HOMEBUYER EDUCATION COURSE

BUDGETING FOR YOUR HOME PURCHASE

Our daily lives have become so busy that the American family is generally accustomed to "buying" rather than "shopping". When we do not take the time to shop for the best value, generally the cost is higher. This buying mode has made many of us "impulsive" spenders.

An impulsive spender is one who purchases an item without giving any thought to the significance of the purchase. A family that develops this type of spending pattern is less likely to save money. The family lives from paycheck to paycheck. Sometimes that paycheck does not stretch far enough, and then it becomes, "borrowing from Peter to pay Paul". Even if there is a desire to buy a home of their own, it seems out of reach, because they don’t have the money for the down payment or closing costs.

We want to help you understand your own spending habits and give you guidance and tools to work with to accomplish your dream of owning your own home. Are you a "buyer" or a "shopper"?

There is a simple technique to help you control impulsive spending and better manage your money. This simple technique is called: "Budgeting your money!" What does "budget" mean to you?

Now, let’s talk about ways to help you look carefully at your "real" spending habits and discuss "budgeting". Some of you may already by familiar with the budgeting process or how to budget, but others may not understand the concept of a budget. A budget is simply a plan for spending and saving money.

In the corporate world, companies MUST budget their income properly to make a profit and keep their spending in line with the income the company receives. These budgets are generally prepared annually, with quarterly and sometimes monthly reviews.

The budget provides a direction for the way company money is to be spent. By budgeting, a company can realize a savings of money which results in a profit that can be distributed to the investors/stockholders, as dividends.

In a family or household, a budget generally includes your salary and expenses and needs to be reviewed and adjusted more often than quarterly. A monthly plan and review is recommended. For some of you that are just learning to budget, a weekly plan and review may work best.

Where to begin? How can a budget help you? A budget is a written log of how your money is being spent. It allows you to see your total income and where that income is going. Budgeting may seem hard for some of your because it requires some planning and a desire or determination to follow the budget.

How to Budget—Gather family members together and allow them to each express their ideas about how the money is to be spent.

• Set realistic goals. Allow room for change. Many events can happen in a short period of time that can change or alter your goals.
• Be specific in writing your goals. Make sure all family members understand the goal in a clear and concise manner.

Setting goals and prioritizing them is a very good place to begin on the budgeting process. You cannot decide how to get somewhere if you don’t know where you are going. So, let’s begin by deciding where we are going.

What is a "goal"? Some of you may already understand the importance of setting goals. It is always recommended when setting a goal, that you write it down on paper. The fact that you have put the goal in writing and can look at it and examine it makes it real. In the corporate world, company goals are the ideals of what they want to accomplish during a year. Once they have determined their goals, they then must prioritize the goals to determine what is most important.

CASE STUDY #1 – XYZ DELICATESSEN

XYZ Delicatessen’s owners need to make a decision on renewing the lease on their store location. They have located a new space that looks more appealing to them, but the rent would be higher. Their current landlord is willing to renew their lease at the same rate for the next year, but they really like the other space better.

Their current space has provided them a good income with a profit, so they have been able to put money into a savings account. When they reviewed their savings balance, they decided they could afford to improve their deli equipment by buying a new oven. Just as the old lease expired, the refrigerator that holds their drinks broke down. They are faced with having to replace it. Since most of their savings were used to purchase the new oven, they are a little short on cash in savings.

Question: Should they ignore the refrigerator problem, not replace it and go ahead and lease the new deli space? OR Should they buy a new refrigerator and wait another year before they move into new space?

THIS IS CALLED SETTING YOUR PRIORITIES. WHICH IS MORE IMPORTANT: 1) The refrigerator? OR 2) The new store space?

XYZ Deli owners determined that if they moved into the new space without a refrigerator for drinks they would not make as much profit as before. If their profits went down, then they might not be able to afford the new store space. They had set priorities.

Their greatest priority was making a profit. It would be better for them to buy the new refrigerator and wait for one year before looking at new space. At the end of one year, their oven and refrigerator would still have a long life and they would have extra money in the savings account that could help them with the moving expenses of a move to a new location.

The next step in the budgeting process is: Prioritize your goals. This process helps you "plan" for the most important projects. There are two types of goals: 1. Short-Range Goals and 2. Long- Range Goals. It is best to have both of these goals.

Short-Range Goals

Generally, you will prepare a short-range goal for the period of time covered with each paycheck you receive. If you get paid weekly, the plan will include all your expenses and income for one (1) week; if you get paid bi-weekly, the goal will include all your expenses and income for two (2) weeks, etc.

Generally, you will prepare a short-range goal for the period of time covered with each paycheck you receive. If you get paid weekly, the plan will include all your expenses and income for one (1) week; if you get paid bi-weekly, the goal will include all your expenses and income for two (2) weeks, etc.

List 10 short-range goals:

1) ______________________________	2) ______________________________
3) ______________________________	4) ______________________________
5) ______________________________	6) ______________________________
7) ______________________________	8) ______________________________
9) ______________________________	10) ______________________________

Your short-range goals may include things like:

• Pay your rent
• Pay utilities
• Buy weekly food
• Pay weekly childcare
• Buy weekly gasoline

Each of these goals occurs in a short span of time and many of them may be recurring. You will include these short-range goals in your working budget. Many of you have set short-range goals, even though you may not have realized what you were doing. A goal doesn’t change whether it is a mental thought or a written statement. It becomes much clearer and more realistic, however, when you have taken the time to write it down. As you can see, in order to meet your short-range goals, you need a job that provides you an income to pay for those goals.

Long-Range Goals

Your long-range goal will span sometimes only one (1) month, six (6) months or could span one (1) year or more. Your long-range goals are determined by how long it will take you to accumulate the money to meet the goal. There are variable that enter into that decision. How much does the goal cost? And how much are you setting aside each pay period to work toward that goal?

List 10 long-range goals:
1)______________________________________________________________________
2)______________________________________________________________________
3)______________________________________________________________________
4)______________________________________________________________________
5)______________________________________________________________________
6)______________________________________________________________________
7)______________________________________________________________________
8)______________________________________________________________________
9)______________________________________________________________________
10)_____________________________________________________________________

Your long-range goals may include things like:

• Buy house
• Buy new clothes
• Buy furniture or appliances
• Buy car
• Pay off bills
• Education
• Vacation

The long-range goals, however, require not just an income, but also a plan for money to be accumulated to pay for these goal items. A savings account provides the avenue to accumulate this money. The savings account becomes a line item in your budget process. Saving money is generally, the only way individuals, today, are able to accumulate the funds required to purchase a home. Fortunately, Partners In Charity will give you the down payment for your new home so that your savings can be used for other essentials.

Now that we have talked about short- and long-range goals, let’s work on prioritizing those goals.

List your short-range goals in order of priority:
1)______________________________________________________________________
2)______________________________________________________________________
3)______________________________________________________________________
4)______________________________________________________________________
5)______________________________________________________________________
6)______________________________________________________________________
7)______________________________________________________________________
8)______________________________________________________________________
9)______________________________________________________________________
10)_____________________________________________________________________

List your long-range goals in order of priority:
1)______________________________________________________________________
2)______________________________________________________________________
3)______________________________________________________________________
4)______________________________________________________________________
5)______________________________________________________________________
6)______________________________________________________________________
7)______________________________________________________________________
8)______________________________________________________________________
9)______________________________________________________________________
10)_____________________________________________________________________

CASE STUDY #2 – MURRAY FAMILY

Janet and Sam Murray are a young newly married couple. They both have graduated from college are ling in an apartment. Currently, they both have jobs. They have been thinking about buying a home, but do not think they have enough money in their Bridal Registry Account to cover the full cost of a downpayment and closing costs. They need to evaluate their income and expenses to: 1. See if they can afford a home. 2. Determine how they could add money to their Bridal Registry Account to save enough money for a downpayment and closing costs. They have just finished a wonderfully prepared meal and have sat down with all their payroll check stubs and bills to discuss the possibility of purchasing a home. During their discussion, Janet quickly realized she and Same had different ideas. She was getting confused, so they agreed that they first needed to determine some goals. They each wrote down their goals and prioritized them.

Sam’s Goals:	Janet’s Goals:
Buy a new car—Sam was driving the same car he had in high school and college. It was getting old and needing frequent repairs. Pay off college debt—Sam had to borrow money to finish college. He was now obligated to repay that loan. Buy a home	Buy a home. Buy new living room furniture. Reduce income taxes—Since both Sam and Janet work, live in an apartment, and have no children, Janet thought they were paying too much in income tax.

It didn’t take long for them to see that they shared some of the same goals, but in reality, they needed to negotiate to see how all of their goals could be met. They then decided to take a look at their income and expenses.

Sam graduated from college with a degree in Chemical Engineering. He got a job at Bama Pie Company. He was doing very well at his job and felt he had job security, since Bama Pie makes all the pies for the McDonald’s fast food chain and had recently landed a new, very big contract with Pizza Hut Corp. to make their pizza dough. Sam’s salary is $38,000 per year, paid on the first and the fifteenth of the month.

Janet also graduated from college with a degree in accounting and got a job with Williams Companies. She passed her Certified Public Accountant exam, which allowed her to get an immediate increase in salary. Janet is making $35,000 per year and also gets paid on the first and fifteenth of the month.

Monthly Income	Monthly Expenses
Sam’s Income: Janet’s Income: Gross: $3,166.67 Gross: $2,916.67 (Soc. Sec. Tax) 242.25 (Soc. Sec. Tax) 223.13 (Fed. Tax) 886.67 (Fed. Tax) 816.67 (State Tax) 221.67 (State Tax) 204.17 (Health Ins.) 100.00 (Health Ins.) 100.00 (Profit Sharing) 150.00 (Profit Sharing) 150.00 Net Salary $1,566.08 Net Salary $1,572.70 TOTAL MO. NET $3,138.78	Apartment Rent $ 500.00 All utilities paid Food 600.00 Car Insurance 125.00 1-car/liab. Only 1-car/full coverage Clothing 200.00 Auto 250.00 maintenance/repairs Phone 100.00 both parents live away Entertainment 200.00 Gasoline 150.00 Medical 50.00 medicine Cash 200.00 Credit Cards 300.00 $2,000 balance for household needs Loan Payment 150.00 $15,000 college loan Total Expenses: $2,825.00

MURRAY FAMILY WORKSHEET

Six Month Budget Plan
Total Net Monthly Income: _______________________

Budget Category	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	TOTAL
Housing
Utilities
Food
Car Insurance
Clothing
Auto Maintenance
Phone
Entretainment
Gasoline
Medical
Cash
Credit Card
Loan Payment
Child Care
Miscellaneous
TOTAL

CONCLUSION - MURRAY FAMILY

Murray Net Income: $3,138.78
(Less) Expenses: 2,825.00
Net Savings: $ 313.78

Sam and Janet have $300 per month they can save for a downpayment and closing costs. They have a balance of $1500 in their Bridal Registry Account. At a savings rate of $300 per month, they could add $3600 to their account giving them a total of $5100 in a year. Their credit cards will be paid off in seven (7) months at the rate of $300 per month, which would give them an additional $300 per month for savings. Sam’s college loan will take approximately eight (8) years to pay off at the rate of $150 per month. Sam and Janet both agreed that they should leave the college loan payment at the $150 and let it pay itself off at that normal time, because the interest rate on that loan was lower than they could earn on their money in a savings account.

After taking a look at their budget, goals, and priorities, it became clear they could negotiate some of their goals and both be happy with them. They divided their goals into short-range and longrange goals. Their goals for the next six (6) months were the following:

1. Pay cash for all purchases
2. Have their credit cards paid off in six months
3. Add $300 per month to savings

Their long-range goals:

1. Continue to pay $150 per month on Sam’s college loan and not be concerned about the time it would take to pay it off, because it was at a low interest rate.
2. When the credit cards were paid off, add that $300 per month to the savings account.
3. At the end of one (1) year, have a savings balance of $6,600.
   By evaluating their income and expenses, they knew they could afford to buy their own home as long as the price was within their housing budget amount. They knew that by following their budget and meeting their goals, they could afford the down payment and closing costs for the purchase of a home.

They knew that by following their budget and getting a gift of a down payment from, they could buy a home very soon.

CASE STUDY #3 – HERNANDEZ FAMILY

Juan and Rita Hernandez have been married six (6) years. They have two (2) children and do not plan to have any more. Juan and Rita own two (2) Duds and Suds Laundromats. Their business is doing very well. They purchased their business shortly after they were married and at that time, they were determined to make sure the business was successful before starting a family. After three (3) years in business, their cash flow was established and they both felt comfortable with having a family.

From the beginning of their marriage, they learned to negotiate and compromise for what they wanted. They lived with Juan’s parents from the start of their marriage. This arrangement allowed them to put all of their financial resources into the business. They were both working much of the time and the living arrangement worked very well for them. After having their two children, however, the hoe of Juan’s parents was feeling cramped and too small. Juan’s father died shortly after their last child was born. Juan is an only child, and is mother is older and not in good health, so he feels very responsible for her care. Rita and Juan decided it may be time for them to purchase a home of their own. They discussed the move with Juan’s mother. Because of her health problem, Juan believes it would be best for them to purchase a home large enough for their family of four (4) with additional space for his mother to live with them. To purchase a home large enough for all of them, the cost of housing will increase. Juan’s parents had their home paid for, so to purchase a new home will have a major impact on the family’s housing costs. Juan’s mother makes it perfectly clear that they should sell her house and use the money from the sale to apply to the purchase of their new home. With that offer, Juan, Rita, and Mom sit down to discuss their family finances to determine how much they could allow in their budget for the increased housing expense.

Juan and Rita pay themselves a monthly salary from their business. Their net income is $42,000 per year. Juan’s mother is retired and has a retirement income of $15,000 per year. Mom Hernandez has offered to contribute her retirement income to the household budget.

Monthly Income

Monthly Expenses

Juan & Rita’s Net Monthly Income: $3,500.00 Mom Hernandez’s Net Monthly Income: 1,250.00 Total Net Monthly Income: $4,750.00

Utilities $ 200.00 Home Maintenance 300.00 Includes Insurance & Taxes Food 750.00 Car Insurance 0 Their car is a business expense, so they pay for the car insurance through the business account. 1-car/full coverage Clothing 300.00 Auto Maintenance 25.00 Much of their auto maintenance is charged to the business account. Phone 30.00 Entertainment 400.00 Gasoline 25.00 Most of their driving is deducted as a business expense. Medical 700.00 Mom Hernandez is on several different and expensive medications. She also has to be tested at the clinic every month. Cash 400.00 Credit Cards 200.00 Loan Payment 300.00 Car payment Child Care 400.00 Miscellaneous 200.00 Total Expenses: $4,230.00

CASE STUDY #3 – HERNANDEZ FAMILY WORKSHEET

Six Month Budget Plan
Total Net Monthly Income: $4,750.00

Budget Category	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	TOTAL
Housing
Utilities
Food
Car Insurance
Clothing
Auto Maintenance
Phone
Entretainment
Gasoline
Medical
Cash
Credit Card
Loan Payment
Child Care
Miscellaneous
TOTAL

CONCLUSION – CASE STUDY #3 – HERNANDEZ FAMILY

Hernandez Net Monthly Income: $4,750.00
(Less) Monthly Expenses: 4,230.00
Net Savings: $ 520.00

Upon evaluating their net savings, Juan, Rita and Mom decided they would have to make some adjustments in their lives if they were going to purchase a new home. They were looking at buying a newly built home, so their initial maintenance would be less than on their current older home. Their utilities would stay about the same, since they were looking at a larger home. Even though it would be more energy efficient, the size would make up the difference. The $520 plus $300 maintenance would allow them a monthly payment of $820. This monthly payment would have to include the hazard insurance and real estate taxes. They also realized how much they were spending in miscellaneous, cash, and entertainment and thought that if they wanted a new home, they could cut down on some of their frivolous spending and have more money to apply to a new house payment. They decided to limit their entertainment spending to $300 per month; out of pocket cash spending to $200 per month; and if they were not spending as much on entertainment, then their monthly child care expense would also automatically decrease. They decided to discipline themselves to not spending more than $350 per month on childcare.

With these reductions in their spending habits, they could have added flexibility of $350 per month to apply to a house payment or expenses of buying new items for their new house. They now could look at up to $1170 per month in a house payment.They called a Realtor to list their house immediately, and began looking at plans and specifications with a builder to get the exact house they wanted.

PERSONAL INCOME AND EXPENSE SHEET

INCOME: Wage Earner 1 Wage Earner 2
Weekly __________________________________________
Bi-weekly __________________________________________
Monthly __________________________________________
TOTAL __________________________________________

WAGE EARNER 1 _____________________
WAGE EARNER 2 _____________________
TOTAL _____________________

EXPENSES: Weekly Monthly
Housing __________________________________________
Utilities __________________________________________
Food __________________________________________
Insurance __________________________________________
Clothing __________________________________________
Auto Maintenance __________________________________________
Phone __________________________________________
Entertainment __________________________________________
Gasoline __________________________________________
Medical __________________________________________
Cash __________________________________________
Credit Cards __________________________________________
Loan Payments __________________________________________
Child Care __________________________________________
Miscellaneous __________________________________________

TOTAL __________________________________________
TOTAL INCOME: _____________________
(less) TOTAL EXPENSES: _____________________
NET INCOME AVAILABLE FOR SAVINGS _____________________

PERSONAL BUDGET WORKSHEET

Budget Plan For Week Of: _____________________ To_____________________, 20
Net Monthly Income:__________________________

Budget Category	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	TOTAL
Housing
Utilities
Food
Car Insurance
Clothing
Auto Maintenance
Phone
Entretainment
Gasoline
Medical
Cash
Credit Card
Loan Payment
Child Care
Miscellaneous
TOTAL

SIX MONTH BUDGET PLAN
NET MONTHLY INCOME:___________________________

Budget Category	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	TOTAL
Housing
Utilities
Food
Car Insurance
Clothing
Auto Maintenance
Phone
Entretainment
Gasoline
Medical
Cash
Credit Card
Loan Payment
Child Care
Miscellaneous
TOTAL

KEYS TO SUCCESSFUL BUDGETING

1. Basic decisions should be made which involve the entire family concerning how the money will be spent, who will actually pay the bills, and who will maintain the budget.
2. Develop your own spending plan-suited to your family’s income, needs, goals. Don’t try to follow others.
3. Decide what your family’s most important goals are. Your money should be spent for those things which mean most to your family’s welfare and happiness.
4. Plan ahead for the whole year…only in this way can you have a true picture of where you are going and how well you are following your financial plan.
5. Include all of your income and all your expenses. Plan according to what your income is now not what you expect it to be.
6. Keep good records but make the procedure as simple as possible.
7. It is important that you track and record most every penny spent in order to control spending habits.
8. As a homeowner, it is extremely important that you include reserve accounts for home maintenance in your budget plan.
9. Pay yourself first by developing a personal savings plan. Try to save 10% of your income. If you can’t manage 10% right away, try to save a smaller amount, but do so regularly.
10. If at the beginning, you fail at times to stick to your budget plan, don’t give up; stay with it. You will succeed if you are determined.
11. Review your plan once a month. Analyze expenditures and alter the plan if your feel adjustments would improve the workability of your budget.

ARE YOU AN OVERSPENDER?

If you feel your finances control you instead of you controlling your finances, ask yourself the following questions. If your answer is "yes" to the majority of these questions, you may want to consider altering your current spending habits.

1. Are you still paying bills from purchases made a year ago?
2. Do you use credit cards even when the purchase is small and you have the cash?
3. Is your checking account frequently overdrawn?
4. Do you race to the bank to deposit your paycheck before the checks come in?
5. Have you stopped having, or adding to, a savings account?
6. Do you sometimes wonder why you made a particular purchase?
7. Do you feel "out of control" when faced with a buying decision?
8. Do you "juggle" payments to keep creditors satisfied?
9. Are your credit accounts usually at the maximum credit line?
10. Do you ever feel free to spend more after clearing up a debt?
11. Are you surprised at how much interest you pay creditors annually?
12. Do you hope that your children will handle money better than you do?
13. Would a small reduction in your income or an unusual expense force you to neglect your obligation to creditors?

BUDGET QUESTIONS

Upon completion of your budget worksheet, here are some questions to think about. You and your spouse or significant other should discuss these questions together.

1. What are the biggest items in your budget?
2. How much are you saving each month on your current budget?
3. How could you save more money? What expenses could you cut or reduce?
4. In what ways do you see your financial picture changing in the next year?
5. In the next five years?

SHOPPING FOR YOUR HOME

The most exciting phase for the homebuyer is finding the right house. For most families, buying a home is the largest single investment they will ever make. Selecting the right house takes a lot of thought and careful planning. Many factors play an important role in determining the right place for you to live. The first step in selecting a home involves asking yourself the following questions:

• Where will the home be located?
• What community amenities are important?
• What type of house? Single level, two story, duplex, condo, etc.
• Is adequate transportation available?
• Convenient to shopping?
• Quality and location of schools?

For most families, their wants far out weigh their needs when it comes to buying a home. It is unlikely (but not impossible) that the homebuyer’s dream house will be easy to locate, so flexibility is required in searching for a suitable house. It is important to remember that special or unusual features in a property usually increase the price.

SECTION 1 – SELECT THE RIGHT NEIGHBORHOOD

Where would you like to live? To answer this question, take a few minutes and write down your answers to the questions below:

• Where do you work?
• Do you drive to work?
• Do you need public transportation?
• How much time are you willing to spend going to and from work?

Get a map, find where you work and look at the neighborhoods you are considering and determine the amount of time you are willing to commute. If you need public transportation, get a bus schedule or a rail map of the local systems to see which neighborhoods they service. For example: If you can spend an hour traveling each way to work and you need public transportation, look t areas one hour’s ride from your work. If you can spend an hour driving each way to work, look at neighborhoods that you can drive to in an hour. Don’t waste time searching for a house in areas that you cannot reach or that are too far away from your job site.

Evaluating Neighborhoods

The location of the home is important from both a buying and a future selling standpoint. Usually a potential homebuyer will sacrifice features in a home to live in a more desirable neighborhood. This conveniences and amenities available are critical in evaluating neighborhoods. Some people want to be near their place of employment, churches, or shopping. Schools, parks, and recreation may be more important for some people. For others, the need to be near public transportation or have easy access to freeways and interstates may be a top priority. There are several things that almost everyone looks for in a neighborhood:

• Adequate police and fire protection
• Reasonable real estate taxes
• Well-maintained appearance

In addition, to finding a neighborhood that is right for you, there are some things you might want to check into more thoroughly such as schools, safety and the costs. Some suggestions for you to consider:

Scools

• Call the neighborhood school and ask if you can visit.
• Talk to friends and co-workers about the schools in the area and ask about the after-school programs.

Safety

• Visit the neighborhoods you are considering in the day and night time.
• Look for signs of illegal activities, especially at night.
• Look for things that may indicate a high crime area, such as bars on doors and windows, security alarm signs, private or community security patrols.
• Visit the local police station and find out the crime statistics for that area.

Taxes and Hazard Insurance Costs

• Call the tax assessor’s office or ask a real estate agent how much are the property taxes for that area.
• Call an insurance agent and find out the average cost of hazard and car insurance premiums for that neighborhood.

The Neighborhood Check Sheet is to help you decide what’s important to you. However, you should consider the things that may not be important to you, because they may be important to the value of your property if you decide to sell. Before you start, it might be a good idea to make copies of this check sheet so that you can use them while you are house-hunting. You should use it to rate what is least or most important about the neighborhoods you are viewing. For example, if the church of your preference is in the neighborhood, you may rate it as a 3.

Neighborhood Check Sheet

Least Important=1 Important=2 Most Important=3

Scools 1 2 3	Hardware 1 2 3
Day Care 1 2 3	Grocery Story 1 2 3
Parks/Recreation	Community Center 1 2 3
Facilities 1 2 3	Transportation 1 2 3
Churches 1 2 3	Other (write in things that
Hospitals 1 2 3	are important to you.)
Police Station 1 2 3	______________________ 1 2 3
Fire Station 1 2 3	______________________ 1 2 3
Library 1 2 3	______________________ 1 2 3
Shopping Center 1 2 3	Total Points__________

Once you have finished viewing neighborhoods, total your points and the one with the most points should be the neighborhood of highest consideration.

Selecting A Real Estate Agent

The majority of home sales occur through the services of a real estate representative. There are two basic types: the seller’s agent and the buyer’s agent. Most real estate transactions involve a seller’s agent. Their primary job is to market the home for the seller and find a buyer. The seller enters into a contract with the seller’s agent to sell their home. This creates a business relationship in which the agent is working for the seller. The seller’s agent will also list the property on the Multiple Listing Service (MLS). MLS is a multiple listing system that provides information on homes currently listed for sale with participating Realtors. The goal of the seller’s agent is to sell the property for the highest price possible. The agent’s loyalty is to the seller, with whom he/she has a contract. In some instances, the seller’s agent will also be the buyer’s agent.

A buyer’s agent and the buyer enter into a contract in which the agent agrees to work in the buyer’s best interest. If a buyer chooses to work with an agent when the contract is signed, the buyer agrees to work exclusively with that agent. The buyer’s agent is often paid by the seller, and in this case, the seller’s agent splits the commission. A real estate agent can provide you with helpful information concerning a neighborhood, such as how, and why the neighborhood is changing, and by comparing the real estate activity to other neighborhoods.

A real estate agent can recommend you to a mortgage lender, professional home inspector, attorney, insurance agents, title companies and escrow agents. They can help with information on community based housing services. Most agents have access to a variety of homes through the Multiple Listing Service. This means that you can get in touch with any real estate agent working in the area in which you want to live, and that person can help you look for a home on a wide scale, in any community. Usually, there is no cost to you for the services they provide.

You should feel comfortable working with the real estate agent, because it can take months before you find the house you want to purchase. The real estate agent is looking for something that suits your individual needs and tastes, and this will happen sooner if you have a good relationship. One way to find a real estate agent is to get the name of the real estate firm that appears on a "for sale" sign you see as you look around a neighborhood. You want a real estate agent who knows the neighborhood. You can also just walk into a real estate agent’s office or ask for a referral from friends and relatives. Talk to the real estate agent about the kind of house you are looking for in your price range. The agent should be able to tell you if there are any homes like that in your price range in that are. A simple calculation to determine the price of the home you can afford can be easily determined by multiplying your annual gross income by 2.5.

Example: annual gross income $30,000 x 2.5 = $75,000 priced home.

If you are moving out of state, an agent in your area may be able to recommend an agent familiar with your new location. Normally, the agent at your former location can make referrals to agents in other areas. Many real estate firms have sophisticated referral programs which will list houses available. In most instances, these agencies can provide a list of available properties prior to you relocating.

SECTION II – HOUSE HUNTING

It is important for home shoppers to know how to find houses that are available for sale in the community which they have elected to buy. There are many different resources available to the home shoppers. The following are a few of those resources:

Most local newspapers have daily classified ad sections which feature area homes for sale. Real Estate firms often advertise homes that are for sale in newspapers. Usually weekend editions have expanded coverage and often indicate "Open Houses" which are being conducted in the area. Newspapers also list "For Sale By Owner" or "Builder" ads in the classified section.

The Real Estate Shopper Guide are specific real estate magazines which typically feature selected homes for sale in an area. These are usually printed weekly or monthly, and are often available in vending machines, grocery stores, convenience stores, and banks. Real Estate Shopper Guides are helpful because they generally have full color pictures and detailed information about the homes for sale in the local area.

The homebuyer can drive through an area and find "For Sale Signs" in front of houses that are available. This is also a good way to spot unadvertised "For Sale By Owner" properties. Homebuyers should let friends and relatives know of their plans to purchase a house. Sometimes through networking, homebuyers can find homes before they come on the market and are available to the public.

The Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA)--Both HUD and VA offer acquired properties for sale to the general public. The homebuyer should understand that these homes are usually sold "as is", and often are in need of repair. The homebuyer may have difficulty finding a lender that will allow financing for both the purchase and required repairs for these properties.

Local lending institutions may have foreclosed homes in their inventory. Interested parties should contact the lender’s Real Estate Owned (REO) office to find out if any are available. In some cases, Lenders may be willing to offer homebuyers special financing incentives in order to sell these houses.

Many local municipalities confiscate property for delinquent taxes. These homes are often auctioned monthly or quarterly and sold to the highest bidder. Information on available properties can usually be obtained from Tax Assessment Departments or from Community Development Departments.

• Estate Auctions – Many Times when someone dies with no heirs, or files bankruptcy, the property is auctioned off and sold to the highest bidder. Homebuyers who may be interest in estate auctions should be aware that buying a house at an auction usually requires an immediate closing. If the homebuyer is financing the purchase of the property he/she may need to be approved for a mortgage before bidding on the house. In many cases, these sales require that the purchase be made in cash.
• Owners of Record – Sometimes homebuyers may find homes that are obviously vacant, but not advertised for sale. Interested parties should find out who the owner is by contacting the local land records office. Sometimes writing the owner, and informing him or her that you are interested, can result in a sale.
• In some area, non-profit housing agencies and foundations have been established to develop or renovate housing and make it available for low-to-moderate income families. Homebuyers should check with the applicable state housing agency to see if such programs are available in the desired communities.
• Other Places – Call the State Housing Agency for a list of their properties for sale. If you see a house that looks vacant, call the local land records office to get the name of the owners. If you are successful in reaching the owners, you may be able to buy the house at a reduced price.
• Existing vs Proposed/New Construction

Existing or resale homes are the most common type of sales. Proposed/new construction is a valuable resource for locating a home. In the case of proposed construction, certain financing programs offer assistance with the down payment and other costs, which can be gained through sweat equity. The borrower’s labor may be considered as the equivalent of cash if the borrower can demonstrate his or her ability to complete the work in a satisfactory manner. The lender must document the contributory value of the labor through either the appraiser’s estimate or through a cost estimating service. However, delayed work, clean up, debris removal and other general maintenance cannot be included as sweat equity. There can be no cash back to the borrower in these transactions. Sweat equity on a property other than the property being purchased is not acceptable. Compensation for work performed on other properties must be in cash and be properly documented.

If materials are furnished by the borrower, evidence of the source of funds used to purchase and the market value of the materials must be provided. The sales contract must indicate the tasks to be performed by the homebuyer during construction.

Finding A House

First-time homebuyers are often eager to buy a house and frequently fail to take the time to do a thorough job of evaluating each prospect. The average homebuyer looks at approximately 16 to 25 homes before selecting one to buy. Homebuyers should be well prepared for each viewing so that features of various homes are not confused and the possibilities narrowed. Below is a list of "things to remember" when the homebuyer tours each house:

• Take a tape measure, flashlight and camera.
• Take down notes about the features of each room.
• Use the flashlight to see into dark areas, such as the attic or basement.
• Check for water damage and inquire about recently repaired areas.
• Find out what is included in the purchase price and what is not. Some sellers will include some of their appliances, others will not.
• Measure the room sizes: This will be beneficial in determining the amount of space a buyer may need.
• Inspect the interior and exterior items.
• Take pictures of each house if possible and the surrounding homes. The pictures can be valuable later as the homebuyer narrows the purchase possibilities.
• Take a look around the neighborhood because it is just as important as the house and property.
• Ask the seller or agent questions about the condition of the roof, appliances, heating and cooling systems, electrical and plumbing systems to determine if the house and property have been well maintained.

When you look at houses, use the Homebuyers Check Sheet below to keep track of their features. It is easy to become confused after looking at a number of houses. Prior to viewing the property, identify your needs on the check sheet. As you view each property, be sure to include the property address, asking price, yearly taxes and any features that it has. This will allow you in the comfort of your home to perform a comparative analysis on each property.

Hombuyers’ Check Sheet
Address:__________________________________________________________________
Asking Price:___________________________ Yearly Taxes:________________________

FEATURES	NEEDS	HAS
House
Older
Newer
Traditional
Contermporary
One-Story
Two-Story
Split Level
Garage
Other
Interior
House Size (square footage)
# of Bedrooms
# of Bathrooms
Kitchen Size
Living Room Size
Family Room
Dinning Room
Laundry Room
Floors/Floor Covering
Exterior
Exterior Type
Landscaping
Porch
Deck
Large Yard
Mechanical System
Heating and A/C Type
Other
Other
Other

House Inspection List

What To Look For: Stains on basement walls Moss, mildew, or stain on lower siding Stains or mildew on underside of roof Soggy areas in yard Eroded areas in walkway or driveway Roof that sags in the middle Walls that curve in and out Windows or doors that look crooked Porches that lean or sag Diagonal cracks above doors and windows Slipping or shifted foundation Floors that feel spongy or uneven Inside doors or windows that don’t fit Houses that are built on wood posts or sill beams on ground Very high heating or air conditioning bills (ask the owner if you can look at the bills) leaking plumbing, especially the main water line (turn on the water and look at the pipes)

Main electrical service that is too small (turn on lots of lights and appliances at the same time to see if they blow a fuse or circuit breaker) Extension cords running a long way Odd smells, such as sewer gas Lack of insulation in attic (there should be thick insulation on the floor or ceiling) Signs of termites or ants Old flaky paint on sills or trim Flaky paint on the outside Floor covering that is worn in large areas Siding that is wavy or spongy underneath Roof cover that is seriously worn or has many layers

It is important that you take the time to do a thorough job of evaluating each property before making a decision to buy.

The Real Estate Purchase Contract

Real estate purchase contracts will vary from location to location. If the homebuyer is working with a real estate agent, the agent will probably use the standard contract that is approved by the local Board of Realtors. Since real estate agents handle the bulk of real estate sales transactions, they generally use purchase contracts that provide both buyer and seller protection. Whether using a real estate agent or handling the purchase agreement on your own, there are a number of items listed below that should be included in the purchase agreement:

• The full legal description of the property found on title policies, surveys, or public records in the country recorders office. The street address should also be included.
• The amount of earnest money—a purchase offer is usually accompanied with an "earnest money" deposit. This money serves to assure the seller that the buyer is making an offer in good faith that you mean business. Because the seller will take his home off the market once a purchase offer is signed, the earnest money offer her/him some protection if the buyer backs out of the deal. The seller will weigh the offer to see if it will result in a successful sale.
• The amount of earnest money given is totally at the buyer’s discretion. The earnest money is usually placed with a real estate broker or deposited in an escrow account. If the buyer proposes a small amount of money, the offer may not be considered. On the other hand, if the buyer deposits a customary amount of earnest money, it indicates the sincerity of the buyer’s intentions to purchase the home. If, for some reason, the buyer changes his/her mind, the seller may be entitled to keep the earnest deposit. The contract should clearly state under what circumstances this money will be counted as a credit toward the amount of money needed by the buyer.
• The offer to purchase is usually valid for a limited time from the date of the offer. If the seller is out of town or unavailable, the buyer may want to extend this acceptance period.

The buyer should find out as much as possible about the sellers from their real estate agent. Accurate information is the key to price negotiation when making an offer. It is helpful to know if the seller is really motivated to sell the property. You should also ask the seller or seller’s agent questions about the house and property. The condition of the appliances, heating and cooling systems, roof, the electrical systems and plumbing systems will help determine if the house has been well maintained. The prospective buyer should disclose as little as possible to the seller or his/her agent. For example, the buyer can be at a disadvantage if the seller discovers that the buyer’s lease is about to expire or has expired. Enclosed is a sample Real Estate Purchase Contract. Review it for familiarity. The real estate agent will assist in filling out the contract when an offer is made. (Review the Real Estate Purchase Contract located in the Forms and Work Sheet Section of your Guide.)

Contingencies

The purchase offer may include contingencies in addition to the amount of money that you are proposing to pay for the property. Contingencies are conditional events which must happen in order for the buyer and seller to conclude the transaction. All details of the contingencies should be listed in written form on the purchase offer. Some typical contingencies include:

• The buyer’s ability to get a specific type, amount and rate of financing
• The buyer’s ability to complete the sale of a present home before a certain date
• The seller’s agreement to let the buyer move in prior to closing
• The seller’s agreement to make certain repairs
• The items of personal property which may stay or go
• Appliances
• Window coverings
• Ceiling fan

Negotiating Offers

The amount of the offer should be determined after considering the factors listed below:

• The typical sales price of homes in the area, which have approximately the same features as the home selected. The buyer can obtain this information by reviewing recent sales transactions at the local courthouse or with your real estate agent.
• The condition of the house and any repairs, or improvements, needed. The offer can acknowledge these items, and be adjusted depending on whether the buyer or the seller will correct them.
• The amount of money that the homebuyer is pre-qualified to finance.
• The availability of similar homes in the area in the desired price range.
• How long the house has been on the market. In many cases, if the house has been listed for sale for an extended period of time (3 to 6 months), the seller usually is willing to entertain offers less than originally expected.
• Has the price already been reduced? If the price has already been reduced, this is usually an indication that the seller is willing to accept less than originally intended.
• Is the seller considering other offers at this time? If the seller has several offers on the house now, and this is the house the buyer is really "sold" on, he has to make an offer that is closer to the asking price.

You cannot rely on the real estate agent for assistance in determining what to offer unless the agent is a buyer’s agent. Remember, in most cases, the agent involved is obligated to get the highest price for the seller. Often, sellers are willing to negotiate their asking price. This is not a hard and fast rule; seller flexibility on the sale price is based on many factors. Some sellers are firm in their asking price and the real estate agent may tell the buyer this. If the buyer can’t get the seller to come down to an acceptable price, perhaps the seller will make some additional improvements to the property if the buyer agrees to buy at the seller’s price.

Some buyers prefer to "bluff" the seller by offering a price that is well below what they are actually willing to pay. Though this strategy can sometimes pay off, it will occasionally backfire if the seller gets insulted and refuses to negotiate. It is better to be fair and reasonable.

The seller’s agent usually knows what price the seller will ultimately accept for the house. The seller’s agent may tell the buyer that he or she knows the seller will not accept the offer. Although the agent has a good idea of what conditions will make or break the deal, he or she is legally obligated to present all offers to the seller.

Counter Offer

Once the buyer is satisfied that he/she has included all contingencies in his offer, the real estate agent present it to the seller. At this point, the seller has one of three options:

1. Acceptance—The Seller can accept the buyer’s offer with no change or modification.
2. Rejection—The seller can refuse the buyer’s offer altogether. There may be several different reasons why the offer is unacceptable. If a real estate agent is involved, he or she may be able to provide the buyer with the seller’s objections. If the buyer has the ability and the willingness to resolve the objections, he/she may address each and present a new offer.
3. Counter To The Counter Offer—The seller may be in agreement with most of the buyer’s offer, and may be willing to negotiate. When making the counter offer the seller would indicate any changes proposed to the buyer’s original offer. Once the buyer has received the seller’s counter offer, he/she then has the options to accept, reject, or counter the counter offer.

It is likely that the buyer and seller will bargain over the fine points. An offer can be renegotiated several times in the form of counter offers. It is important, however, that the buyer knows when to quit. The buyer must have the ability to meet all conditions once an agreement is made.

It is likely that the buyer and seller will bargain over the fine points. An offer can be renegotiated several times in the form of counter offers. It is important, however, that the buyer knows when to quit. The buyer must have the ability to meet all conditions once an agreement is made.

SECTION III – PRE-PURCHASE INSPECTIONS

A pre-purchase, general home inspection involves visual examination of major building systems and components. The intention of the pre-purchase general home inspection is to provide the buyer with useful information about the condition of the residence and identify major deficiencies in the home’s structure, its systems and components.

A home inspector is a professional who has been trained to examine the visual condition of residential properties and determine if they are free from discoverable major mechanical (heating, plumbing, electrical, etc.) or structural (walls, roof, foundation, etc.) deficiencies.

A Professional Home Inspector will tell you if the roof or heating system will soon need major repair or replacement, and whether the electrical and plumbing systems are functioning properly. The inspector will let you know whether the major mechanical/structural systems are in overall satisfactory condition.

A Professional Home Inspector will locate discoverable major mechanical/structural defects and suggest repair methods. There are no problems of this type, mechanical or structural, that cannot be remedied. Professional Home Inspectors are generalists, much like medical general practitioners. They know how the home’s many systems and components work, both independently and together, and they understand how and why they fail. You should expect a permanent report of your inspection, either written or video taped. The report should describe the condition of the home at the time of the inspection based upon the inspector’s visual observations.

Professional Home Inspectors throughout the country are generally expected to follow the Standards of Practice established by the American Society of Home Inspections (ASHI). The "Standards of Practice" are guidelines that specify the components of a home to be included in an inspection: the heating and air conditioning systems, the plumbing and electrical systems, the roof, gutters and down spouts, attic, visible insulation, visible drainage systems, walls, ceilings, floors, windows, doors, garage, foundation, basement, etc.

The inspection is important and strongly recommended because you learn how to maintain the home you have chosen and you become an informed buyer. You should know about the home prior to buying and making that investment. By following the inspector, by observing and asking questions, you will learn a great deal about your new home and how to maintain it. This valuable information will serve you for many years after you move in. The inspector is paid by the person who selects the inspector and orders the inspection. The buyer selects the inspector and pays the inspection fee directly to the inspector.

How To Select A Qualified, Professional Home Inspector

The key professional qualifications of a Professional Home Inspector are experience, standards, and ethics. You should not leave your search until the last minute. Interview a Professional Home Inspector as soon as you find the right house.

Here are some important questions to ask:

Is the inspector a Certified Member of the American Society of Home Inspectors? How long has the inspector been in business as a Professional Home Inspector? Is the inspector specifically experienced in residential inspections? Does the company do any repairs or improvements or make referrals to those who do? Such offers and/or referrals constitute an apparent conflict of interest and would be grounds to reject the inspector. How long will the inspection take? (The average is 2 to 2 ½ hours.)

What will it include? (Get specifics.) What will it cost? (The national average is $250.00.) Does the inspection include a permanent report: written, video taped, etc.? Does the inspector encourage the client to attend the inspection? This is a valuable education opportunity and he/she should welcome the client along. Does the inspector participate in continuing education programs to keep his/her qualifications current?

REVIEW QUIZ I

Name two key factors that a homebuyer should consider in selecting a home. What are four things that a homebuyer should look for in a neighborhood? Identify four resources that are available to assist a homebuyer in finding a house in a specific community. What is sweat equity? Name five things that should be remember while touring a house. Why are they important? Name the two basic types of a real estate representative. Why is a professional home inspection important? What is MLS?

List five key things to remember when you are preparing to tour a house. What calculation is used when determining the price home you can afford? Give a brief description of five items that should be included in the purchase agreement. List three factors that should be considered when negotiating an offer to purchase? What are contingencies? What is a counter offer? What is a counter to a counter offer?

SECTION I: SHOPPING FOR YOUR LOAN

To obtain financing for the purchase of a home can be an intimidating process for a home buyer. The following three Sections are designed to minimize this frustration by highlighting the steps involved in the process.

FIND THE RIGHT LENDER

To identify the right lender, you must first have a clear understanding of the various types of lenders available. The home financing system in the United States includes many private and public institutions. Home mortgages are made and processed by primary market lenders and these mortgages are often insured and/ or sold to “secondary market” institutions. Although the types of lenders originating mortgages are growing, there are five categories of “primary market” lenders active in the residential lending market. They include:

• Commercial Banks that primarily specialize in consumer and construction lending.
• Savings and Thrift Institutions that provide residential mortgages. They are regulated and their deposits are insured by FDIC (Federal Deposit Insurance Corporation) or corresponding state agencies.
• Mortgage Bankers that are independent firms or subsidiaries of commercial banks that originate mortgages. They focus exclusively on providing mortgages and they do not accept deposits. They typically originate mortgages and then sell them to other financial institutions. These purchasers constitute the “secondary market”. Mortgage Bankers are not federally regulated like commercial banks.
• Credit Unions that are private banking organizations that frequently have very good mortgage rates for its members. A number of credit unions will offer first mortgages to its members. Credit unions are generally regulated by federal or state agencies.

You should use the services of the lender that best suit’s your needs based on location, type of products offered, and the quality of service they provide.

The term “secondary market” refers to financial institutions that purchase mortgage loans originated by other lenders. They are often large banks, life insurance companies, pension funds and federally or state chartered institutions. The most significant purchasers of mortgages on the secondary market are Fannie Mae and Freddie Mac. Both are large, shareholder-owned and privately managed corporations. They are federally chartered and have federal statutory obligations to serve the needs of lower income households and other underserved populations. As a result, both organizations have made affordable new lending products available to originating lenders.

Ginnie Mae plays a similar role as Fannie Mae and Freddie Mac. They all purchase government insured or financed mortgages. However, unlike Fannie Mae and Freddie Mac which are quasi government corporations, Ginnie Mae is a government corporation under the jurisdiction of the Department of Housing and Urban Development (HUD).

The secondary market allow lenders that originate residential mortgages to sell some or all of their portfolio to secondary market purchasers. By doing so, lenders can replenish their cash so that additional financing can be made available. The underwriting and other criteria set by the secondary market great impacts the lending practice of most mortgage lenders.

CONVENTIONAL MORTGAGE AND INSURANCE PRODUCTS

Mortgage products vary in their requirements for down payment, qualifying ratios, loan-tovalue ratios, credit reviews and cash reserves. Some of the best deals come with income restrictions (low and moderate income home buyers only). To understand these products, it is helpful to divide them into tow brad categories; conventional loans and government guaranteed or insured programs.

The Conventional loans of years ago required a 20% down payment. These loans have now joined many other loan products which require as little as a three to five percent down payment, and they have more flexible underwriting criteria. This is where Partners In Charity comes in. We will gift the down payment to you based on the lender's requirements for your selected loan. This explosion of new loan products provides an increased opportunity for first time homebuyers to move into homeownership. This increased flexibility and corresponding risk has occurred as a result of such factors as:

• greater sophistication and automation in the mortgage lending industry
• establishment of Community Reinvestment Act (CRA) requirements
• increased competition for customers
• availability of private and government sponsored mortgage insurance
• existence and influence of the secondary market

FANNIE MAE’S COMMUNITY HOMEBUYERS PROGRAM

In 1994 Fannie Mae unveiled a mortgage product, “Fannie 97”, that required only a three percent down payment, one month mortgage reserve, and standard underwriting ratios of 28% / 38%. This program is one of the most popular program for low and moderate income home buyers and is available through a wide variety of mortgage lenders. The program provides for higher qualifying ratios, a five percent down payment with at least three percent from the purchaser. This program also allows flexibility regarding non-traditional credit histories. Debt to income ratios of 33%/38% are permitted and even higher ratios in certain circumstances. Home buyer education is required for participation.

FREDDIE MAC’S AFFORDABLE GOLD PROGRAM

Freddie Mac’s Affordable Gold Program has provisions for a 95% loan-to-value ratio, and it has flexibility regarding non-traditional forms of credit, reserve requirements, and qualifying ratios. Of particular interest, the Affordable Gold Program does not use a “front end/top” (housing expense to income) ratio. Rather it utilizes a single “back end/bottom” (total debt-to-income) ratio. Home buyer education is required for participation.

Lenders often refer to the Fannie 97 Program and the Affordable Gold Program as the “3/2 Program” which refers to the requirement that at least three percent of the down payment come from the buyer and the two percent can come from other sources.

PRIVATE MORTGAGE INSURANCE

Conventional financing requires mortgage insurance on all loans in which the loan-to-value (LTV) exceeds 80%. This insurance is referred to as Private Mortgage Insurance or PMI. There are eight private mortgage insurance companies. The insurance premium is the same for all eight firms and is typically added to the mortgage interest rate. The mortgage lender originating the loan selects the mortgage insurer.

GOVERNMENT FINANCED AND INSURED PROGRAMS

There are numerous direct lending, subsidy, and mortgage insurance products available through federal, state, and local agencies. Direct lending is provided through federal Rural Economic and Community Development (RECD – formerly the Farmers Home Administration), state housing financing agencies, and various local governments. Mortgage insurance or loan guarantees are provided through the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA), and RECD.

FHA administers numerous mortgage insurance programs. Although there are no income restrictions, most FHA insured financing is provided to lower income, first-time home buyers.

VA guarantees mortgages for veterans of the armed services, those currently in the armed services and their spouses. VA guaranteed mortgage guidelines are similar to FHA except, a loanto- value ratio of 100% is allowed.

RECD administers several programs for low to moderate income families who want to buy new or existing homes in rural areas. The homeownership loans may be used for building, buying or improving a home.

State housing finance agencies generally issue tax-exempt mortgage revenue bonds (MRBs) to be used for family mortgages with below-market interest rates. Federal regulations outline both income and house price maximums. Some states use part of their MRB authority to issue Mortgage Credit Certificates (MCCs). Homeowners use MCCs to lower their taxable income, thereby reducing their tax burden and increasing their disposal income.

State and local governments offer many homeowner programs for lower and other underserved households. Some are funded with federal funds, or state/local originated housing trust fund revenues. These programs offer local flexibility and have favorable underwriting and repayment terms.

TYPES OF MORTGAGES

Prior to applying for a loan/mortgage for your home, you need to understand the various type of loan products available, and the specific characteristics of each. The prevailing interest rates and loan type will greatly influence the evaluation process when trying to qualify for a mortgage. The most common types of mortgages are described below.

The standard fixed-rate loan is the most common for first time home buyers. It has a fixed interest rate, a fixed principal and interest payment and is fully amortized – that is, the loan will be completely paid off – over a specified number of years. The most common is the 30-year mortgage.

Payments on a fixed- rate mortgage are almost always structured on a monthly basis. A portion of each monthly payment covers the interest due and another portion is applied toward the reduction of the principal balance. Regular payments will systematically reduce the loan balance until the loan is paid in full. The standard fixed-rate mortgages are simple to understand and they have predictable payments. It should be added that even though the monthly principal and interest portion of the monthly payment is fixed, the monthly payment may be adjusted if property taxes increase or the cost of hazard insurance changes. Fixed-rate mortgages are ideal for families that plan to live in their homes for a long period of time, or families that like the certainty a fixed-rate mortgage offers.

Adjustable-rate mortgages (ARM) are generally for 15 to 30 years and have interest rates that are adjusted periodically which potentially changes the monthly payment amounts. The initial interest rate on an ARM is usually substantially lower than the rate for fixed-rate mortgages, but adjustment in the payment generally occurs every one, three or five years based on money market conditions. This can cause the monthly payment to increase or decrease.

The interest rate on an ARM does not automatically change at adjustment time. A clear understanding of the following factors will explain why and therefore, must be considered when contemplating an ARM:

• Adjustment period – By definition, an adjustable-rate mortgage has the potential for rate and payment changes at specified predetermined periods every year, three years, or five years. Other adjustment periods vary from six months to 10 years. Some ARM’s combine two adjustment periods. For example, a 3/1 ARM has a fixed-rate for the first three years and then adjusts annually for the remaining life of the loan.
• Caps are limits placed on how much the interest rate can fluctuate. The “adjustment cap” is the limit on how much the interest rate can change at each adjustment period. The “lifetime cap” is the limit on how much the rate can change over the life of the mortgage. Caps can limit increases by either a dollar amount or a percentage. The most common interest rate caps specify a 1% to 3% maximum rate increase per adjustment cap, and a 4% to 6% maximum rate increase per lifetime cap.
• Index is the rate measurement used by lenders to determine any changes to the interest rate charged on ARM’s. The interest rate on an ARM is determined by an index. If the index increases, the interest rate will increase unless an interest rate cap has been reached. The most widely used index is the one-year Treasury Bill Index.
• Margin which represents the lender’s cost and profit for doing business is added to the index rate which determines the interest rate for the upcoming period. The size for the margin will vary depending on the index used. Once the lender has specified the margin, it will remain fixed. The margin is a critical factor to consider when comparing ARM’s because it can have a significant impact on payments.

On a one-year ARM, adjustments are made annually with each adjustment typically limited to a 1% to 2% increase. A lifetime maximum cap of 6% is common. One-year ARM’s offer an attractive initial interest rate to borrowers who are willing to accept the uncertainty of future rate and payment changes. Three and five year ARM’s have adjustment periods of three and five years respectively. Each adjustment is typically limited to a 2% increase with a lifetime cap of 6%.

The primary advantage of an ARM is that it provides a lower interest rate initially, in return, for taking a chance with the market that interest rates will be adjusted periodically. However, this lower initial rate often enables a homebuyer to qualify for an ARM loan when she or he would not have qualified for a fixed-rate loan.

There are significant drawbacks to ARM’s for lower income buyers, however. Although there are caps on increases, possible future interest rate increases may result in significantly higher monthly mortgage payments. ARM’s are best suited for those who expect an increase in income in the future years and/or do not expect to live in the home for more than five to seven years. Young families who are just starting out their careers are often good candidates for ARM loans.

Convertible Mortgages – Typically, have a single established fixed-rate for three, five or seven years, after which they are converted to market rates for the remainder of the 15 to 30 year term. Like the ARM, this mortgage also provides lower interest rates in earlier years. However, the unpredictability of interest rates over time could result in a higher monthly payment at conversion. The three, five or seven year interest rate is typically higher than an ARM and lower than a straight fixed 30 year amortized loan.

Temporary Buydowns – Often, termed “BUYDOWNS” are fixed-rate or adjustable rate mortgages that permit homebuyers to make monthly payments for one or two years at 1% or 2% below the first year’s mortgage note rate. Generally, during the first year of the mortgage, the homebuyer will pay 1% or 2% below the note rate and the second year, 1% below the note rate. The temporary buydown differs from an ARM in that the difference in the amount paid monthly and the note rate is deposited in an escrow account at closing. A buydown agreement is signed with the escrow agent agreeing to pay the monthly difference to the lender each month. Funds for the buydown escrow account can come from a gift, the home buyer, a state or local government agency. The advantage of a buydown is that it allows you to qualify for the loan at the lower interest rate.

FHA REHABILITATION MORTGAGE INSURANCE SECTION 203(K)

This program allows homebuyers to purchase and rehabilitate single family properties with one loan/mortgage. Historically, the program has been underutilized. However, within the past few years the loan origination process was streamlined, and the authority to make loan decisions was delegated to local FHA Offices.

COMPARISON SHOPPING

As prospective homebuyer, there are several factors that you must consider before applying for a mortgage. In addition to the type mortgage (fixed-rate, ARM, etc.) and the various mortgage products available, there are certain key terms that the novice homebuyer should understand about the products offered to effectively compare and decide which is best. At a minimum, you should have a general idea about the following:

• Down payment, requirements vary by mortgage. Some lenders offer a 95% LTV which requires a 5% down payment. Under certain programs, many lenders allow up to 2% of the 5% down payment to come from a gift, a grant from a non-profit organization, or from a federal, state or local government agency. Fannie Mae offers a 3% down payment program. FHA offers a 3% down payment on homes selling for $50,000 or less.
• A discount point is equal to 1% of the loan amount (on a $70,000 loan, a point would be $700). Discount points can be thought of as prepaid interest because they increase the lender’s yield on loans without raising the stated interest. Each point is approximately 1/8 percent added to the interest rate. For instance, an 8% loan with 2 points is roughly equal to 8 1/4 % loan with no points. The more points required, the more cash is needed at closing because discount points cannot be financed. The fewer points required, the higher the interest rate. Prospective homebuyers must be aware of lenders and broken that charge excessive points and rates.
• Annual Percentage Rate (APR) is the total yearly costs for the mortgage stated as a percentage of the loan amount. The APR is a better source for comparison of mortgage costs than the interest rate alone.

REVIEW QUIZ

Explain the differences between the primary market and the secondary market. What is PMI? What does the acronyms FHA and RECD mean?

What are the two major categories of mortgages? What is the 203(k) Program? Identify three key factors that a prospective home buyer should consider when loan shopping.

SECTION II – THE MORTGAGE LOAN PROCESS – “THE WAIT”

MORTGAGE LOAN APPLICATION

After your offer to purchase the property has been accepted and you have identified the lender you will use, your next step is to apply for a mortgage loan.

Initial Interview – Typically, the initial interview will be held in the lender’s office and takes about an hour. During the interview the lender will ask questions related to income, expenses, credit history, employment and the terms of the offer to purchase the property. Some lenders permit the initial interview to be conducted over the telephone. At the conclusion of the interview, you will have 1) completed an application, 2) been pre-qualified by the lender, 3) paid a fee for the credit report and appraisal, 4) received a list of additional information needed for loan procession, 5) received the HUD handbook on settlement costs, and 6) received an ARM disclosure (if applicable).

Mortgage Loan Application – is in essence an application supplied by the lender for the borrower to apply for a mortgage loan. A checksheet summarizing the information that most lenders require is included at the end of Section III of this module in your Guide. The completed application must be signed and dated by you. A sample copy of the Loan Application is included in the Forms and Work Sheet section of your Guide.

Pre-Qualifying – Once you have completed the mortgage loan application, the lender will perform pre-qualification calculations to determine whether your monthly income is adequate enough to support the monthly payments on the loan amount you requested. Some lenders at this point may also run an in-file (one repository) credit report to determine whether there are major credit problems that would prevent you from being approved for the loan. The pre-qualification process involves simple calculations that you can perform prior to ever applying for a mortgage. It should be noted at this point that pre-qualification is not to be confused with pre-approval. Pre-qualifying merely lets the lender know “how much” mortgage you would qualify for under certain mortgage conditions based on your gross monthly income.

The pre-qualification worksheet and sample factor table can be used to determine the loan amount that you could qualify for based on your gross monthly income. Using the example below and the Sample Factor Table provided, fill in the blanks and complete the worksheet by performing the simple calculations as instructed on the worksheet.

Example

Borrower and Co-borrower – Mr. & Ms. Atlast Gross Monthly Income (both) - $3,600.00 Total Monthly Debt Payments - $612.00 FHA Qualifying Ratios – Pre-qualification Worksheet Borrower ___________________ Co-Borrower ___________________ Gross monthly income $_______________(1) Gross Monthly Income x _____________% = $_______________(2) Housing Ratio -- Gross Monthly Income x _____________% = $_______________(3) Debt To Income Ratio -- Total Monthly Debt Payments = $_______________(4) (Any debt with 6 months or more remaining) Subtract Line (4) from Line (3) = $_______________(5) Maximum Monthly Mortgage Payment Allowed

-housing is 29% -total debt is 41% Term on the mortgage is 30 years 8% fixed interest rate Enter the lesser amount from Line (2) or (5) $_______________(6) Escrows Multiply Line (6) by 20% = $_______________(7) Subtract Line (7) from Line (6) $_______________(8) Maximum principal plus interest payment Affordability Term of Mortgage ________________ Interest Rate Factor _______________ Factor Table Divide Line (8) by ______________ = $________________(9) Factor Multiply Line (9) by $1,000.00 = $________________(10) Maximum Mortgage Amount

SAMPLE FACTOR TABLE

Interest Rate	15-Year Mortgage	20-Year Mortgage	30-Year Mortgage
6.00%	$8.44	$7.16	$6.00
6.50%	$8.71	$7.46	$6.32
7.00%	$8.99	$7.75	$6.65
7.50%	$9.27	$8.06	$6.99
8.00%	$9.56	$8.36	$7.34
8.50%	$9.85	$8.86	$7.69
9.00%	$10.14	$9.00	$8.05
9.50%	$10.44	$9.32	$8.41
10.00%	$10.75	$9.65	$8.78
10.50%	$11.05	$9.98	$9.15
11.00%	$11.37	$10.32	$9.53
11.50%	$11.68	$10.66	$9.91
12.00%	$12.00	$11.01	$10.29

The maximum mortgage amount that Mr. & Ms. Atlast would qualify for is $94,168.00. If you got this answer, congratulations. If not check your math, it is probably a math error. Additional Pre-Qualification Worksheets are included at the end of your Guide. Make copies and as the factors on the worksheet changes, so will the qualified maximum loan amount.

It should also be noted that if the loan amount requested on Mr. and Ms. Atlast’s loan application is less than or equal to the maximum loan amount on the Pre-Qual Worksheet ($94,168), the lender will have advised them that they pre-qualified for the loan amount requested. If however, the loan amount reflected on the loan application is greater than $94,168, the lender would apprise them of the maximum loan amount for which they can qualify, and recommend that steps be taken to reduce the requested loan amount.

Good Faith Estimate of Settlement Costs – within three days of applying for the loan, the lender will send you a Good Faith Estimate of what it will cost you to close or settle on the loan. The document provides an itemized break down of fee amounts for closing costs and prepaid expenses.

Closing Costs are costs, in addition to the price of the property that are paid at closing. A portion of the closing costs may be financed on an FHA-insured or VA guaranteed mortgage. If financed, these costs will increase the loan amount and will be included when computing debt-toincome ratios.

Prepaids are advance deposits (Real Estate taxes, hazard insurance, etc.) paid at closing by the borrower that are placed in an escrow account and dispersed by the lender as they become due.

Truth in Lending Statement – is another document that your lender will generally provide within three days of applying for the loan. This Statement provides a summary of how your loan will be repaid. It reflects the APR, total finance charges, the number of payments and their amounts, and the total amount that you will pay in interest and principal over the life of the loan.

Disclosure Statement of Loan (required by Federal Reserve Regulation Z)
BORROWERS: ________________________      LENDER: LOAN NO._____________

DATE:___________________

PROPERTY ADDRESS: __________________________________________________________

Annual Percentage Rate. The cost of your credit as a yearly rate.          %

Finance Charge. The dollar amount _____________ the credit will cost.

Amount Financed. The amount of credit provided to you or on your behalf. ____________

Total of Payments. The amount you will have paid after you have made all payments as scheduled. ____________

*Estimated amounts

You have the right to receive at this time an itemization of the Amount Financed.

_________ I want an itemization

_________ I do not want an itemization

Your Payment schedule will be:

Number of payments	Amount of payments	When payents are due

Variable Rate Feature:

_________Not Applicable

_________My loan contains a variable

Property Insurance: Property Hazard Insurance from an insurer acceptable to Lender is REQUIRED. You may obtain property insurance from anyone you want that is acceptable to this institution. If you get the insurance from_____________________________ you will pay $_________ ____ for the term of ______________________.

Credit Insurance Election: CREDIT LIFE INSURANCE AND CREDIT DISABILITY INSURANCE are not required to obtain this loan, and will not be provided unless you sign below and agree to pay the additional cost for this insurance. THIS INSURANCE IS NOT IN EFFECT UNTIL YOU APPLY FOR IT, THE INITIAL PREMIUM IS PAID, AND THE INSURANCE COMPANY ISSUES THE POLICY.

Type	Premium	Signature
CreditLife	$	I want credit life insurance: Signature
Credit Disability	$	I want credit disability ins.:
Credit Life & Disability	$	I want credit life and disability insurance: Signature
I do not want any such insurance or information on it.	$	Signature

Security: You are giving a security interest in the goods or property being purchased. _____________________________________________________________ (brief description of other property)

Late Charge: If a payment is late, you will be charged $___________ /___________ %

Prepayment:

If you pay off early, you may, will not have to pay a penalty: _______may,____will not be entitled to a refund of part of the finance charge.

Assumption: Someone buying your house may, may not subject to conditions, be allowed to assume the remainder of the mortgage on the original terms.

See your contract documents for any additional information about nonpayment, default, any required payment in full before the scheduled date, and prepayment refunds and penalties.

Please acknowledge receipt of the above information by signing below:

I ACKNOWLEDGE RECEIPT OF A COPY OF THE FOREGOING DISCLOSURE STATEMENT WITH ALL BLANKS APPROPRIATELY

FILLED ON THE______________ DAY OF________________________
_______________________________________________________ BORROWER
_______________________________________________________ CO-BORROWER OR AGENT
If mailed, mailed by _______________________________ Date

Property Appraisal – the purpose of the appraisal is to provide the lender with written documentation of the value of the house. The lender will order the appraisal after the loan application is completed. The lender then uses the appraisal to determine the loan-to-value ratio. If the value is not sufficient to obtain the requested loan amount, you may 1) renegotiate the price of the house with the seller, 2) make an additional down payment, or 3) decide not to buy the house. The seller can dispute the appraised value or request a review of the appraisal by the lender. The lender will also use the appraisal to compute the loan-to-value (LTV) ratio by dividing the loan amount by the appraised value.

After the loan application is completed, the lender must verify and confirm all the information provided. This is an intense evaluation process and generally takes from four to six weeks to complete.

LOAN PROCESSING

Once the loan application has been submitted, THE WAIT begins. It can take up to six weeks for you to receive a loan approval. During the wait between application and approval, it is common for buyers to be apprehensive. However, “NO NEWS IS GOOD NEWS.” If the loan processor has a problem or needs additional information, you will be contacted by telephone or mail for this information. If working with a housing counselor, have him/her occasionally check with the lender on how things are going. However, don’t make a habit of calling the loan officer or loan processor too often. It will only cause delays.

During the loan processing phase, the lender is confirming and verifying the information you provided. For example, the Verification of Employment and Verifications of Deposit are sent out, the appraisal and your credit report are ordered, your application and supporting documentation are reviewed, etc. As the lender receives confirmation of the information you provided, loan processing is continued.

Monthly Income – Monthly income refers to the “Gross” amount of income you receive monthly. If you are paid an annual salary, it’s that salary divided by 12 months. For example, if your annual salary is $36,000 a year, your monthly gross income is $3,000 ($36,000 divided by 12 months). If you are paid on an hourly basis and work 40 hours a week, your gross monthly income is computed by multiplying your hourly rate by 2080 hours and then dividing by 12 months. For example, if your hourly rate is $10.00 an hour, your monthly gross income would equal $10 X 2080 divided by 12 = $1,733.33. The lender will use your gross monthly income to determine whether you have sufficient income to support the mortgage payments.

Loan Limits & Terms – The maximum amount of money that can be borrowed to purchase a home will vary depending on the mortgage product and loan limits established for the area. Because of these variances, you should ask the real estate agent or your lender about the maximum loan amount for your area. It should also be noted that each borrower is expected to make a minimal down payment. Only certain mortgage program provide 100% financing. The term on a mortgage simply refers to the number of years that you have opted to repay the debt, i.e. 15 years, 20 years, or 30 years. The mortgage term will greatly impact the monthly mortgage payment.

PITI is a phrase used in the mortgage industry that refers to four components of a monthly mortgage payment.

P – refers to the principal portion of your payment. I – refers to the interest portion of your payment.

T – refers to the property taxes portion of the payment. I – refers to the insurance portion of the payment.

The PITI is used by the lender to determine whether you can afford the mortgage. It is used to compute the housing expense to income ratio. The taxes and insurance amounts paid monthly are placed in an escrow account and the lender will pay the real estate taxes and insurance premiums from that account as they become due.

Qualifying Ratios – As part of the qualifying process, the lender will use ratio calculations to determine whether you have adequate stable income to support the monthly mortgage payments. These calculations are often referred to as debt-to-income ratios. There are two ratio calculations performed by the lender: one to determine the housing debt to income ratio and the total monthly debt to income ratio. To demonstrate adequate monthly income to support the mortgage payment, qualifying top/front ratios (housing to income) will range from a maximum of 28% to 31%. To demonstrate your ability to pay your mortgage and other recurring monthly obligations, qualifying bottom/back ratios (total debt to income) will range from a maximum of 38% to 43%.

To compute the housing expense ratio (top/front), the lender will divide the PITI by the gross monthly income. To compute the total monthly debt ratio (bottom/back), the lender will divide the total monthly debt including the PITI by your gross monthly income.

Using the Debt and Income Worksheet, and a proposed monthly mortgage payment to compute your debt to income ratios.

DEBT AND INCOME RATIO WORKSHEET

Your Gross Monthly Income		$________________________
Other Gross Monthly Income		$________________________
Total Gross Monthly Income	$______________________A
Monthly Installment Debts		$________________________
Monthly Revolving Debts		$________________________
Total Monthly Debts	$______________________B

RATIOS

Proposed Monthly Mortgage Payment	$_____________________C
Top Ratio (Divide C by A)		________________%