Questions & Answers About Buying A New Home
HOW DO I KNOW IF I'M READY TO BUY A HOME?
You can find out by asking yourself some questions:
If you can answer "yes" to these questions, you are probably ready to buy your own home.
HOW DO I BEGIN THE PROCESS OF BUYING A HOME?
Start by thinking about your situation. Are you ready to buy a home? How much can you afford in a monthly mortgage payment (see Question 4 for help)? How much space do you need? What areas of town do you like? After you answer these questions, make a "To Do" list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the "Homes" section of the newspaper.
HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
The two don't really compare at all. The one advantage of renting is being generally free of most
maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage
of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate
without permission and may be at the mercy of the landlord for housing.
HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT CAN AFFORD?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, 4 should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
Your home should fit way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities - things like location and size. Should the house be close to certain schools? Your job? To public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a 'wish list." Minimum requirements are things that a house must have for you to consider it, while a "wish list" covers things that you'd like to have but aren't essential.
FINDING YOUR HOME HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?
You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area.
HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?
Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You may also want to visit the local library. It can be an excellent source for information on local events and resources, and the librarians will probably be able to answer many of the questions you have.
HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?
Your real estate agent can give you a ballpark figure by showing you comparable listings. If you are working with a real estate professional, they may have access to comparable sales maintained on a database.
HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?
The total amount of the previous year's property taxes is usually included in the listing information. If it's not, ask the seller for a tax receipt or contact the local assessor's off ice. Tax rates can change from year to year, so these figures may be approximate.
WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?
Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities
IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?
There isn't a definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiances, and have lower property tax rates. People who buy older homes, however, shouldn't mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don't want to worry initially about upkeep and repairs.
WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
In addition to comparing the home to your minimum requirement and wish lists, use the HUD Home Scorecard and consider the following:
Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each home from a professional standpoint.
WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller's or real estate agent's answers are clear and complete. Ask questions until you understand all of the information they've given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. The HUD Home Scorecard can help you develop your question list.
HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?
If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don't hesitate to return for a second look. Use the HUD Home Scorecard to organize your photos and notes for each house.
HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
There isn't a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you're looking for. It will help avoid wasting your time.
YOU'VE FOUND IT
WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN INSPECTION FIGURE IN THE PURCHASE OF A HOME?
An inspector checks the safety of your potential new home. Home Inspectors focus
especially on the structure, construction, and mechanical systems of the house and will make you
aware of only repairs, that are needed.
DO I NEED TO BE THERE FOR THE INSPECTION?
It's not required, but it's a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the home you'd I like to purchase and it is a good time to ask general, maintenance questions.
ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem a more specific Inspection may be recommended. It's a good idea to consider having your home inspected for the presence of a variety of health-related risks like radon gas asbestos or possible problems with the water or waste disposal system.
HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE HOME?
If the house you're considering was built before 1978 and you have children under the age of seven, you will want to have an inspection for lead-based point. It's important to know that lead flakes from paint can be present in both the home and in the soil surrounding the house. The problem can be fixed temporarily by repairing damaged paint surfaces or planting grass over effected soil. Hiring a lead abatement contractor to remove paint chips and seal damaged areas will fix the problem permanently.
DO I NEED A LAWYER TO BUY A HOME?
Laws vary by state. Some states require a lawyer to assist in several aspects of the home buying process while other states do not, as long as a qualified real estate professional is involved. Even if your state doesn't require one, you may want to hire a lawyer to help with the complex paperwork and legal contracts. A lawyer can review contracts, make you aware of special considerations, and assist you with the closing process. Your real estate agent may be able to recommend a lawyer. If not, shop around. Find out what services are provided for what fee, and whether the attorney is experienced at representing homebuyers.
DO I REALLY NEED HOMEOWNER'S INSURANCE?
Yes. A paid homeowner's insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to be made prior to that day. Plus, involving the insurance agent early in the home buying process can save you money. Insurance agents are a great resource for information on home safety and they can give tips on how to keep insurance premiums low.
WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER'S INSURANCE COSTS?
Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you look at homes. Newer homes and homes constructed with materials like brick tend to have lower premiums. Think about avoiding areas prone to natural disasters, like flooding. Choose a home with a fire hydrant or a fire department nearby.
IS THE HOME LOCATED IN A FLOOD PLAIN?
Your real estate agent or lender can help you answer this question. If you live in a flood plain, the lender will require that you have flood insurance before lending any money to you. But if you live near a flood plain, you may choose whether or not to get flood insurance coverage for your home. Work with an insurance agent to construct a policy that fits your needs.
WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
Always check to see if the house is in a low-lying area, in a high-risk area for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or making an addition in the future. Your real estate agent should be able to help you with these questions.
HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will include the following information:
Remember that a sale commitment depends on negotiating a satisfactory contract
with the seller, not just making an offer.
HOW DO I DETERMINE THE INITIAL OFFER?
Unless you have a buyer's agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent's advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what homes sell for in the area, the home's condition, how long it's been on the market, financing terms, and the seller's situation. By the time you're ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.
WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?
Earnest money is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you.
WHAT ARE "HOME WARRANTIES", AND SHOULD I CONSIDER THEM?
Home warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or home systems, which are not covered by homeowner's insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a home, a time when many people find themselves cash-strapped.
GENERAL FINANCING QUESTIONS: THE BASICS
WHAT IS A MORTGAGE?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF MY LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised
value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a
95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000),
and would have to pay, $2,500 as a down payment.
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
Types - advantages
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
Balloon Mortgage- Offers very low rates for an Initial period of time
(usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced
(though not automatically)
Generally offer lower initial interest rates
WHEN DO ARMS MAKE SENSE?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
HOW LARGE OF A DOWN PAYMENT DO I NEED?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.
WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in” which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.
WHAT ARE DISCOUNT POINTS?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, With each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases With each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.
HOW DO I CHOOSE THE RIGHT LENDER FOR ME?
Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it's beneficial when the lender knows home values and conditions in the local area. Do research and ask family, friends, and your real estate agent for recommendations.
HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?
Pre-qualification is an informal way to see how much you maybe able to borrow.
You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income,
your long-term debts, and how large a down payment you can afford. Without any obligation,
this helps you arrive at a ballpark figure of the amount you may have available to spend on
HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double check the "high credit limit,"'total loan," and 'past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.
CREDIT REPORTING COMPANIES
WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.
WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?
A credit bureau score is a number, based upon your credit history that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.
HOW CAN I IMPROVE MY SCORE?
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.
FINDING the RIGHT LOAN for YOU
HOW DO I CHOOSE THE BEST LOAN - PROGRAM FOR ME?
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.
Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.
WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN LENDERS?
First, devise a checklist for the information from each lending institution. You should
include the company's name and basic information, the type of mortgage, minimum down payment required,
interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.
ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
Yes. When you turn in your application, you'll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.
WHAT IS RESPA?
RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose
information to potential customers throughout the mortgage process, By doing so, it protects
borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers
about all closing costs, lender servicing and escrow account practices, and business relationships
between closing service providers and other parties to the transaction.
WHAT IS A GOOD FAITH ESTIMATE, AND HOW DOES IT HELP ME?
It's an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.
BESIDES RESPA, DOES THE LENDER HAVE ANY ADDITIONAL RESPONSIBILITIES?
Lenders are not allowed to discriminate in any way against potential borrowers. If you believe a lender is refusing to provide his or her services to you on the basis of race, color, nationality, religion, sex, familial status, or disability, contact HUD's Office of Fair Housing at 1-800-669-9777 (or 1-800-927-9275 for the hearing impaired).
WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?
To ensure you won't fall victim to loan fraud, be sure to follow all of these steps as you apply for a loan:
WHAT HAPPENS AFTER I'VE APPLIED FOR MY LOAN?
It usually takes a lender between 1-6 weeks to complete the evaluation of your application. Its not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application. If the loan is approved, a closing date is set up and the lender will review the closing with you. And after closing, you'll be able to move into your new home.
WHAT SHOULD I LOOK OUT FOR DURING THE FINAL WALK-THROUGH?
This will likely be the first opportunity to examine the house without furniture, giving you a clear view of everything. Check the walls and ceilings carefully, as well as any work the seller agreed to do in response to the inspection. Any problems discovered previously that you find uncorrected should be brought up prior to closing. It is the seller's responsibility to fix them.
WHAT MAKES UP CLOSING COST?
There may be closing cost customary or unique to a certain locality, but closing cost are usually made up of the following:
WHAT CAN I EXPECT TO HAPPEN ON CLOSING DAY?
You'll present your paid homeowner's insurance policy or a binder and receipt
showing that the premium has been paid. The closing agent will then list the money you owe
the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller
owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of
any inspection, warranties, etc.
WHAT DO I GET AT CLOSING?