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:
- Pay cash for all purchases
- Have their credit cards paid off in six months
- Add $300 per month to savings
Their long-range goals:
- 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.
- When the credit cards were paid off, add that $300 per month to the savings account.
- 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
- 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.
- Develop your own spending plan-suited to your family’s income, needs, goals. Don’t try to
follow others.
- 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.
- 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.
- Include all of your income and all your expenses. Plan according to what your income is now not
what you expect it to be.
- Keep good records but make the procedure as simple as possible.
- It is important that you track and record most every penny spent in order to control spending
habits.
- As a homeowner, it is extremely important that you include reserve accounts for home
maintenance in your budget plan.
- 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.
- 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.
- 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.
- Are you still paying bills from purchases made a year ago?
- Do you use credit cards even when the purchase is small and you have the cash?
- Is your checking account frequently overdrawn?
- Do you race to the bank to deposit your paycheck before the checks come in?
- Have you stopped having, or adding to, a savings account?
- Do you sometimes wonder why you made a particular purchase?
- Do you feel "out of control" when faced with a buying decision?
- Do you "juggle" payments to keep creditors satisfied?
- Are your credit accounts usually at the maximum credit line?
- Do you ever feel free to spend more after clearing up a debt?
- Are you surprised at how much interest you pay creditors annually?
- Do you hope that your children will handle money better than you do?
- 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.
- What are the biggest items in your budget?
- How much are you saving each month on your current budget?
- How could you save more money? What expenses could you cut or reduce?
- In what ways do you see your financial picture changing in the next year?
- 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:
-
- Acceptance—The Seller can accept the buyer’s offer with no change or modification.
- 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.
- 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) |
|
________________% |
| Bottom Ratio (Add B plus C and divide by A) |
|
________________% |
SECTION III – QUALIFYING CRITERIA EVALUATED-UNDEREWRITING
QUALIFYING CRITERIA
Research has shown that the most frequently used excuse for not purchasing a home is that the
prospective homebuyer feels they cannot qualify for the loan. Research has also shown that in most
instances this is not the case. The following paragraphs provide a brief explanation of four key
factors which are used by lending institutions to determine a borrower’s qualification for a mortgage
loan.
- stability of income
- adequacy of income
- sufficient income
- credit worthiness
STABILITY OF INCOME
Of prime consideration to any lending institution is whether the borrower’s income is
expected to last during the most critical phase of the mortgage. The first five years of a mortgage is
defined as the “most critical phase” because most defaults occur on a mortgage during this time
frame.
To ascertain the potential stability of the borrower’s income, the lending institution will send
a “Verification of Employment” (VOE) to the borrower’s employer to determine the start date of
employment, position title, the current year-to-date and previous years salary, any bonus or overtime
paid on a regular basis, and the probability of continued employment. This form cannot be hand
carried to the employer by the borrower.
The VOE must be signed and dated by the borrow authorizing the employer to release this
information to a third party, the lender. The VOE is then mailed to the employer to complete, sign,
date, and return to the lender.
Once the completed VOE is returned to the lender, it is examined for completeness and the
information analyzed. The income amount reflected by the borrower on the loan application is
compared with the income amount shown on the VOE. The borrower must provide an explanation
for any discrepancies. The lender will also analyzed the length of time that the borrower has worked
in the same line of work experience, review the employer’s comments, and the probability of
continued employment. Although, a short time on the job is not a basis to reject a borrower, if a
pattern of job hopping without promotional potential or skills development is evident, the lender
may question the probability of the borrower remaining employed; a key factor when evaluating the
stability of the borrower’s income. If the borrower has been employed with the current employer for
less than two years, VOE’s will be sent to all employers covering a two-year period.
On the other hand, if the borrower is self-employed, the lending institution will request at a
minimum, the last two years of income tax returns, and financial statements for the business.
Business financial statements include a Year-to-Date Balance Sheet, and a Profit and Loss
Statement. The lender may in some instances request an income projection statement for the
business for the next two to five years. Once the financial documents are received, the lender will
perform a financial analysis to ascertain the probability of the business’ continued operation which
will have a direct impact on the stability of the borrower’s income.
ADEQUACY OF INCOME
Generally, when most borrowers indicate that they will not qualify for a loan, their reference
is to the adequacy of income, or a high income-to-debt ration.
The lender’s assessment of risk is measured basically by determining whether the borrower
has and adequate amount of stable income to support the mortgage payment and other financial
obligations. The desirable ratios will vary slightly depending on the loan type. For example, on an
FHA-insured mortgage or a VA guaranteed loan, the ratios are 29% / 41%. ON a conventional loan,
the ratios are 28% / 38%. The higher the ratios, the greater the lender’s risk which reduces the
borrower’s chance for approval.
SUFFICIENT MONEY TO CLOSE
Another key factor of prime consideration to lenders is the source and adequacy of the
borrower’s funds to close the mortgage. Borrowers are prohibited from borrowing monies to close
on a mortgage without full disclosure of these intentions to the lender. However, Partners In
Charity is a nonprofit organization that will gift you the down payment and closing costs. This
allows you to meet your lender's requirements. A minimum investment of earnest money is required
on all mortgages. Acceptable sources of earnest monies include savings and checking accounts, gifts
from relatives, savings bonds, employer relocation pay, net proceeds from the sale of a previous
home, etc. During the loan application process, the lender processing the loan application will
request the borrower’s most recent two months of bank statements to verify funds available for
closing. Bank statements can also be used with the VOE to determine the borrower’s ability to save
any additional money needed to close the loan.
The lender will also send to the institutions designated by the borrower a “Verification of
Deposit” (VOD). The borrower will be asked to sign the form authorizing the repository to release
this information to a third party, the lender.
As with the VOE, this form cannot be hand carried to the depository by the borrower or their
real estate agent. It should be pointed out, that in some instances, lending institutions have
developed an Information Disclosure Authorization form that you may be asked to sign during the
initial interview. The authorization form is sent to employers, banks, landlords, etc. Instead of
having you sign several VOE’s or VOD’s. The form contains the same authorization to release the
information to the lender.
INFORMATION DISCLOSURE AUTHORIZATION
TO WHOM IT MAY CONCERN:
I/we hearby authorize you to release to ____________________________ or it’s assigns the
following information for the purpose of verification:
- Employment history, dates, titles, hours, income etc.
- Banking and savings accounts of record
- Mortgage loans (s), landlord rating and payoff information
Any other information deemed necessary in connection with a consumer credit report for
transactions which involve real estate. This information is for the confidential use in compiling a
mortgage loan credit file for VA, FHA or conventional home loan.
A photographic or carbon or faxed copy of this authorization being a valid copy of the signature (s)
of the undersigned, may be deemed to be the equivalent of the original and may used as a duplicate
original. Further, I/we authorize any depository listed on our loan application to debit our account
for the processing fee assessed and the completion of the verification form.
Your prompt reply will help expedite my real estate transaction.
Thank you for your cooperation.
| ___________________ |
___________________ |
|
___________________ |
___________________ |
| Signature |
Date |
|
Signature |
Date |
| ___________________ |
___________________ |
|
___________________ |
___________________ |
| Social Security Number |
|
Social Security Number |
NOTICE TO BORROWERS: This is notice to you as required by the Right to Financial
Privacy Act of 1978 that FHA has a right of access to financial records held by financial institutions
in connection with the consideration or administration of assistance to you. Financial records
involving your transaction will available to FHA without further notice or authorization but will not
be disclosed or released by this institution to another Government Agency or Department without
your consent except as required or permitted by law.
CREDITWORTHINESS
The fourth and a very important factor a lender considers in evaluating the borrower’s
qualification for a loan involves creditworthiness. A detailed examination of the borrower’s credit
report will reveal certain information about the borrower. The lender will order a residential
mortgage credit report form one of the major Credit Reporting Repositories. The credit report is
analyzed to determine the borrower’s pay habits, and past patterns in meeting financial obligations.
The borrower will be asked to provide a statement explaining any credit derogatives.
If a borrower has elected to pay cash and has no credit accounts, creditworthiness can still be
evaluated by demonstrating a willingness to pay in a timely manner with “rent receipts” and
“receipts for utility bills”, a form of silent credit.
Because a borrower has experienced credit difficulties in the past, due to unforeseen
circumstances, will not automatically signal a reject for a loan. The borrower’s statement and reason
for credit derogatives are carefully evaluated before a final decision is made.
Compensating Factors – Mortgage lenders, the secondary market, and mortgage insurers are
increasingly permitting compensating factors which is a term that refers to a borrower’s
circumstances that warrant more flexible underwriting.
Commitment Letter – After your loan is approved, the lender will send a commitment letter. This
is a formal offer or loan commitment. It will state the amount and terms of the loan. You will be
given a certain amount of time to accept the loan offer and close. You should read and understand
the commitment letter before signing. A counselor from a housing counseling agency or an attorney
can assist you if the terms identified in the letter are unclear.
HOMBUYERS MORTGAGE COMPANY
4467 Some Street
Anytown, USA 61767
|
September 4, 2000
Justin Time
Last Time
1941 Moving Avenue
Anytown, USA 42643
|
Dear Mr. and Mrs. Time:
We are please to advise that your mortgage loan application has been approved for a fixedrate
real estate mortgage on the property located at 32048 Residence Plaza, Uptown, USA 62544
subject to the following terms:
-
Amount of Loan
Term
Interest Rate
Commitment Fee
|
$82,850.00
30 years
8%
$829.00
|
In order to accept this commitment, you must sign and date the original and return it to us on
or before September 19, 2000. This commitment will expire if the loan is not closed under the terms
specified by October 9, 2000. In order to close this transaction, the following document must be
furnished to us for review. Please contact Ms. Getloan about obtaining the following:
Preliminary Title Report
This commitment is subject to all laws and regulations governing the transaction. At the
established time for closing, please arrange to bring to the closing certified band funds or a cashier’s
check for the funds needed to close the transaction. Make the check payable to Homebuyers
Mortgage Company. Please call me if you have any questions. Thank you for the opportunity to be
of service to you.
|
Sincerely, |
| I accept the terms as outlined in your letter dated September 4, 2000. ( Please sign. Do not print). |
| Signature________________________________ Date_________________ |
Fair Housing Laws
This module would not be complete without a brief review of Fair Housing Laws. Laws
have been passed by Congress to protect homebuyers against certain types of discrimination in
housing. The purpose of these laws is to create a single, unbiased market where everyone has the
opportunity to purchase a home and live where she or he chooses.
The Fair Housing Act prohibits discrimination in housing or mortgage lending and the
provision of insurance or brokerage services because of:
- Race or color
- National Origin
- Sex
- Familial status (one or more children under 18; also applies to pregnant women.)
|
- Handicap or disability
- Creed
- Religion
- Age
|
What is prohibited?
No one may take any of the following actions based on the above basis:
- Refuse to rent or sell housing
- Refuse to negotiate for housing
- Make housing unavailable
- Deny housing
- Set different terms, conditions or privileges for sale or rental of a dwelling
- Provide different services or facilities
- Falsely deny that housing is available for inspection, sale or rental
- For profit, persuade owners to sell or rent (blockbusting)
- Steering – Conscientious direction of persons to or away from specific areas
- Redlining – Refusing to make loans or issue insurance policies in certain areas
- Coerce, intimidate or harass someone for exercising their fair housing rights.
|
- No one may refuse to reasonably accommodate the needs of persons with disabilities.
In mortgage lending, no one may take any of the following actions based on the above bases:
- Refuse to make mortgage loan
- Refuse to provide information regarding loans
- Impose different terms or conditions on a loan
- Discriminate in appraising property
- Refuse to purchase a loan
- Set different terms or conditions for purchasing a loan
|
The Equal Credit Opportunity Act prohibits denials of credit based on race, color, religion,
national origin, sex, age, marital status or receipt of public assistance. If you believe that you have
encountered discrimination, you should contact a local fair housing agency or your local HUD
office, or call (toll-free) 1-800-669-9777. Hearing impaired persons may call (TDD) 1-800-927-
9275.
REVIEW QUIZ II
- What is a VOE and what does it tell a lender?
- Why are debt-to-income ratios reviewed by lenders?
- What is a VOD and why is it used by lenders?
- Identify key information contained in a credit report?
- High ratios increase / decrease the lender’s risk. (circle one)
- Identify two acts that can reduce your ratios.
Below is a checklist of the most frequently requested information by lenders from the borrower.
Use the Checksheet to gather information and documents prior to completing the loan application.
Checksheet
Property Information:
_____ 1. Purchase Contract and Escrow Instructions – signed by all parties, original or a copy
certified true and correct.
_____ 2. Names, company and telephone number for listing and selling real estate agent’s.
_____ 3. Name, address and telephone numbers for Title Company and Escrow Office.
_____ 4. Copy of check for earnest money deposit.
_____ 5. Copy of listing, including real estate taxes and lot dimensions.
_____ 6. Legal description of property being purchased.
_____ 7. Property hazard insurance agents name, company, and telephone number.
_____ 8. Name and telephone number of persons for appraiser to contract to access the property.
Employment:
_____ 1. Names, addresses, telephone numbers, and exact dates of employment with ALL employers
over the past two years.
_____ 2. W-2 / 1099’s for 20__ and 20__ from all employers (two years).
_____ 3. Signed personal federal tax return including all schedules for 20__ and 20__.
_____ 4. Most recent pay stub.
_____ 5. Signed company federal tax returns including all schedules for 20__ and 20__ (selfemployed).
_____ 6. Current (within past 3 months) Year-to-date Profit and Loss statement and Balance Sheet
for self-employed or commissioned applicants, reviewed and signed by an accountant without audit.
_____ 7. Award letter(s) or most current amendment for social security or retirement benefits.
Include proof of payment (direct deposit or check stub).
_____ 8. Copy of Note income – must have 5 years or more remaining.
_____ 9. Rental agreements / leases (FHA requires one year lease) for all tenants or real property
owned.
_____ 10. Schedule of Real Estate on all real property owned to include property address and zip
codes, type property (SFR, TH, condo, etc.) type mortgage (FHA, VA, conventional, private, etc.),
date mortgage originated, mortgage balance, mortgage payment, rental income, and net income
earned (positive and / or negative) on each property.
_____ 11. Proof of consistent receipt of child support and alimony if considered qualifying income.
Assets
_____ 1. Two months of current statements for ALL bank, credit union or savings accounts showing
BALANCE, ACCOUNT NUMBERS, and COMPLETE ADDRESS of the lenders.
_____ 2. Stock and bond account statements including broker’s names, addresses, account numbers,
number of shares and value.
_____ 3. Life insurance face amount – cash value if any.
_____ 4. Year, make and estimated value of all vehicles.
_____ 5. Gift letter – funds will be verified in borrower’s account.
Liabilities:
_____ 1. Name, addresses, balances, monthly payments, and account numbers for all vehicle loans,
charge accounts, credit cards, and any other financial obligations.
_____ 2. Lenders’ names, addresses, balances, monthly payments, and account numbers for all
mortgages. Include a copy of annual statement, a 12 month payment history, and the loan type
(FHA, VA, conventional and / or private) for each loan.
_____ 3. Letter explaining any slow pays, collection accounts, judgments, or other credit problems.
_____ 4. Bankruptcy paper (petition, schedule of debts, and discharge) and a letter of explanation.
Other:
_____ 1. Addresses and dates of occupancy for ALL residences for the past two years.
_____ 2. Names and addresses of all landlords within the past two years.
_____ 3. Copies of social security cards and driver’s license (photo ID is required for each
borrower).
_____ 4. If divorced, provide divorce decree and stipulations.
_____ 5. Name and address of nearest living relative.
SO NOW YOU’RE READY TO CLOSE
You have already learned:
How to budget for a home.
How to look for your dream home.
How to find a lender and apply for a loan to purchase that dream home.
Now it is time to discuss how are you are going to survive the “closing process” of that loan
on your “Dream Home!” The closing of a home loan often is the most confusing and difficult part
of the home purchase process. There are many forms that you are asked to sign. You may
encounter good and not so good closing agents. There are few things about the loan closing that you
should always remember:
- Never be intimidated by your closing agent. The closing agent may close several loans a
day. They become so familiar with the forms and process, that sometimes they forget that
you are a novice.
- If you do not understand what you are signing, don’t sign until the closer has explained the
form so you can understand it.
- Remember, it is your signature on the dotted line, not the closer’s. The closing company is
getting paid a fee to close your loan and you should expect excellent customer service.
Your lender, real estate agent or closing agent, will contact you to let you know when it is time
to close your loan. All parties purchasing the home should be present for the closing. On occasion,
if one of the parties is out of town at closing time, documents may be signed ahead of time. For the
purpose of this class, however, we are going to role play with all parties involved in a closing
presentation.
The following is a list of some typical “closing documents.”
- HUD 1 – Settlement Statement
- Addendum to HUD 1
- Assessor’s Letter
- Truth in Lending Disclosure Statement
- Escrow Disclosure
- Assumption Disclosure
- Prepayment Letter
- Affidavit that there are no Outside Agreements
- Mortgage or Deed of Trust
|
- Note
- Termite Certificate
- Survey
- Survey Disclosure and Receipt
- Encroachment Affidavit (if needed)
- Flood Zone Disclosure
- Loan Application
- Addendums to Loan Application
- Warranty Deed
- Lien Affidavit
|
By now you are probably saying to yourself: “What have I gotten myself into?” Right?
Well, just remember, everyone that buys a home has to sign some, if not all, of these closing
documents. It is all just part of the responsibility of being a homeowner. At the end of this session,
you should feel perfectly comfortable with the closing process. There are three (3) basic types of
residential closings:
- Closing of an FHA loan
- Closing of a VA loan
- Closing of a Conventional loan
Many of the same forms are used for any of the three (3) basic types of closings. We will
review each of the common forms and discuss other forms that may also be included in only some
closings.
HUD I – SETTLEMENT STATEMENT
We will discuss this form by each line item: A loan closer should walk through this form
with you at closing, line item, by line item.
HUD-1 Settlement Statement Costs
| A. U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT SETTLEMENT STATEMENT |
| B. TYPE OF LOAN |
|
|
6. File Number |
7. Loan Number |
| |
1. o FHA |
2. o FmHA |
|
|
| 3. o CONV. UNINS. |
4. o VA |
5. o CONV. INS. |
8. Mortgage Insurance Case Number |
| C. NOTE: This form is furnished to give you a statement of actual settlement costs. Amounts paid to
and by the settlement agent are shown. Items marked "(p.o.c.)" were paid outside the closing; they are shown here
for informational purposes and are not included in the totals. |
| D. NAME AND ADDRESS OF BORROWER: |
E. NAME AND ADDRESS OF SELLER: |
F. NAME AND ADDRESS OF LENDER: |
| G. PROPERTY LOCATION: |
H. SETTLEMENT AGENT: NAME, AND ADDRESS |
| |
PLACE OF SETTLEMENT: |
I. SETTLEMENT DATE: |
| J. SUMMARY OF BORROWER’S TRANSACTION |
|
K. SUMMARY OF SELLER’S TRANSACTION |
| 100. GROSS AMOUNT DUE FROM BORROWER: |
|
400. GROSS AMOUNT DUE TO SELLER: |
| 101. Contract sales price |
|
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401. Contract sales price |
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| 102. Personal property |
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402. Personal property |
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| 103. Settlement charges to borrower(line 1400) |
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403. |
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| 104. |
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404. |
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| 105. |
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405. |
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| Adjustments for items paid by seller in advance |
|
Adjustments for items paid by seller in advance |
| 106. City/town taxes to |
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406. City/town taxes to |
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| 107. County taxes to |
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407. County taxes to |
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| 105. |
|
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405. |
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| 108. Assessments to |
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408. Assessments to |
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| 109. |
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409. |
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| 110. |
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410. |
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| 111. |
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411. |
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| 112. |
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412. |
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| 120. GROSS AMOUNT DUE FROM BORROWER |
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420. GROSS AMOUNT DUE TO SELLER |
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| 200. AMOUNTS PAID BY OR IN BEHALF OF BORROWER: |
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500. REDUCTIONS IN AMOUNT DUE TO SELLER: |
| 201. Deposit of earnest money |
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501. Excess deposit (see instructions) |
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| 202. Principal amount of new loan(s) |
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502. Settlement charges to seller (line 1400) |
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| 203. Existing loan(s) taken subject to |
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503. Existing loan(s) taken subject to |
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| 204. |
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504. Payoff of first mortgage loan |
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| 205. |
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505. Payoff of second mortgage loan |
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| 206. |
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506. |
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| 207. |
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507. |
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| 208. |
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508. |
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| 209. |
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509. |
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| Adjustments for items paid by seller in advance |
|
Adjustments for items paid by seller in advance |
| 210. City/town taxes to |
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510. City/town taxes to |
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| 211. County taxes to |
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511. County taxes to |
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| 212. Assessments to |
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512. Assessments to |
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| 213. |
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513. |
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| 214. |
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514. |
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| 215. |
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515. |
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| 216. |
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516. |
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| 217. |
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517. |
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| 218. |
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518. |
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| 219. |
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519. |
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| 220. TOTAL PAID BY/FOR BORROWER |
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520. TOTAL REDUCTION AMOUNT DUE SELLER |
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| 300. CASH AT SETTLEMENT FROM/TO BORROWER |
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600. CASH AT SETTLEMENT TO/FROM SELLER |
| 301. Gross amount due from borrower(line 120) |
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601. Gross amount due to seller (line 420) |
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| 302. Less amounts paid by/for borrower(line 220) |
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602. Less reductions in amount due seller (line 520) |
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| 303. CASH (_ FROM) (_ TO) BORROWER |
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603. CASH (o TO) (o FROM) SELLER |
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| L. SETTLEMENT CHARGES |
| 700. TOTAL SALES/BROKER’S COMMISSION based on price $ @ %= |
PAID FROM BORROWER’S FUNDS AT SETTLEMENT |
PAID FROM SELLER’S FUNDS AT SETTLEMENT |
| Division of Commission (line 700) as follows: |
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| 701. $ to |
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| 702. $ to |
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| 703. Commission paid at Settlement |
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| 704. |
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| 800. ITEMS PAYABLE IN CONNECTION WITH LOAN |
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| 801. Loan Origination Fee % |
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| 802. Loan Discount % |
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| 803. Appraisal Fee to |
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| 804. Credit Report to |
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| 805. Lender’s Inspection Fee |
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| 806. Mortgage Insurance Application Fee to |
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| 807. Assumption Fee |
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| 808. |
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| 809. |
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| 810. |
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| 811. |
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| 900. ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE |
| 901. Interest from to @$ /day |
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| 902. Mortgage Insurance Premium for months to |
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| 903. Hazard Insurance Premium for years to |
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| 904. years to |
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| 905. |
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| 1000. RESERVES DEPOSITED WITH LENDER |
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| 1001. Hazard Insurance months @ $ per month |
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| 1002. Mortgage insurance months @ $ per month |
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| 1003. City property taxes months @ $ per month |
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| 1004. County property taxes months @ $ per month |
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| 1005. Annual assessments months @ $ per month |
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| 1006. months @ $ per month |
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| 1007. months @ $ per month |
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| 1008. Aggregate Adjustment months @ $ per month |
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| 1100. TITLE CHARGES |
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| 1101. Settlement or closing fee to |
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| 1102. Abstract or title search to |
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| 1103. Title examination to |
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| 1104. Title insurance binder to |
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| 1105. Document preparation to |
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| 1106. Notary fees to |
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| 1107. Attorney’s fees to |
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| (includes above items numbers; ) |
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| 1108. Title Insurance to |
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| (includes above items numbers; ) |
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| 1109. Lender’s coverage $ |
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| 1110. Owner’s coverage $ |
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| 1111. |
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| 1112. |
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| 1113. |
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| 1200. GOVERNMENT RECORDING AND TRANSFER CHARGES |
| 1201. Recording fees: Deed $ ; Mortgage $ ; Releases $ |
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| 1202. City/county tax/stamps: Deed $ ; Mortgage $ |
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| 1203. State tax/stamps: Deed $ ; Mortgage $ |
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| 1204. |
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| 1205. |
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| 1300. ADDITIONAL SETTLEMENT CHARGES |
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| 1301. Survey to |
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| 1302. Pest inspection to |
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| 1303. |
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| 1304. |
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| 1305. |
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| 1400. TOTAL SETTLEMENT CHARGES (enter on lines 103, Section J and 502, Section K) |
|
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In most cases the HUD 1 – Settlement Statements must be signed by both the buyer and the seller.
Proper legal names are to be typed and signed as indicated.
ADDENDUM TO HUD 1 – SETTLEMENT STATEMENT
The FHA requires this addendum as a certification that the borrower and seller received copies of the
Settlement Statement and that the receipts and disbursements are true and accurate. The Settlement
Agent also has to certify to the same information. A closing date is required on this form.
TRUTH IN LENDING DISCLOSURE STATEMENT
The truth in Lending Disclosure Statement is a document that discloses to the borrower all the costs
involved in making and closing the loan. The lender is required to give this to the borrower within
three business days of the loan application. For home purchase loans, this statement may be revised
just before closing because it is based on the Good Faith Estimate of closing costs. This statement
can be confusing to the borrower. It has (5) primary boxes:
-
1) Annual Percentage Rate (APR):
The annual percentage rate or APR is the cost of a borrower’s credit as a yearly rate. This APR is
defined by the federal Truth in Lending Act, as including finance charges, as well as, the contractual
interest rate. The APR shown on the Truth in Lending Disclosure Statement is always higher than
the interest rate shown on the note and mortgage. This does have a tendency to confuse the
borrower.
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2) Finance Charge:
This is the dollar amount the credit will cost you. It is your estimated closing costs.
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3) Amount Financed:
The amount of credit provided to you or on your behalf. It is your loan amount.
-
4) Total of Payments:
The total amount of money you will have paid after you have made all scheduled payments. This
amount is usually a very large dollar amount, because most often is spans a twenty-five (25) to thirty
(30) year mortgage term. The figure is a total of all interest you will pay over the life of the loan
plus the original mortgage amount.
-
5) Your Payment Schedule:
This area of the statement show the breakdown of your monthly payments. It sets out the principal
and interest amounts, as well as, all tax and hazard insurance amounts and how those payments are
to be made. It also indicates any late payment charges or prepayment charges.
NOTE
The note is a document on which a borrower promises to repay a loan. IN the case of a home loan,
the note is often referred to as a mortgage note. The note contains the following information:
- It identifies the “ borrower” as the person signing the Note, as well as, the person’s successors
and assigns.
- It identifies the “lender” by name.
- A Note always contains a clause declaring the borrower’s promise to pay interest and repay the
principal sum of the note.
- It sets out the principal amount, rate of interest and term of the note.
- It says when and where payments are to be made.
- It gives the amount of each payment.
- It indicates the Note is secured by a mortgage, deed of trust, or similar security instrument that
is dated the same date as the Note and called the “Security Instrument.” The Security Instrument
protects the lender’s legal interest in the property should the property be foreclosed.
- It indicates payment adjustments, if applicable.
- A Note declares a borrower’s right to prepay the debt.
- A Note sets out the penalty if the borrower fails to make his/her payments. It sets out late
charges, and default charges.
- The Note sets out waiver rights, obligations and proper notice requirements.
By signing the note, the borrower accept and agrees to the terms and conditions contained in the
note.
PAYMENT LETTER – ATTACHMENT TO SETTLEMENT STATEMENT
This is a simple form that sets out all information required to make your monthly mortgage
payments. It may include the following information:
- Loan number
- Borrower’s name and address
- First payment due date
- Complete breakdown of payment
amount, indication the amount of the payment being applied to principal , interest,
taxes, and hazard insurance.
|
- When payment are due
- To whom checks are to be made payable, with the address
- An estimate of your annual real estate taxes
|
These items are not required but may be included:
- Legal description of the property
- Date of closing or settlement
- Property value
- Sales price
- Loan amount
|
- Interest rate
- Term of loan
- Seller’s name
|
INITIAL ESCROW ACCOUNT DISCLOSURE STATEMENT
The escrow disclosure statement is an estimate of activity in your escrow account. It
indicates a starting balance, payment amounts into and from the account, description of those
payments into, from, and anticipated escrow account balance.
PURCHASER / BORROWER STATEMENT
SELLER / OWNER STATEMENT
This is an affidavit that there are no outside agreements associated with this loan or the sale
of this property. The buyer and seller both sign certifications to the fact that they are the sole owner
of a fee simple title and are in possession or will be in possession of the property
MORTGAGE
The mortgage or security instrument is a document signed by a borrower and a lender giving
the lender the right to the borrower’s house if the borrower does not repay the loan. The mortgage
has many clauses. The mortgage contains the same information as the Note and other clauses such
as:
- Application of payments
- Fire, flood and other hazard insurance requirements
- Condemnation
- Foreclosure procedures
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- Occupancy, preservation, maintenance and protection of the property
- Fees
- Grounds for acceleration of the debt
- Reinstatement information
|
Generally during a loan closing, the borrower does not take t he time to read completely
through a mortgage. It is advisable for the borrower to be very familiar with the mortgage prior to
closing. Typically the mortgage is a lengthy document to read at a loan closing, but you, the
borrower, have every right to take the time to read the mortgage. Asking for a draft copy of the
mortgage in advance would be wise. Don’t ever sign a document you have not read or are not
familiar with. Ask questions about any provision found in the mortgage if you do not understand the
provision. Seek legal counsel when needed.
HOW TO CARE FOR YOUR HOME AFTER CLOSING
Congratulations! You are now the proud owner of the home of your dreams. You have
worked hard to save money, find the right neighborhood, the right real estate broker, the right house,
the right lender, and the right closing agent. Now it is time to think about how to protect your
investment in your home.
There are some questions you should be asking yourself. For example:
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- How should the house be maintained?
- How do the repairs get done?
- How will you pay for major repairs?
- What are the safety issues that need to be addressed?
- How do you relate to the new neighbors?
- What ways are there to make the house more energy efficient?
- What insurance coverage is necessary?
- Is refinancing a way to reduce mortgage payments?
- What should be done if it’s not possible to make mortgage payments?
Seeking Advice From The Previous Homeowner
The best source of information for the continuing maintenance of your new home is the
previous owner. Hopefully, before closing takes place, you spent some time with the previous owner
going through the house room by room to become familiar with all the aspects of the house. Most
important would be the basic systems such as the roof, the electrical, the heating, the plumbing and
the foundation. In addition, the previous homeowner can give you the names and phone numbers of
contractors and other professionals (electricians, plumbers, roofers, carpenters) who have worked on
the house and what they did and when they did it. You should try to obtain construction information
such as wiring diagrams, blueprints or remodeling plans. It is important to know who picks up the
garbage or trash and when they do it. You should also know who the fuel oil supplier is and when
fuel oil is delivered, if you have an oil burning heating unit. You should be familiar with the location
of the main shut off valves for water and gas, the main electrical switch, the fuse or circuit/breaker
box, and the operation of the hot water heater thermostat.
Making Necessary Repairs
The pre-inspection report you requested before buying the house will give you information
related to repairs that may be needed now and in the very near future. There are minor repairs to the
house that you will be able to perform such as replacing a broken window, caulking tile in the
bathroom, weather stripping or painting. For typical repairs, you’ll need to have the following basic
tools:
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- Hammer
- Straight blade and Phillips screwdriver (or combination screwdriver with interchangeable
tips)
- Slip joint pliers
- Handsaw
- Wall Scraper
- Tape Measure
- Flashlight
- Plunger (one that works for both sinks and toilets).
Other repairs will require the services of a contractor. You will need to know how to find a
contractor who is reputable. Here are a few guidelines you can follow to help you make the right
selection:
- Talk to people in you neighborhood to get the names of contractors suitable to do the repairs
that are needed. You should also use local publications to put together a list of contractors.
- Arrange to have the contractors visit you for an interview and a discussion of the work that
needs to be done. Ask the contractor for the address of a property where you can see what
work has been done.
- Get free cost estimates from the contractors. Ask them to give you an estimate in writing in
the form of a firm bid with a date that work will be started and completed.
- A contract specifying what work is to be performed, all material and labor for the project,
when payments are due, when work is to be completed etc., should be signed by you and the
contractor you selected. It’s important to hold back about ten percent of the payment until
after the work is completed.
- The contractor should be required to obtain the necessary permits and make sure the work is
inspected, if required by local government.
- Be sure the contractor has liability insurance that includes bodily or personal injury, and
property damage.
- The contractor should provide a reasonable time of guaranteeing the work that is to be
performed. Thirty days is normal, but the type of work performed should be considered.
Manufacturers’ warranties could apply for a product that was installed by the contractor.
Home Maintenance
Now that you own a home of your very own, you want to make sure it is maintained
properly. Home maintenance requires some routine inspections for maintenance. We have provided
you a Home Maintenance Checklist to help you become familiar with the items and systems that
should be routinely inspected and cared for.
HOME MAINTENANCE CHECKLIST
The purpose of this checklist is to help you identify the need for minor repairs or
maintenance by walk-through inspections. These should be done at least twice a year because of
seasonal changes—once in the fall and once in the spring. You should be able to recognize the
evidence of a need for repairs at other times during the year based on your walk-through
experiences. Major repairs and their cost will be avoided if you do proper inspections and take
appropriate action. The checklist indicates the parts of the home, what indicators of a problem to
look for, and suggests possible causes.
Interior
- Basement—Dampness or water following wet weather—Check if ventilation to the
basement is adequate, if sump pump is working, if leaders and downspouts are working
properly, and if drainage on the outside of the foundation is away from the house.
- Living Area—Water stains on the ceiling—Check for missing caulk around the bath tub and
tile.
- Attic or Ceiling Under Roof—Water stains—Check for worn roof or missing shingles.
- Electrical System—Fuses that blow or circuit breakers that go off—Check for overloads
and employ a licensed electrician to upgrade the system if the problem continues.
- Heating and Cooling Systems—Inadequate heating and cooling—Check for dirt and dust
around furnace. Clean or change any air filters. Have heating and cooling system checked by
a qualified service person.
- Plumbing System—Leaking faucets—Check for worn washers.
Exterior
- Foundation—Pool of water—Check leaders and downspouts to make sure rain water flows
through properly and away from the foundation.
- Walls—Peeling paint or decayed siding and trim—Check for lead-based paint, if the house
was built prior to 1978 and take corrective measures if there is a problem. Check drainage
from leaders and downspouts.
- Roof—Missing or worn shingles—Check branches of nearby trees to determine if they are
too near the roof. Evaluate roof for replacement.
- Yard—Rotted or dying trees—Check for insect infestation and soil contamination from
road salt, chemicals, etc.
Getting Money To Pay For Repairs
The money to pay for major repairs can come from home improvement or personal loans
from local lenders. The contractor may provide financing or advise you where to obtain it. A home
equity loan may be the approach you take. In any event, you should shop around for the best interest
rate and the best repayment schedule for you. Check with community agencies to find out if money
is available through special grants or loan programs.
You should perform a fall and spring inspection, since it will be helpful for you to be aware
of items that may need attention before they become major repairs. Eventually, it will become
routine to check items that my need repair before they become a problem. This will save you money
in the long run. Example would include replacing a downspout from the gutters, scrapping and
painting the outside trim of windows, cleaning or replacing the furnace filter, and draining the hot
water heater.
Saving Money Through Energy Efficiency
Energy efficiency such as adding insulation without over-insulating to cause dampness,
having a thermostat timer and purchasing energy efficient items will result in lowering the expense
of homeownership. You can contact your local utility or state agency for energy-saving tips and the
availability of grants or low cost loans to improve the energy efficiency of your home. You should
be aware of energy savers such as: turning out lights when you leave the room, not letting water run
unnecessarily, insulating your attic, having your furnace or heat pump serviced periodically,
installing storm windows and putting weather striping around your windows and doors.
Safety issues relate to protecting your home by changing locks, installing fire extinguishers,
and listing emergency numbers near your phone. In addition, fire marshal recommended smoke
detectors should be installed on the ceiling or hallway outside each bedroom door and in or near the
living room. They should be checked periodically to make sure they are working. A chain link ladder
should be considered for a way to escape from a second or third story window. It can be stored under
a bed or in a closet. You can perform a fire-prevention tour of your home or have a fire inspector
come to your home if the community provides the service. A first aid kit with band-aids and
medicines in an easy to reach place is very important for everyone in your family. Ways of making
your home secure would include locking your doors and windows when you’re not at home,
trimming shrubs that hide windows and doors, putting up lights for lighting your house and yard, and
stopping mail and newspaper delivery if you’re going to be away for a few days. You should have
all of your important papers in a safe place such as a safe deposit box at a local bank or a fireproof
safe at your home.
Getting Neighborly Advice
Neighbors are a very important source of information. You should make it a point to meet
with your neighbors soon after you move into your home. They will be invaluable should an
emergency occur where you need their help, and they will be most helpful in advising you of the
benefits of being part of your community. For example, changes such as street widening, zoning
changes on a nearby property, and the location of a community center could have impact on you and
your home. Your neighbor can provide you with access to community organizations you may find
helpful to getting involved in neighborhood activities. This might include a Blockwatcher or
Neighborhood Watch Association, child home care or play group, Volunteer Fire Fighters
Association, Boys and Girls Clubs, etc.
Considering Hazard, Flood and other Insurance Protection
It is very important to keep hazard insurance complete and up-to-date. Flood insurance is
also needed, if you are located in a federally designated flood plain area. Insurance is required by
lenders before closing. You should make sure your hazard insurance policy contains an inflation
rider which automatically increases the coverage as the value of the home increases. It is important
to be sure replacement cost new is provided rather just value. Other insurance available would
include a homeowners’ warranty and insurance from the place of purchase that extends the warranty
period for new equipment. Mortgage life insurance pays off the mortgage at the borrower’s death.
You may wish to consider all of the preceding insurance as good investments; however, you will
have to include the cost for each in your expenses.
Lowering Your Mortgage Payments
It is possible to lower monthly mortgage payments by refinancing the mortgage on your
home. The decision to refinance a mortgage depends on the interest rate available for a new
mortgage, discount points, and the amount of closing costs to be paid. Typically there needs to be at
least a two percent difference between your mortgage and the new mortgage that is available.
Refinancing may not be a good idea for you if you have a prepayment penalty on your mortgage.
Looking For Homesaver Assistance
You should contact your lender immediately if you are unable to make a mortgage payment.
The main reason homeowners fail to make mortgage payments is usually due to a loss of income
related to divorce or marital problems, death of a family member, job loss and/or the inability to
replace income, major illness and/or large medical bills, etc. You should immediately contact a
housing counseling agency for assistance in straightening out your financial difficulties and helping
you deal with your lending institution.
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