.gov/bcp/conline/edcams/freereports/index.html.

Does FACTA give me the right to get my FICO score?

No. FACTA only covers two kinds of scores. The “educational” score shows you how scoring works and how you rate as a credit risk. You may also get a “mortgage score,” that is a score used in connection with residential real property loans. You are entitled to the mortgage score free if your loan is denied.

Can I get my credit score without also buying a credit report?

This depends mainly on where you live and where you get your score. Laws in California and Colorado allow you to get your credit score for a “reasonable” fee. Educational scores produced by the credit bureaus may also be purchased as a stand-alone product without also buying a credit report.

Are stand-alone scores of any value to me?

Stand-alone “educational” scores can give you an indication of your credit risk level. Also, a score that is completely out of line with your knowledge of your own financial status may indicate something amiss in the underlying credit report. But keep in mind, scores are in a sense a “moving target,” depending on the information in the credit report at the time your file is scored.

Will I know how the credit bureau arrived at this score?

When you request your “educational” credit score, it should come with a notice that tells you:

* That the credit scoring model may be different than the credit score that may be used by lenders.
* The range of possible scores under the model used.
* The key factors (limited to four) that adversely affected the credit score.
* The date the credit score was created.

Can I dispute a low credit score?

No. The dispute process outlined in the FCRA applies to your credit report, not your credit score. Since your score is based on data in your credit report at any given time, correcting errors in your credit report should improve your score. (For information on how to dispute data in your credit report, see www.ftc.gov/bcp/conline/pubs/credit/crdtdis.htm.)

3. Who’s Keeping Score?

Minnesota based Fair Isaac, Inc., www.myfico.com, was the first company to develop a credit scoring model based on selected criteria included in credit reports. In the 1990s the mortgage industry started to use scoring models to automatically rate consumers. In these early years credit scoring was largely a mystery to consumers.

This all changed when California passed a law in 1999 requiring mortgage lenders to disclose credit scores. The California law also requires the three national credit bureaus – Experian, TransUnion, and Equifax – to disclose credit scores to consumers who request a score.

Today credit scoring has moved far beyond the mortgage industry and is used by nearly all lenders to make instant decisions about the odds a loan will be repaid. Scoring models developed by Fair Isaac, which have come to be known simply as your FICO, continue to dominate the credit scoring market.

Fair Isaac licensed it scoring software to all three national credit bureaus. Then each bureau adopted its own version of the Fair Isaac model. Different scoring factors coupled with different data in each bureau’s credit files can lead to wide disparity in scores. You may have seen this first hand when you applied for a car loan or other credit.

In March 2006 the three national credit bureaus announced a joint venture and a new credit scoring system — VantageScore. With the new scoring system, the bureaus apply a uniform scoring model. The bureaus say any disparity with VantageScore is because of different data included in the files of each bureau. Following the academic scale, VantageScores range from 501 to 990 to which is then applied a letter “grade.” You get an “A,” for example, if you score between 901-990, the highest range under the VantageScore system.

As we discuss in Part 4, FICO scores, with a range of 300 to 850, have been the scoring norm. If VantageScores with a cap of 990 take hold, this is bound to cause consumer confusion. You might think, for example, that a score of 850 puts you at the top as a credit risk. You’d be right if your lender used a FICO score. But, if your lender scores under the VantageScore system, you’ll only get a “B.” (For a description of VantageScore numerical ranges and how this translates to a letter ìgrade,î see Experian’s news release, dated March 14, 2006. http://experian.global-pressoffice.com/documents/showdoc.cfm?doc=2129 and Experian’s frequently asked questions about scoring, www.experian.com/consumer/credit_score_faqs.html#6) In the future, when you apply for credit, it’s wise to ask your lender what scoring system it uses.

In addition to FICO scores and the new VantageScores, many companies have developed scoring models. Experian, for example, estimates there may be up to 1,000 different scoring models, each with a different scoring range. Some models focus on specific types of loans like automobile loans or credit cards. Currently there is what the Federal Trade Commission characterizes as an “extensive and dynamic market for credit score products.” Very often credit scores come bundled with offers to sell other products such as credit reports, credit report monitoring services or identity theft insurance. We discuss such offers in Part 7.

In recent years, it has become the industry norm, although not required by federal law, to allow consumers to purchase credit scores or get free scores when applying for a mortgage. Scores may also now be available through companies with which you have an existing relation. For example, some credit card companies offer a free score along with your monthly statement. Under recent amendments to the FCRA, consumers nationwide are entitled to purchase a credit score for a “reasonable” fee. But, again, the FCRA only applies to “educational” scores that show you how scoring works and how you rate as a credit risk.

4. The Tally and When Points Are Added or Taken Away

In Part 3 we discuss the new joint scoring model called VantageScore adopted by the three national credit bureaus. The bureaus have not disclosed the factors that go into the VantageScore. However, it is nearly certain that many factors included in the FICO model, like late payments or a bankruptcy, will affect your VantageScore. Because the VantageScore factors are unknown, for the sake of this guide, we continue to follow the FICO model.

FICO scores range from 300 to 850, with any score under 620 considered high risk, often called “subprime.” The higher your score, the more likely you are to be seen by creditors as a good risk. This quick risk analysis translates into dollars in your pocket. The difference in interest rates and finance charges can be dramatic. The report by the Consumer Federation of America jointly with Providian estimates that consumers nationwide could save $16 billion a year in lower credit card finance charges by improving credit scores by an average of 30 points. www.consumerfed.org/pdfs/Providian_Press_Release_9_05.pdf

The Fair Isaac home page translates the effect of a good rating into the language of monthly mortgage payments on a 30-year fixed loan of $150,000. www.myfico.com Examples change as interest rates fluctuate, but one recent example given is:

* A consumer with the highest score range of 760-850 with an interest rate of 5.55% would pay a monthly mortgage payment of $856.
* One within the lower scoring range of 620-639 with an interest rate of 7.15% would have a monthly mortgage payment of $1,012.

FICO does not give examples of subprime rates for scores below 620. However, the site includes an interactive calculator for estimating interest rates and payments for scores below 620. www.myfico.com/myfico/CreditCentral/LoanRates.asp

What factors determine my credit score?

The exact formula of the FICO and other scoring models is a trade secret. However, Fair Isaac has identified five factors and the importance given to each factor. Other scoring models include most of the same factors. However, the weight given to individual factors may vary.

The five are (www.myfico.com/CreditEducation/WhatsInYourScore.aspx):

* Payment history ñ 35%
* Amounts owed ñ 30%
* Length of credit history ñ 15%
* New credit ñ 10%
* Types of credit used ñ 10%

It’s clear that the single most important factor is your record of paying your bills on time. The number of delinquent accounts and the length of time the account went unpaid also factor into the calculation. Your payment history may also include financial problems that have ended up in court such as bankruptcy or judgments entered against you.

Over five years ago I had several late payments due to an illness. Will this affect my score?

Yes, but not as much as a recent late payment. Negative information can remain on your credit report for seven years, and this information will be calculated into your score as long as it appears on your credit report.

However, the more recent the late payment, the more it will detract from your score. In addition, the longer a debt goes unpaid and the more accounts that show a history of late payments, the more points will be subtracted from your total score. For example, if your credit report shows several accounts that were 120 days past due, this is far more damaging to your score than one account that was 30 days past due.

Does the calculation include only negative information?

No. The number of accounts shown on your credit reported as “never late” or “paid as agreed” have a positive effect on your credit score. It just seems like the calculation is based only on negative factors.

Often negative information is reported without a corresponding report of positive information. Utility companies are a good example of this. You are not likely to get positive points for paying your electric bill on time, but the utility company late payments will negatively impact your score. Parking tickets or even library fees may show up on your credit report. But, you won’t get extra points for being a good driver or responsible library patron.

Does my credit card company have to report on-time payments to the bureaus?

There is nothing in the FCRA that requires any company to report either positive or negative information. If a company you do business with does not report to at least one of the three national credit bureaus, contact the company and ask that your good record be included in your credit report.

Also, some companies that report on-time or late payments may not report the maximum credit available. The ratio of credit used to credit available factors into your score. If you use credit wisely and don’t spend to the maximum limit, you deserve the benefit of this positive data.

If companies you do business with refuse to report to one or more of the credit bureaus and/or do not report the maximum credit available, take your business elsewhere. And let them know why you are moving on. Companies who lose customers because of their irresponsible business practices need to hear from you.

Does it improve my score to pay off my credit card balance every month?

Not necessarily. Points are given or taken away based on the amount of available credit used. Certainly, using the maximum amount on your credit card and paying only the minimum each month can lower your score. But, using a large percentage of your available credit each month, even when you pay the bills faithfully, can detract points if you are carrying a high balance at the time your credit history is scored.

Remember, the credit score is a snapshot of your credit report on any given day. Most credit card companies and other lenders report to the credit bureaus every 30 days. If your credit report is scored right before your monthly credit card bill is due and you’ve used a significant portion of your available credit, your score will go down.

Why do I have a different score from each credit bureau?

There may be a number of explanations for varying scores. Not all lenders report to all three credit bureaus. A late payment reported by a credit card company to only one bureau would lower your score on that bureau’s credit report. Also, until recently, each credit bureau used its own variation of the FICO model. Even slight deviations could end in a different score. As discussed in Part 3 of this guide, with the VantageScore the three national bureaus now use the same scoring model.

A 2002 study conducted by the Consumer Federation of America and the National Credit Reporting Association examined the reasons for different scores at the three national credit bureaus. In addition to different reporting practices by lenders, the study found that consumers sometimes have multiple or mixed credit reports. This may be explained by variations of names used on credit applications or by credit files that include information about more than one consumer. www.consumerfed.org/pdfs/121702CFA_NCRA_Credit_Score_Report_Final.pdf

How do the types of loans I have affect my credit score?

Major bank credit cards with good payment records are better for your score than a department store card. Loans or credit established with a finance company, even when you have a good payment record, do not carry as much weight as a major bank card. A major bank card says you are in the mainstream of credit where credit limits can reach the stratosphere with a good payment record.

A revolving credit card such as with a department store generally carries a very low credit limit. One who seeks credit from a finance company may be considered in the high-risk category and ineligible for the mainstream credit market. Installment loans such as car loans and mortgages have a positive effect on your credit score although a high loan balance-to-value ratio can detract from your score.

Will credit counseling hurt my score?

According to Fair Isaac, the fact that you participate in credit counseling is not calculated into your FICO score. However, scoring models developed by other companies do not necessarily follow the FICO factors. For a list of what is and is not included in your FICO score, see the Fair Isaac Credit Education section, www.myfico.com/CreditEducation/?fire=1.

In our view, credit counseling should not be a scoring factor. Credit problems that cause you to seek counseling are almost certainly reflected in your credit report. Any scoring system that includes counseling as a negative factor is simply unfair. If anything, counseling should be considered a positive factor.

5. Do Credit Report Inquiries Lower Your Score?

Your credit report includes more than your record of paying bills. One section of the report lists inquiries. These are records showing who has accessed your credit report. There are various purposes allowed for companies to look at your credit report.

* Your credit card company may monitor your report to review your account with them. This type of inquiry appears on your credit report, but does not affect your credit score.
* Creditors and insurers review your report to see if you qualify for an offer. These “preapproved” or “prescreened” offer reviews do not affect your credit score. (For information on how to stop preapproved reviews, see www.privacyrights.org/fs/fs1a-basics.htm.)
* You apply for a job and the employer orders your report. This inquiry does not affect your credit score.
* You check your own credit report. This will not lower your credit score.

The only credit report inquires that can lower your credit score are applications for new credit.

I’m shopping for a new car and have applied to several lenders. Will these inquiries lower my score?

According to Fair Isaac, multiple inquiries to automobile or mortgage lenders within a short period of time (usually 30 days) generally count as a single inquiry. Thus, a little shopping for the best interest rate should not hurt your credit score. www.myfico.com/CreditEducation/FactsFallacies.aspx?fire=5

However, when shopping for a big-ticket item or going on a shopping spree in a department store, it is probably wise to pass up the 10% discount offered by many retailers for opening a new store account.

Will closing old credit accounts increase my score?

No. In fact the opposite may be true. Scoring models look at both your current use of credit and the length of time you have used credit. Older accounts even with a zero balance establish your history as a credit user.

Do I need a perfect score of 850 to get the best interest rate?

No. Fair Isaac estimates a score ranging between 720 and 850 qualifies for the best interest rate. If you have a score within this range, but are being quoted sub-prime rates, it may be time to shop for another lender. At least, you should try to negotiate a better rate based on your good score.

6. You Have to Play to Score

For various reasons, some people shun credit, choosing instead to live on a cash-only basis. Perhaps self-discipline, a bad experience with credit, or even family tradition have steered you away from credit cards or installment loans. Others, especially recent graduates just starting out, have not had a chance to establish a credit history.

A traditional credit score calculation is nearly impossible without a credit file. Having just a few notations in the file can result in a “thin” file, equally impossible to conform to the standard scoring models.

I pay my bills on time, but in cash. Can I ever hope to get credit?

Fair Isaac has developed a new scoring model designed to score credit risk through “non-traditional” data obtained from various data vendors. This, the company claims, will make credit easier for the nearly 25% of the population that either has no credit file or too little information to benefit from traditional scoring models. The kinds of accounts covered in what Fair Isaac calls the FICO Expansion Score include deposits with a bank, records with payday lenders, and purchase payment plans.

One example of data that could either help or hurt you in obtaining a good expansion score is your banking history. ChexSystems is a consumer reporting agency that compiles information and issues reports about banking. If you have a negative entry in your ChexSystems report, it could be detrimental to your score. If this is a concern, you can check your ChexSystems report free once every 12 months. www.consumerdebit.com/consumerinfo/us/en/index.htm

Other companies also allow consumers to build a good history through non-traditional payments like rent and utility payments. One such company is Annapolis, Maryland, based PayRentBuildCredit. www.prbc.com. Another is First American Credco, www.credco.com.

Can I elect to have a lender use the expansion score rather than my credit history?

Expansion scores cannot be used as an alternative to scoring your credit report. If negative information in your credit report results in a low score, you cannot avoid this by selecting an expansion score. Again, the expansion score’s goal is to allow lenders to make credit offers to consumers who don’t have a traditional credit history. Like the traditional scoring models, the expansion score seeks out consumers with a good payment history.

For more on FICO expansion scores, see www.ficoexpansionscore.com/Content/FAQs.aspx.

As a recent graduate, how do I establish good credit?

Start small, perhaps with a credit card secured by your bank account. Make payments consistently on time. And, do not use all available credit. In fact, try to keep your use of available credit under one half the limit.

Will my score increase when my credit limits go up?

Not necessarily. Scoring models take into account how you use your available credit. Maxing out your credit cards or using all the available credit will deduct points from your score. The amount of credit you have available is not a scoring factor.

7. Scores for Sale ñ Proceed with Caution

Despite the shroud of secrecy that once surrounded credit scoring, the market for scoring products is now big business. A simple Internet search using the words “credit score” reaps millions of sites. Many of these sites sell packages of credit products that can include not only credit scores but credit reports, credit monitoring services, and identity theft insurance. Some searches may even lead you to fraudsters whose aim is not to sell you a credit score but rather to steal your personal information.

What is the best way to order my score?

The best way to purchase your score is through one of the national credit bureaus.
The national bureaus are:

* Experian, www.experian.com
* TransUnion, www.transunion.com
* Equifax, www.equifax.com

You can also purchase your score if you order your free credit report through the official online source established for this purpose. www.annualcreditreport.com/cra/index.jsp

The credit bureaus also offer a stand-alone score. You may purchase an educational score, now required by FACTA, or the official FICO score through the credit bureaus. You can also purchase your FICO score through www.myfico.com. Scores purchased through the Fair Isaac site come only as a package, requiring the additional purchases of credit reports or monitoring services.

How will I know the score I purchase through a credit bureau is my FICO score?

The three credit bureaus market FICO scores under the names.

Equifax Beacon
Experian Experian/Fair Isaac Risk Model
TransUnion Empirica

If the score you receive does not come with one of the above captions, you may have purchased an educational score which should come accompanied by the notice discussed in Part 2. It is not yet clear whether the bureaus will continue to offer the FICO branded scores now that they’ve joined forces to create the VantageScore. Equifax, for one, continues to offer its Beacon score as of this writing.

What is the harm in ordering credit reports and scores through an alternative web site?

There is only one official site for free credit reports, and that is www.annualcreditreport.com. (For more on the “official” web site, see the FTC’s information on your right to free annual reports. www.ftc.gov/bcp/conline/edcams/freereports/index.html)

Web sites you access through a search of such terms as “free credit reports” or “free credit scores,” may end up costing you money for products you neither need nor want. In the worst case, sites may actually be a fraud designed to steal your personal information.

For more on fake web sites, see the FTC’s alert, Fake Credit Report Sites: Cashing in on Your Personal Information , www.ftc.gov/bcp/conline/pubs/alerts/fakealrt.htm. See also the report Call Don’t Click by the World Privacy Forum. www.worldprivacyforum.org

8. Tips for Improving Your Score

* Monitor your credit report and dispute errors. Errors in your report will usually translate into a low score.
* Pay your bills on time even if it means you can only pay the minimum amount due.
* Low balances are a positive factor in scoring models. Don’t use all your available credit.
* New credit applications can detract from your score. Even an application for a department store card can lower your score. Multiple applications can have a devastating effect on your score, especially around the time you are shopping for major purchases like a car loan or mortgage.
* Old accounts (even those you haven’t used for a long time) can help your score. Scoring models look at not just how to use credit today but also how long you have used credit.
* Consolidating balances or moving debt around may make for one easy payment, but this can have an adverse effect on your score. Shuffling of balances could be especially harmful to your score if you close established accounts and open new accounts to consolidate your debt.
* Ask your lender what scoring model it uses. With new scoring models like the credit bureaus’ VantageScore, it is easy to get confused. A number score alone will not tell you where you stand.
* Know the going interest rates. Current rates for mortgages, car loans, and other consumer credit are published in daily newspapers or can be found online at such sites as www.bankrate.com. If you have a good credit score but are not offered a good interest rate, ask questions, negotiate, or shop elsewhere.

Your Credit Score: How It All Adds Up
By Privacy Rights Clearinghouse

Who Qualifies for the Obama Mortgage Refinancing Program?

There has been a lot of press on what many people call the Obama Mortgage. But what IS an Obama Mortgage and who is eligible?

In early 2009, the Obama administration announced a program called Making Home Affordable. This program is expected to help nine million homeowners keep their homes and avoid foreclosure through refinancing and modified loans designed to lower monthly mortgage payments.

The Obama mortgage is not part of the Hope for Homeowners program started in 2008. Making Home Affordable does offer hope for homeowners in need of mortgage rescue, but there are specific conditions for the program. Do you wish to apply for refinancing under Making Home Affordable?

* You must be current on your mortgage payments. Those who hope to take advantage of programs under a 2008 or 2009 housing rescue bill soon learn that staying current on your mortgage is often one of the first requirements. That’s one reason financial advisors tell people not to default or stop paying their mortgages. To qualify for an Obama Mortgage you must not have been more than 30 days late on any mortgage payment in the last 12 months.
* Your home must be your primary residence. For those in need of homeowner’s relief with FHA loans, this is a very familiar condition, but for those in conventional loans, the “primary residence” requirement may be new. Those who don’t live in the building they seek refinancing for will not be approved for an Obama mortgage.
* Your home must be financed with either a Fannie Mae or Freddie Mac loan. If you aren’t sure if your home loan meets this requirement, contact your loan officer or call 1-800-Freddie or 1-800-7FANNIE to learn more.
* Normally, home owners with loan-to-value ratios above 80% are not eligible for refinancing, but Home Affordable gives homeowners affected by such loan-to-value ratios a second chance; you may be eligible to refinance into lower mortgage rates and stable interest rates if you qualify. The Home Affordable refinance program’s official site asks, “Do you believe that the amount you owe on your first mortgage is about the same or less than the current value of your house?” If so, you qualify for refinancing rather than loan modification.

If you meet these conditions, your next step should be to contact your loan officer to ask about starting the application process. You will need all information about your current loan, any second mortgage plus other lines of credit like credit cards or personal loans. You’ll also be asked to supply your most recent tax documents as part of the process of applying for an Obama mortgage refinancing package.

Legislation is pending to help those who have FHA and VA loans get similar homeowner relief as those who have Fannie Mae and Freddie Mac loans under Home Affordable, but as of now those with FHA and VA loans should ask their lenders what alternative options are available since the Obama mortgage is not designed for FHA and VA borrowers.

Homeownership is becoming a reality for more and more Americans. During 2000, the US homeownership rate reached 67.7%, the highest rate ever. Yet many Americans don’t realize that homeownership is within their grasp.

A home is a financial asset and more: it’s a place to live and raise children; it’s a plan for the future; it’s an investment in your community. That’s why we at the U.S. Department of Housing and Urban Development want all Americans to have an opportunity to enjoy the benefits of owning a home. And we are especially proud of our work to help first-time homebuyers: thanks to our special programs, more than 81% of FHA-insured loans went to first-time homebuyers during 2000.

Knowledge is said to open doors. This is literally true when it comes to buying a home. To become a first-time homebuyer, you need to know where and how to begin the homebuying process. The following questions and answers have been carefully selected to give you a foundation of basic knowledge. In addition to helping you begin, this brochure will give you the tools necessary to navigate the entire process – from deciding whether you’re ready to buy, all the way to that final proud step, getting the keys to your new home.

Calling for this brochure was your first step. Now you can use this information to determine if you’re ready to buy a home. if you are ready, contact a real estate agent, lender, or a housing counseling agency. They can help you decide your next step.

HUD’s FHA has helped more than 30 million people become homeowners since 1934. We want to help you open the door to your own home. After all, HUD and FHA are on your side.

Part I Getting Started
Part II Finding Your Home
Part III You’ve Found It
Part IV General Financing — Questions:The Basics
Part V First Steps
Part VI Finding The Right Loan For You
Part VII Closing
Part VIII How Can HUD And The FHA help Me Become a Homeowner
Part IX Mortgage Insurance
Part X FHA Products

GETTING STARTED

1. HOW DO I KNOW IF I’M READY TO BUY A HOME?

You can find out by asking yourself some questions:
- Do I have a steady source of income (usually a job)? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few outstanding long-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?

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

2. HOW DO I BEGIN THE PROCESS OF BUYING A HOME?

Start by thinking about your situation. Are you ready to buy a home? How much can you afford in a monthly mortgage payment (see Question 4 for help)? How much space do you need? What areas of town do you like? After you answer these questions, make a “To Do” list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the “Homes” section of the newspaper.

3. HOW DOES PURCHASING A HOME COMPARE WITH RENTING?

The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.

Owning a home has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. But given the freedom, stability, and security of owning your own home, they are worth it.

4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT CAN AFFORD?

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

5. HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?

Start by asking family and friends if they can recommend an agent. Compile a list of several agents and talk to each before choosing one. Look for an agent who listens well and understands your needs, and whose judgment you trust. The ideal agent knows the local area well and has resources and contacts to help you in your search. Overall, you want to choose an agent that makes you feel comfortable and can provide all the knowledge and services you need.

6. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?

Your home should fit way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities – things like location and size. Should the house be close to certain schools? your job? to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a ‘wish list.” Minimum requirements are things that a house must have for you to consider it, while a “wish list” covers things that you’d like to have but aren’t essential.

FINDING YOUR HOME

7. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?

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

8. WHAT SHOULD I DO IF I’M FEELING EXCLUDED FROM CERTAIN NEIGHBORHOODS?

Immediately contact the U.S. Department of Housing and Urban Development (HUD) if you ever feel excluded from a neighborhood or particular house. Also, contact HUD if you believe you are being discriminated against on the basis of race, color, religion, sex, nationality, familial status, or disability. HUD’s Office of Fair Housing has a hotline for reporting incidents of discrimination: 1-800-669-9777 (and 1-800-927-9275 for the hearing impaired).

9. HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?

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

10. HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?

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

11. HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?

Your real estate agent can give you a ballpark figure by showing you comparable listings. If you are working with a real estate professional, they may have access to comparable sales maintained on a database.

12. HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?

The total amount of the previous year’s property taxes is usually included in the listing information. If it’s not, ask the seller for a tax receipt or contact the local assessor’s off ice. Tax rates can change from year to year, so these figures may be approximate.

13. WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?

Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities,

14. IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?

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

15. WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?

In addition to comparing the home to your minimum requirement and wish lists, use the HUD Home Scorecard and consider the following:
- Is there enough room for both the present and the future?
- Are there enough bedrooms and bathrooms?
- Is the house structurally sound?
- Do the mechanical systems and appliances work?
- Is the yard big enough?
- Do you like the floor plan?
- Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions.)
- Does anything need to repaired or replaced? Will the seller repair or replace the items?
- Imagine the house in good weather and bad, and in each season. Will you be happy with it year-round?

Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional standpoint.

16. WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?

Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller’s or real estate agent’s answers are clear and complete. Ask questions until you understand all of the information they’ve given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive.

17. HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?

If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don’t hesitate to return for a second look. Use the HUD Home Scorecard to organize your photos and notes for each house.

18. HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?

There isn’t a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. It will help avoid wasting your time.

YOU’VE FOUND IT

19. WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN INSPECTION FIGURE IN THE PURCHASE OF A HOME?

An inspector checks the safety of your potential new home. Home Inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of only repairs,that are needed.

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

It’s a good idea to have an inspection before you sign a written offer since, once the deal is closed, you’ve bought the house as is.” Or, you may want to include an inspection clause in the offer when negotiating for a home. An inspection t clause gives you an ‘out” on buying the house if serious problems are found,or gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.

20. DO I NEED TO BE THERE FOR THE INSPECTION?

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

21. ARE OTHER TYPES OF INSPECTIONS REQUIRED?

If your home inspector discovers a serious problem a more specific Inspection may be recommended. It’s a good idea to consider having your home inspected for the presence of a variety of health-related risks like radon gas asbestos, or possible problems with the water or waste disposal system.

22. HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?

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

23. ARE POWER LINES A HEALTH HAZARD?

There are no definitive research findings that indicate exposure to power lines results in greater instances of disease or illness.

24. DO I NEED A LAWYER TO BUY A HOME?

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

25. DO I REALLY NEED HOMEOWNER’S INSURANCE?

Yes. A paid homeowner’s insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to be made prior to that day. Plus, involving the insurance agent early in the home buying process can save you money. Insurance agents are a great resource for information on home safety and they can give tips on how to keep insurance premiums low.

26. WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER’S INSURANCE COSTS?

Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you look at homes. Newer homes and homes constructed with materials like brick tend to have lower premiums. Think about avoiding areas prone to natural disasters, like flooding. Choose a home with a fire hydrant or a fire department nearby.

27. IS THE HOME LOCATED IN A FLOOD PLAIN?

Your real estate agent or lender can help you answer this question. If you live in a flood plain, the lender will require that you have flood insurance before lending any money to you. But if you live near a flood plain, you may choose whether or not to get flood insurance coverage for your home. Work with an insurance agent to construct a policy that fits your needs.

28. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?

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

29. HOW DO I MAKE AN OFFER?

Your real estate agent will assist you in making an offer, which will include the following information:
- Complete legal description of the property
- Amount of earnest money
- Down payment and financing details
- Proposed move-in date
- Price you are offering
- Proposed closing date
- Length of time the offer is valid
- Details of the deal

Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just Making an offer.

Other ways to lower ins-insurance costs include insuring your home and car(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim.

30. HOW DO I DETERMINE THE INITIAL OFFER?

Unless you have a buyer’s agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home’s condition, how long it’s been on the market, financing terms, and the seller’s situation. By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.

31. WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?

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

32. WHAT ARE “HOME WARRANTIES”, AND SHOULD I CONSIDER THEM?

Home warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or home systems, which are not covered by homeowner’s insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a home, a time when many people find themselves cash-strapped.

GENERAL FINANCING QUESTIONS:THE BASICS

33. WHAT IS A MORTGAGE?

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

34. WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF MY LOAN?

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

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

35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?

Fixed Rate Mortgages: Payments remain the same for the the life of the loan

Types
- 15-year
- 30-year

Advantages
- Predictable
- Housing cost remains unaffected by interest rate changes and inflation.

Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types
- Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
- Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan
- ARMS linked to a specific index or margin

Advantages
- Generally offer lower initial interest rates
- Monthly payments can be lower
- May allow borrower to qualify for a larger loan amount

36. WHEN DO ARMS MAKE SENSE?

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

37. WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?

30-Year:
- In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
- As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year:
- Loan is usually made at a lower interest rate.
- Equity is built faster because early payments pay more principal.

38. CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?

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

39. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?

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

40. HOW LARGE OF A DOWN PAYMENT DO I NEED?

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

41. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).

42. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?

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

43. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?

A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate “lock-in”which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

44. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?

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

45. WHAT ARE DISCOUNT POINTS?

Discount points allow you to lower your interest rate. They are essentially prepaid interest, With each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases With each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

46. WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.

FIRST STEPS

47. WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?

The first step in securing a loan is to complete a loan application. To do so, you’ll need the following information.
- Pay stubs for the past 2-3 months
- W-2 forms for the past 2 years
- Information on long-term debts
- Recent bank statements
- tax returns for the past 2 years
- Proof of any other income
- Address and description of the property you wish to buy
- Sales contract

During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.

48. HOW DO I CHOOSE THE RIGHT LENDER FOR ME?

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

49. HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?

Pre-qualification is an informal way to see how much you maybe able to borrow. You can be ‘pre-qualified’ over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

Pre-approval is a lender’s actual commitment to lend to you. It involves assembling the financial records mentioned in Question 47 (Without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

50. HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?

There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it’s important to verify its accuracy. Double check the “high credit limit,”‘total loan,” and ‘past due” columns. It’s a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.

CREDIT REPORTING COMPANIES

Company Name Phone Number
Experian 1-888-397-3742
Equifax 1-800-685-1111
Trans Union 1-800-916-8800

51. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?

Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.

52. WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?

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

53. HOW CAN I IMPROVE MY SCORE?

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

FINDING the RIGHT LOAN for YOU

54. HOW DO I CHOOSE THE BEST LOAN – PROGRAM FOR ME?

Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.
- Do you expect your finances to changeover the next few years?
- Are you planning to live in this home for a long period of time?
- Are you comfortable with the idea of a changing mortgage payment amount?
- Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?

Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.

55. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN LENDERS?

First, devise a checklist for the information from each lending institution. You should include the company’s name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.

Speak with companies by phone or in person. Be sure to call every lender on the list the same day, as interest rates can fluctuate daily. In addition to doing your own research, your real estate agent may have access to a database of lender and mortgage options. Though your agent may primarily be affiliated with a particular lending institution, he or she may also be able to suggest a variety of different lender options to you.

56. ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?

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

57. WHAT IS RESPA?

RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process, By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.

For more information on RESPA, or call 1-800-569-4287 for a local counseling referral.

58. WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?

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

59. BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL RESPONSIBILITIES?

Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD’s Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).

60. WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?

To ensure you won’t fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:
- Be sure to read and understand everything before you sign.
- Refuse to sign any blank documents.
- Do not buy property for someone else.
- Do not overstate your income.
- Do not overstate how long you have been employed.
- Do not overstate your assets.
- Accurately report your debts.
- Do not change your income tax returns for any reason. Tell the whole truth about gifts. Do not list fake co-borrowers on your loan application.
- Be truthful about your credit problems, past and present.
- Be honest about your intention to occupy the house
- Do not provide false supporting documents.

CLOSING

61. WHAT HAPPENS AFTER I’VE APPLIED FOR MY LOAN?

It usually takes a lender between 1-6 weeks to complete the evaluation of your application. Its not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing with you. And after closing, you’ll be able to move into your new home.

62. WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?

This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller’s responsibility to fix them.

63. WHAT MAKES UP CLOSING COST?

There may be closing cost customary or unique to a certain locality, but closing cost are usually made up of the following:
- Attorney’s or escrow fees (Yours and your lender’s if applicable)
- Property taxes (to cover tax period to date)
- Interest (paid from date of closing to 30 days before first monthly payment)
- Loan Origination fee (covers lenders administrative cost)
- Recording fees
- Survey fee
- First premium of mortgage Insurance (if applicable)
- Title Insurance (yours and lender’s)
- Loan discount points
- First payment to escrow account for future real estate taxes and insurance
- Paid receipt for homeowner’s insurance policy (and fire and flood insurance if applicable)
- Any documentation preparation fees

64. WHAT CAN I EXPECT TO HAPPEN ON CLOSING DAY?

You’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.

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

You’ll pay the lender’s agent all closing costs and, in turn,he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.

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

HOW CAN HUD and the FHA HELP ME BECOME a HOMEOWNER

66. WHAT IS THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT?

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

67. HOW DOES HUD HELP HOMEBUYERS AND HOMEOWNERS?

HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans available for lower- and moderate-income families through its FHA mortgage insurance program and its HUD Homes program. HUD owns homes in many communities throughout the U.S. and offers them for sale at attractive prices and economical terms. HUD also seeks to protect consumers through education, Fair Housing Laws, and housing rehabilitation initiatives.

68. WHAT IS THE FHA?

Now an agency within HUD, the Federal Housing Administration was established in 1934 to advance opportunities for Americans to own homes. By providing private lenders with mortgage insurance, the FHA gives them the security they need to lend to first-time buyers who might not be able to qualify for conventional loans. The FHA has helped more than 26 million Americans buy a home.

69. HOW CAN THE FHA ASSIST ME IN BUYING A HOME?

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

70. HOW IS THE FHA FUNDED?

Lender claims paid by the FHA mortgage insurance program are drawn from the Mutual Mortgage Insurance fund. This fund is made up of premiums paid by FHA-insured loan borrowers. No tax dollars are used to fund the program.

71. WHO CAN QUALIFY FOR FHA LOANS

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

72. WHAT IS THE FHA LOAN LIMIT?

FHA loan limits vary throughout the country, from $115,200 in low-cost areas to $208,800 in high-cost areas. The loan maximums for multi-unit homes are higher than those for single units and also vary by area.

Because these maximums are linked to the conforming loan limit and average area home prices, FHA loan limits are periodically subject to change. Ask your lender for details and confirmation of current limits.

73. WHAT ARE THE STEPS INVOLVED IN THE FHA LOAN PROCESS?

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

74. HOW MUCH INCOME DO I NEED TO HAVE TO QUALIFY FOR AN FHA LOAN?

There is no minimum income requirement. But you must prove steady income for at least three years, and demonstrate that you’ve consistently paid your bills on time.

75. WHAT QUALIFIES AS AN INCOME SOURCE FOR THE FHA?

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

76. CAN I CARRY DEBT AND STILL QUALIFY FOR FHA LOANS?

Yes. Short-term debt doesn’t count as long as it can be paid off within 10 months. And some regular expenses, like child care costs, are not considered debt. Talk to your lender or real estate agent about meeting the FHA debt-to-income ratio.

77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?

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

78. CAN I EXCEED THIS RATIO?

You may qualify to exceed if you have:
- a large down payment
- a demonstrated ability to pay more toward your housing expenses
- substantial cash reserves
- net worth enough to repay the mortgage regardless of income
- evidence of acceptable credit history or limited credit use
- less-than-maximum mortgage terms
- funds provided by an organization
- a decrease in monthly housing expenses

79. HOW LARGE A DOWN PAYMENT DO I NEED WITH AN FHA LOAN?

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

80. WHAT CAN I USE TO PAY THE DOWN PAYMENT AND CLOSING COSTS OF AN FHA LOAN?

Besides your own funds, you may use cash gifts or money from a private savings club. If you can do certain repairs and improvements yourself, your labor may be used as part of a down 8 payment (called -sweat equity”). If you are doing a lease purchase, paying extra rent to the seller may also be considered the same as accumulating cash.

81. HOW DOES MY CREDIT HISTORY IMPACT MY ABILITY TO QUALIFY?

The FHA is generally more flexible than conventional lenders in its qualifying guidelines. In fact, the FHA allows you to re-establish credit if:
- two years have passed since a bankruptcy has been discharged
- all judgments have been paid
- any outstanding tax liens have been satisfied or appropriate arrangements have been made to establish a repayment plan with the IRS or state Department of Revenue
- three years have passed since a foreclosure or a deed-in-lieu has been resolved

82. CAN I QUALIFY FOR AN FHA LOAN WITHOUT A CREDIT HISTORY?

Yes. If you prefer to pay debts in cash or are too young to have established credit, there are other ways to prove your eligibility. Talk to your lender for details.

83. WHAT TYPES OF CLOSING COSTS ARE ASSOCIATED WITH FHA-INSURED LOANS?

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

84. CAN I ROLL CLOSING COSTS INTO my FHA LOAN?

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

85. ARE FHA LOANS ASSUMABLE?

Yes. You can assume an existing FHA-insured loan, or, if you are the one deciding to sell, allow a buyer to assume yours. Assuming a loan can be very beneficial, since the process is streamlined and less expensive compared to that for a new loan. Also, assuming a loan can often result in a lower interest rate. The application process consists basically of a credit check and no property appraisal is required. And you must demonstrate that you have enough income to support the mortgage loan. In this way, qualifying to assume a loan is similar to the qualification requirements for a new one.

86. WHAT SHOULD I DO IF I CAN’T MAKE A PAYMENT ON LOAN?

Call or, write to your lender as soon as possible. Clearly explain the situation and be prepared to provide him or her with financial information.

87. ARE THERE ANY OPTIONS IF I FALL BEHIND ON MY LOAN PAYMENTS?

Yes. Talk to your lender or a HUD-approved counseling agency for details. Listed below are a few options that may help you get back on track.

For FHA loans:
- Keep living in your home to qualify for assistance.
- Contact a HUD-approved housing counseling agency (1-800-569-4287 or TDD: 1-800-483-2209) and cooperate with the counselor/lender trying to help you.
- HUD has a number of special loss mitigation programs available to help you:
- Special Forbearance: Your lender will arrange for a revised repayment plan which may Include temporary reduction or suspension of payments; you can qualify by having an Involuntary reduction in your Income or Increase In living expenses.
- Mortgage Modification: Allows refinance debt and/or extend the term of the your mortgage loan which may reduce your monthly payments; you can qualify if you have recovered from financial problems, but net Income Is less than before.
- Partial Claim: Your lender maybe able to help you obtain an interest-free loan from HUD to bring your mortgage current.
- Pre-foreclosure Sale: Allows you to sell your property and pay off your mortgage loan ,to avoid foreclosure.
- Deed-in lieu of Foreclosure: Lets you voluntarily “give back” your property to the lender; it won’t save your house but will help you avoid the costs, time, and effort of the foreclosure process.
- If you are having difficulty with an-uncooperative lender or feel your loan servicer is not providing you with the most effective loss mitigation options, call the FHA Loss Mitigation Center at 1-888-297-8685 for additional help.

For Conventional Loans:

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

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

Freddie Mac, like Fannie Mae, will usually only work with the loan servicer. However, if you encounter problems with your lender during the loss mitigation process, you can coil customer service for help at 1-800-FREDDIE (1-800-373-3343).

In any loss mitigation situation, it is important to remember a few helpful hints:
- Explore every reasonable alternative to avoid losing your home, but beware of scams. For example, watch out for:

Equity skimming: a buyer offers to repay the mortgage or sell the property if you sign over the deed and move out.
Phony counseling agencies: offer counseling for a fee when it is often given at no charge.

- Don’t sign anything you don’t understand.

MORTGAGE INSURANCE

88. WHAT IS MORTGAGE INSURANCE?

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

89. HOW DOES MORTGAGE INSURANCE WORK? IS IT LIKE HOME OR AUTO INSURANCE?

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

90. DO I NEED MORTGAGE INSURANCE? HOW DO I GET IT?

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

91. HOW CAN I RECEIVE A DISCOUNT ON THE FHA INITIAL MORTGAGE INSURANCE PREMIUM?

Ask your real estate agent or lender for information on the HELP program from the FHA. HELP – Homebuyer Education Learning Program – is structured to help people like you begin the homebuying process. It covers such topics as budgeting, finding a home, getting a loan, and home maintenance. In most cases, completion of this program may entitle you to a reduction in the initial FHA mortgage insurance premium from 2.25% to 1.75% of the purchase price of your new home.

92. WHAT IS PMI?

PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI’s usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.

FHA PRODUCTS

93. WHAT IS A 203(b) LOAN?

This is the most commonly used FHA program. It offers a low down payment, flexible qualifying guidelines, limited lender’s fees, and a maximum loan amount.

94. WHAT IS A 203(k) LOAN?

This is a loan that enables the homebuyer to finance both the purchase and rehabilitation of a home through a single mortgage. A portion of the loan is used to pay off the seller’s existing mortgage and the remainder is placed in an escrow account and released as rehabilitation is completed. Basic guidelines for 203(k) loans are as follows:
- The home must be at least one year old.
- The cost of rehabilitation must be at least $5,000, but the total property value – including the cost of repairs – must fall within the FHA maximum mortgage limit.
- The 203(k) loan must follow many of the 203(b) eligibility requirements.
- Talk to your lender about specific improvement, energy efficiency, and structural guidelines.

95. WHAT IS AN ENERGY EFFICIENT MORTGAGE (EEM)?

The Energy Efficient Mortgage allows a homebuyer to save future money on utility bills. This is done by financing the cost of adding energy-efficiency features to a new or existing home as part of an FHA-insured home purchase. The EEM can be used with both 203(b) and 203(k) loans. Basic guidelines for EEMs are as follows:
- The cost of improvements must be determined by a Home Energy Rating System or by an energy consultant. This cost must be less than the anticipated savings from the improvements.
- One- and two-unit new or existing homes are eligible; condos are not.
- The improvements financed may be 5% of property value or $4,000, whichever is greater. The total must fall within the FHA loan limit.

96. DELETED.

97. WHAT IS A TITLE I LOAN?

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

98. WHAT OTHER LOAN PRODUCTS OR PROGRAMS DOES THE FHA OFFER?

The FHA also insures loans for the purchase or rehabilitation of manufactured housing, condominiums, and cooperatives. It also has special programs for urban areas, disaster victims, and members of the armed forces. Insurance for ARMS is also available from the FHA.

99. HOW CAN I OBTAIN AN FHA-INSURED LOAN?

Contact an FHA-approved lender such as a participating mortgage company, bank, savings and loan association, or thrift. For more information on the FHA and how you can obtain an FHA loan, visit the HUD web site at http://www.hud.gov or call a HUD-approved counseling agency at 1-800-569-4287 or TDD: 1-800-877-8339.

100. HOW CAN I CONTACT HUD?

Visit the web site at http://www.hud.gov or look in the phone book “blue pages” for a listing of the HUD office near you.

The bill provides for a $8,000 tax credit that would be available to first-time home buyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. The credit does not require repayment. Most of the mechanics of the credit will be the same as under the 2008 rules: the credit will be claimed on a tax return to reduce the purchaser’s income tax liability. If any credit amount remains unused, then the unused amount will be refunded as a check to the purchaser.

Here are some points to understand $8000 tax credits and their eligibility criteria:
. It is only available to the first time home buyers.
. Tax credit is not a loan. One does not need to pay it back. But that is subjective. In case the home is sold off with in 3 years, the $ 8,000 tax credit must be re-paid.
. Tax credit requires the home buyer’s tax liability. In case the buyer’s liability is less than $ 8,000, the remaining credit would be issued as a check.
. The home purchases must only be for a primary residence.
. It is only available for the homes that are purchased between January 1, 2009 & December 1, 2009.
. The single persons with an income of $ 75,000 or more are not eligible to get this tax credit.
. The married couples whose joint income is $ 150,000 or more, they do not qualify for this tax credit.
. The tax credit is not eligible in case the seller is the buyer’s relative.

Who Qualifies?
First-time home buyers who purchase homes between January 1, 2009 and December 1, 2009. To qualify as a “first-time home buyer” the purchaser or his/her spouse may not have owned a residence during the three years prior to the purchase.

Which Properties Are Eligible?
The 2009 First-Time Home Buyer Tax Credit may be applied to primary residences, including: single-family homes, condos, townhomes, and co-ops.

How Much Will the Credit Be?
The maximum allowable credit for home buyers is $8,000. Each home buyer’s tax credit is determined by two factors:
The price of the home—the credit is equal to 10% of the purchase price of the home, up to $8,000.
The buyer’s income—single buyers with incomes up to $75,000 and married couples with incomes up to $150,000—may receive the maximum tax credit.

If the Buyer(s)’ Income Exceeds These Limits, Can He/She Still Get a Credit?
Yes, some buyers may still be eligible for the credit.

The credit decreases for buyers who earn between $75,000 and $95,000 for single buyers and between $150,000 and $170,000 for home buyers filing jointly. The amount of the tax credit decreases as his/her income approaches the maximum limit. Home buyers earning more than the maximum qualifying income—over $95,000 for singles and over $170,000 for couples are not eligible for the credit.

Will the Tax Credit Need to Be Repaid?
No. The buyer does not need to repay the tax credit, if he/she occupies the home for three years or more. However, if the property is sold during the three-year period, the credit will be recouped on the sale.

What’s this new homebuyer tax incentive for 2009?
The 2008 $7500, repayable credit is increased to $8000 and the repayment feature is eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.

Who is eligible?
Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.

How does a tax credit work?
Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual’s income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9,500 – $8000 = $1500)

So what happens if the purchaser is eligible for an $8000 credit but their entire income tax liability for the year is only $6000?
This tax credit is what’s called “refundable” credit. Thus, if the eligible purchaser’s total tax liability was $6000, the IRS would send the purchaser a check for $2000. The refundable amount is the difference
FIRST-TIME HOMEBUYER TAX CREDIT
between $8000 credit amount and the amount of tax liability. ($8000 – $6000 = $2000) Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.

How does withholding affect my tax credit and my refund?
A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.

Is there an income restriction?
Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as Single (or Head of Household) are eligible for the credit if their income is no more than $75,000. Married couples who file a Joint return may have income of no more than $150,000.

How is my “income” determined?
For most individuals, income is defined and calculated in the same manner as their Adjusted Gross Income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS Form 1040.

What if I worked abroad for part of the year?
Some individuals have earned income and/or receive housing allowances while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross Income (MAGI). Their eligibility for the credit will be based on their MAGI.

Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
Not always. The credit phases-out between $75,000 – $95,000 for singles and $150,000 – $170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual’s income reaches $95,000 (single return) or $170,000 (joint return). For example, if a married couple had income of $165,000, their credit would be reduced by 75% as shown: Couple’s income $165,000 Income limit 150,000 Excess income $15,000 The excess income amount ($15,000 in this example) is used to form a fraction. The numerator of the fraction is the excess income amount ($15,000). The denominator is $20,000 (specified by the statute).

In this example, the disallowed portion of the credit is 75% of $8000, or $6000 ($15,000/$20,000 = 75% x $8000 = $6000) Stated another way, only 25% of the credit amount would be allowed. In this example, the allowable credit would be $2000 (25% x $8000 = $2000)

What’s the definition of “principal residence?”
Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as “owner-occupied” housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.

Are there restrictions on the location of the property?
Yes. The home must be located in the United States. Property located outside the US is not eligible for the credit.

Are there restrictions related to the financing for the mortgage on the property?
In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise-eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)

Do I have to repay the 2009 tax credit?
NO. There is no repayment for 2009 tax credits.

Do 2008 purchasers still have to repay their tax credit?
YES. The $7500 credit in 2008 was more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.

How do I apply for the credit?
There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.

So I can’t use the credit amount as part of my downpayment?
No. Congress tried hard to devise a mechanism that would make the funds available for closing costs, but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS into the purchase and settlement phase of the transaction.

So there’s no way to get any cash flow benefits before I file my tax return?
Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.

What if I purchase later this year but can’t get to settlement before December 1?
The credit is available for purchases before December 1, 2009. A home is considered as “purchased” when all events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009 for purchases to be eligible for the credit.

I haven’t even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?
You’ll have a helpful choice that might speed up the process. Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009 can treat the purchase as if it had occurred on December 31, 2008. Thus, they can claim the credit on their 2008 tax return that is due on April 15, 2009. They actually have three filing options. If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15. They can extend their 2008 income-tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.) If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040X. (Form 1040X is available at www.irs.gov)

Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. Their 2009 tax return is due on April 15, 2010.

I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit?
No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (IRS Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.

If I claim my 2009 $8000 credit on my 2008 tax return, will I have to repay the credit just as the 2008 credits are repaid?
No. Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.

I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit, as well?
No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first-time homebuyer.

I live in the District of Columbia. If I qualify as a first-time homebuyer, can I use both the $5000 DC credit and the $8000 credit?
No; double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.

I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?
One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of purchase, you are required to pay back the full amount of any credit, including any refund you received from it. A few exceptions apply. (See below, #24). Note that this same 3-year recapture rule applies, as well, to the $7500 credit available for 2008. This provision is designed as an anti-flipping rule.

What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?
The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first three years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first three years.

I have a home under construction. Am I eligible for the credit?
Yes, so long as you actually occupy the home before December 1, 2009. WITHHOLDING EXAMPLES: Note: The impact of estimated tax payments would be the same. Situation 1: Sally plans her withholding so that her withholding is as close as possible to what she anticipates as her income tax liability for the year. When she fills out her 1040, her liability is $6000. She has had $6000 withheld from her paycheck. She also qualifies for the $8000 homebuyer credit. Result: Sally’s withholding satisfies her tax liability and reduces it to zero. She will receive a refund of the full $8000. Situation 2: Nick and Nora file a joint return. Nick is self-employed and makes estimated payments; Nora has taxes withheld from her salary. When they compute their taxes, their combined withholding and estimated tax payments are $11,000. Their income tax liability is $9800. They also qualified as first-time homebuyers and are eligible for the $8000 refundable tax credit. Result: Ordinarily, their combined estimated tax payments and withholding would make them eligible for a refund of $1200 ($11,000 – $9800 = $1200). Because they are eligible for the refundable tax credit as well, they will receive a refund of $9200 ($1200 income tax refund + $8000 refundable tax credit = $9200) Situation 3: Cesar and LuzMaria both have income taxes withheld from their salaries and file a joint return. When they file their income tax return, their combined withholding is $5000. However, their total tax liability is $7200, generating an additional income tax liability of $2200 ($7200 – $5000). They also qualify for the $8000 first-time homebuyer tax credit. Result: Cesar and LuzMaria have been under-withheld by $2200. Ordinarily, they would be required to pay the additional $2200 they owe (plus any applicable interest and penalties). Because they are eligible for the refundable homebuyer tax credit, the credit will cover the $2200 additional liability. In addition, they will receive an income tax refund of $5800 ($8000 – $2200 = $5800). If they owed penalties and/or interest, that amount would reduce the refund

True or False?
Mortgage lenders are required to give me the lowest rate available.

False: Currently, there are no federal or state laws requiring a mortgage lender to give you the best rate available. These days, many lenders offer a variety of mortgage products, some carrying higher interest rates than others.

For example, many lenders offer reduced-documentation loans, also known as low-doc. or no-doc. loans. These loans require the borrower to provide little financial documentation. They may, however, have pricing premiums attached and cost you more than a loan requiring full documentation (financial statements, proof of employment, etc.).

It is important to comparison shop and understand the loan terms and associated benefits and risks prior to choosing a product. Some mortgage lenders may advertise products that appear to carry substantially lower interest rates than others. These rates, however, may simply be introductory or “teaser” rates to attract customers. Typically, the introductory rate will adjust to a higher rate at some point in the loan term.

Federal law requires the lender to provide you with specific written disclosures during the application process. Federal Reserve Regulation Z, which implements the Truth in Lending Act, and the Real Estate Settlement Procedures Act (RESPA) mandate that the lender provide you with specific documents such as The Good Faith Estimate and the initial Truth in Lending Disclosures. These documents contain the terms of your loan: review them carefully before closing on your loan. They should accurately reflect the terms promised by your lender.

What you should ask the lender:

* Which of your products offers the lowest interest rate?

* Will my interest rate be fixed or variable (change periodically)?

* If the interest rate can change, when will it change and how high or low can it go?

* If the lender offers an introductory or “teaser” rate, ask, When does the rate expire and how will the new rate change my monthly payment amount?

* If the rate expires, what will the new rate be, and will it be fixed or variable?

* Would I qualify for a better interest rate if I went for a standard full-documentation loan rather than a low-doc. or no-doc. loan?

Terms you should know:

Annual Percentage Rate (APR)
Adjustable Rate Mortgage (ARM)
Disclosure Good Faith Estimate (GFE)
Initial Truth in Lending (TIL) Disclosure
Reduced Documentation Loan
Teaser Rate

True or False?
No matter what type of mortgage I have, as long as I continue to make monthly mortgage payments, my principal balance will fall every month.

False: If you have a conventional mortgage, (a 15 – or 30 – year fixed rate product), your principal balance will fall every month because the product requires you to pay down both interest and principal each month and allows you to reduce (amortize) your loan amount.

That, however, is not necessarily the case with some of today’s nontraditional mortgage products such as option-ARMs and interest-onlys with teaser rates: your balance may not fall, and in some cases it may go up, even though you make all the required payments. This is called negative amortization; it can occur if you choose to make minimum monthly payments that typically cover only a part of the monthly interest owed and none of the principal for a certain period of time. The interest that is not paid is added to your principal balance. As a result, your loan balance increases and could exceed what you originally intended to borrow.

The lender should provide you with clear information about the benefits and risks of the products it offers so that you can make an informed decision.

What you should ask the lender:

If the product permits negative amortization:
(the loan balance can increase every month)

* May I have a repayment analysis that includes the initial loan amount plus any balance increase that may result from the negative amortization provision?

If the lender suggests an option-ARM: (option to make minimum monthly payments OR interest only payments)

* What is the minimum monthly payment on the loan?

* If I make that payment, will my loan balance rise, fall, or stay the same?

* What effect will choosing minimum monthly payments have on how much of my home I actually own?

* What effect will choosing interest-only payments have on my loan balance and my home equity (the amount of my home I own)?

* When I start paying down the principal, as required, how would the dollar amount of my payments compare to that of a conventional mortgage lasting the same number of years?

If the lender suggests an interest-only mortgage:
(allows you to pay only the interest and no principal for a set period of time)

* When my payments increase after the designated period (usually 3-5 years), will I still be able to afford my home?

* How does the interest rate on an interest-only compare to a conventional 15- or 30-year mortgage?

* When I start paying down the principal, as required, how will the dollar amount of my payments compare to that of a conventional mortgage lasting the same number of years?

Terms you should know:

Adjustable-Rate Mortgage (ARM)
Amortization
Conventional (or traditional) Mortgage
Interest-Only Mortgage
Minimum Monthly Payment (MMP)
Negative Amortization
Nontraditional Mortgage
Option-ARM

True or False?
With many types of mortgages, my monthly payment could go up a lot from one month to the next.

True: Depending on the terms of your loan, your monthly payments could increase — in some cases dramatically. Nontraditional mortgage loan products such as interest-onlys and option-ARMS are more complex than traditional fixed or 15 – or 30 – year adjustable rate mortgages (ARMs) and can carry a significant risk of payment shock (a large and sudden increase in your monthly payment).

To avoid drastic increases in your monthly payments, it is important for you to understand loan terms and associated benefits and risks prior to choosing one of the many mortgage products available today. If you are considering an adjustable-rate mortgage, traditional or otherwise, make sure you have the ability to repay the debt.

Federal law requires the lender to provide you with specific disclosures about the terms of your loan during the application process. Review these disclosures carefully. The lending institution should provide you with enough information to make an informed decision.

What you should ask the lender:

* What is the most appropriate loan product for me?

* Can my monthly payments rise? If so, how much?

Terms you should know:

Interest-Only Mortgages
Nontraditional Mortgages
Option-ARMs
Payment Shock

True or False?
If the lender is willing to lend me the money for my dream house, I must be able to afford it!

False: Typically, reputable mortgage lenders will not lend to you beyond your means. But others will and may not properly take into account your ability to repay should loan terms or your financial circumstances change.

For example, if you are considering an interest-only mortgage, the lender may qualify you based on your ability to make those interest payments without considering the fact that later on in the loan term you will have to pay down principal as well.

Lenders offer a variety of products that can make it much easier for you to get a house that would otherwise be unaffordable. As with any mortgage, these products are appropriate for some and not others. An interest-only loan may be beneficial to you if you plan to own the house for a short term. If, however, you plan to stay long term, you need to be able to continue to pay your mortgage when the loan resets at a new rate and your monthly payments increase. A soft second or piggyback loan (a mortgage taken to cover your down payment), or private mortgage insurance (PMI) may save you from making a down payment on the house at closing (traditionally 20 percent of the cost). But that means you are starting out with little or no equity in your home.

To obtain your dream house, be sure to understand the risks associated with mortgage products. First and foremost, be sure you can repay the debt. For the unwary borrower, the dream can turn to a financial nightmare if the product is inappropriate or too risky.

It is important, therefore, that you do your homework: Evaluate your financial circumstances to determine what you can and cannot afford before you agree to a mortgage.

Consider the following:

* Think about how long you plan to stay in the house: is this a long- or short-term investment?

* Do you anticipate any changes in your compensation?

* If you plan to stay long term, will you be able to cover changes in your monthly payment and thereby avoid foreclosure or financial disaster?

What you should ask the lender:

* Given my circumstances, is this loan suitable for me?

* If you are considering a piggyback loan (a simultaneous second loan) because you cannot afford to put a down payment on your dream house, ask, What will cost me more — a piggyback loan or PMI?

* Will I qualify for PMI?

Terms you should know:

Debt-to-Income Ratio (DTI)
Loan-to-Value Ratio (LTV)
Private Mortgage Insurance (PMI)
Simultaneous Second Lien Loan (Piggyback)

True or False?
I can always refinance my mortgage in the future.

False: The truth is that in the following circumstances, it may be imprudent to refinance:

1. If home values stop going up, your original loan amount may exceed the value of your home;

2. If you have an adjustable-rate mortgage, it may be costly to refinance as interest rates start rising;

3. Prepayment penalties (fees charged for paying the loan off early) could limit your ability to get out of an unfavorable loan without substantial penalties; or

4. If your credit rating deteriorates, you may no longer qualify for the best rates.

Be cautious of lenders who want to steer you toward a particular product and make predictions about the future direction of interest rates. Telling you that you can always refinance at a later date is, in effect, making such a prediction.

What you should ask the lender:

* How soon after I get the mortgage can I refinance?

* Are there penalties if I pay off the loan early?

* What is the dollar amount of the penalty?

* If the value of the house falls by 5 percent, for example, will I still qualify for the same type of mortgage when I refinance?

Terms you should know:

Credit Score
Credit Report
Prepayment Penalty

Know Before You Go… To Get a Mortgage
By Federal Reserve Board

Did You Know…
That mortgage rates and terms vary greatly among lenders?

It is up to YOU to find the best deal on your mortgage. Shop around!

Did You Know…
That while many borrowers got loans that were reasonable at the time, some may now qualify for better terms that potentially could save them thousands of dollars?

For example, on a 30-year fixed, $200,000 mortgage:*

* The going national rate for a borrower with a 700 credit score would be 6.2%. The monthly payment would be approximately $1,227.

* The going national rate for a borrower with a 620 credit score would be 9.4%. The monthly payment would be approximately $1,671.

The difference in price of these two loans is $444 a month or $5,328 a year!

Ask Yourself the Following…

1. Have I paid all of my bills on time over the past two years?

2. Is my credit history free from any judgments, liens, or bankruptcies in the past five years?

3. Is my credit score over 680?**

4. Is my mortgage rate over 7%?

IF your answer to any of these questions is YES, you might qualify for a loan that could save you money in the long run.

Steps You Should Take…

* Talk to your lender! Your lender may be able to help you modify or refinance into a more appropriate product.***

* Shop around! It is important to comparison shop and understand the loan terms and associated benefits and risks before choosing a product. Some loans start out with lower interest rates than others. These rates, however, may simply be introductory or “teaser” rates to attract customers.

You May Be Paying Too Much For Your Mortgage
By Federal Reserve Board