Common Questions From First-Time Homebuyers
Why should I buy, instead
of rent?
Answer: You'll love the feeling of
having something that's all yours - a home where your own personal
style will tell the world who you are. A thriving vegetable garden
in the backyard, a tiled entryway, a yellow kitchen...when you own,
you can do it all your way! But there's more to owning a home than
personal satisfaction.
You can deduct the cost of your mortgage loan interest
from your federal income taxes, and usually from your state taxes,
too. And interest will compose nearly all of your monthly payment
, for over half the number of years you'll be paying your mortgage.
This adds up to hefty savings at the end of each year. And you're
also allowed to deduct the property taxes you pay as a homeowner.
If you rent, you write your monthly check and it's
gone forever. Another financial plus in owning a home is the possibility
its value will go up through the years.
I've heard of HUD homes. What
are HUD homes, and are they a good deal?
Answer: HUD homes can be a very good
deal. When someone with a HUD insured mortgage can't meet the payments,
the lender forecloses on the home; HUD pays the lender what is owed;
and HUD takes ownership of the home. Then we sell it at market value
as quickly as possible. Read all about buying a HUD home - one might
be right for you! And check our listings of HUD homes - as well as
homes being sold by other federal agencies.
I've had bad credit, and I
don't have much for a down-payment. Can I become a homebuyer?
Answer: You may be a good candidate
for one of the federal mortgage programs that are available. A good
place for you to start is by contacting one of the HUD-funded housing
counseling agencies. They can help you sort through your options.
In addition, contact your local government to see if there are any
local homeownership programs that might work for you.
Look in the blue pages of your phone directory for
your local office of housing and community development or, if you
can't find it, contact your mayor's office or your county executive's
office.
I'm a single mother. How would
I go about buying a home?
Answer: Although you won't have the
benefit of two incomes on which to qualify for a loan, there's no
reason that you can't become a homeowner. Become familiar with the
process, pick a good real estate broker, and think about getting
pre-qualified for a loan.
You might want to contact one of the HUD-funded housing
counseling agencies in your area to talk through your options. And
you also might want to think about buying a HUD home - they can be
very good deals. Also, contact your local government to see if there
are any local home-buying programs that could help you.
Look in the blue pages of your phone directory for
your local office of housing and community development or, if you
can't find it, contact your mayor's office or your county executive's
office.
Should I use a real estate
broker? How do I find one?
Answer: Using a real estate broker
is a very good idea. All the details involved in home buying, particularly
the financial ones, can be mind-boggling. A good real estate professional
can guide you through the entire process and make the experience
much easier.
A real estate broker will be well-acquainted with all
the important things you'll want to know about a neighborhood you
may be considering...the quality of schools, the number of children
in the area, the safety of the neighborhood, traffic volume, and
more. He or she will help you figure the price range you can afford
and search the classified ads and multiple listing services for homes
you'll want to see.
With immediate access to homes as soon as they're put
on the market, the broker can save you hours of wasted driving-around
time. When it's time to make an offer on a home, the broker can point
out ways to structure your deal to save you money. He or she will
explain the advantages and disadvantages of different types of mortgages,
guide you through the paperwork, and be there to hold your hand and
answer last-minute questions when you sign the final papers at closing.
And you don't have to pay the broker anything!
The payment comes from the home seller - not from the
buyer.
By the way, if you want to buy a HUD home, you will
be required to use a real estate broker to submit your bid.
How much money will I have
to come up with to buy a home?
Answer: Well, that depends on a number
of factors, including the cost of the house and the type of mortgage
you get. In general, you need to come up with enough money to cover
three costs: earnest money - the deposit you make on the home when
you submit your offer, to prove to the seller that you are serious
about wanting to buy the house; the down payment, a percentage of
the cost of the home that you must pay when you go to settlement;
and closing costs, the costs associated with processing the paperwork
to buy a house.
When you make an offer on a home, your real estate
broker will put your earnest money into an escrow account. If the
offer is accepted, your earnest money will be applied to the down
payment or closing costs. If your offer is not accepted, your money
will be returned to you. The amount of your earnest money varies.
If you buy a HUD home, for example, your deposit generally will range
from $500 - $2,000.
The more money you can put into your down payment, the lower your
mortgage payments will be. Some types of loans require 10-20% of
the purchase price. That's why many first-time homebuyers turn to
HUD's FHA for help. FHA loans require only 3% down - and sometimes
less.
Closing costs - which you will
pay at settlement - average 3-4% of the price of your home. These
costs cover various fees your lender charges and other processing
expenses. When you apply for your loan, your lender will give you
an estimate of the closing costs, so you won't be caught by surprise.
If you buy a HUD home, HUD may pay many of your closing costs.
How do I know if I can get
a loan?
Answer: Use our simple mortgage calculators
to see how much mortgage you could pay - that's a good start. If
the amount you can afford is significantly less than the cost of
homes that interest you, then you might want to wait awhile longer.
But before you give up, why don't you contact a real estate broker
or a HUD-funded housing counseling agency? They will help you evaluate
your loan potential.
A broker will know what kinds of mortgages the lenders
are offering and can help you choose a lender with a program that
might be right for you. Another good idea is to get pre-qualified
for a loan. That means you go to a lender and apply for a mortgage
before you actually start looking for a home. Then you'll know exactly
how much you can afford to spend, and it will speed the process once
you do find the home of your dreams.
How do I find a lender?
Answer: You can finance a home with
a loan from a bank, a savings and loan, a credit union, a private
mortgage company, or various state government lenders. Shopping for
a loan is like shopping for any other large purchase: you can save
money if you take some time to look around for the best prices.
Different lenders can offer quite different interest
rates and loan fees; and as you know, a lower interest rate can make
a big difference in how much home you can afford. Talk with several
lenders before you decide. Most lenders need 3-6 weeks for the whole
loan approval process.
Your real estate broker will be familiar with lenders
in the area and what they're offering. Or you can look in your local
newspaper's real estate section - most papers list interest rates
being offered by local lenders. You can find FHA-approved lenders
in the Yellow Pages of your phone book. HUD does not make loans directly
- you must use a HUD-approved lender if you're interested in an FHA
loan.
In addition to the mortgage payment,
what other costs do I need to consider?
Answer: Well, of course you'll have
your monthly utilities. If your utilities have been covered in your
rent, this may be new for you. Your real estate broker will be able
to help you get information from the seller on how much utilities
normally cost. In addition, you might have homeowner association
or condo association dues. You'll definitely have property taxes,
and you also may have city or county taxes.
Taxes normally are rolled into your mortgage payment.
Again, your broker will be able to help you anticipate these costs.
So what will my mortgage cover?
Answer: Most loans have 4 parts: principal:
the repayment of the amount you actually borrowed; interest: payment
to the lender for the money you've borrowed; homeowners insurance:
a monthly amount to insure the property against loss from fire, smoke,
theft, and other hazards required by most lenders; and property taxes:
the annual city/county taxes assessed on your property, divided by
the number of mortgage payments you make in a year.
Most loans are for 30 years, although 15 year loans
are available, too. During the life of the loan, you'll pay far more
in interest than you will in principal - sometimes two or three times
more! Because of the way loans are structured, in the first years
you'll be paying mostly interest in your monthly payments. In the
final years, you'll be paying mostly principal.
What do I need to take with me when
I apply for a mortgage?
Answer: Good question! If you have
everything with you when you visit your lender, you'll save a good
deal of time. You should have:
1) social security numbers for both your and
your spouse, if both of you are applying for the loan;
2) copies of your checking and savings account
statements for the past 6 months;
3) evidence of any other assets like bonds or
stocks;
4) a recent paycheck stub detailing your earnings;
5) a list of all credit card accounts and the
approximate monthly amounts owed on each;
6) a list of account numbers and balances due
on outstanding loans, such as car loans;
7) copies of your last 2 years' income tax
statements; and
8) the name and address of someone who can verify
your employment. Depending on your lender, you may be asked for other
information.
I know there are lots of types of
mortgages - how do I know which one is best for me?
Answer: You're right - there are many
types of mortgages, and the more you know about them before you start,
the better.
Most people use a fixed-rate mortgage. In a fixed rate
mortgage, your interest rate stays the same for the term of the mortgage,
which normally is 30 years.
The advantage of a fixed-rate mortgage is that you
always know exactly how much your mortgage payment will be, and you
can plan for it.
Another kind of mortgage is an Adjustable Rate Mortgage
(ARM). With this kind of mortgage, your interest rate and monthly
payments usually start lower than a fixed rate mortgage. But your
rate and payment can change either up or down, as often as once or
twice a year.
The adjustment is tied to a financial index, such as
the U.S. Treasury Securities index. The advantage of an ARM is that
you may be able to afford a more expensive home because your initial
interest rate will be lower.
There are several government mortgage programs that
might interest you, too. Most people have heard of FHA mortgages.
FHA doesn't actually make loans. Instead, it insures loans so that
if buyers default for some reason, the lenders will get their money.
This encourages lenders to give mortgages to people who might not
otherwise qualify for a loan.
Talk to your real estate broker about the various kinds
of loans, before you begin shopping for a mortgage.
When I find the home I want, how
much should I offer?
Answer: Again, your real estate broker
can help you here. But there are several things you should consider:
1) is the asking price in line with prices of
similar homes in the area?
2) Is the home in good condition or will you
have to spend a substantial amount of money making it the way you
want it? You probably want to get a professional home inspection
before you make your offer. Your real estate broker can help you
arrange one.
3) How long has the home been on the market?
If it's been for sale for awhile, the seller may be more eager to
accept a lower offer.
4) How much mortgage will be required? Make
sure you really can afford whatever offer you make.
5) How much do you really want the home? The
closer you are to the asking price, the more likely your offer will
be accepted. In some cases, you may even want to offer more than
the asking price, if you know you are competing with others for the
house.
What if my offer is rejected?
Answer: They often are! But don't
let that stop you. Now you begin negotiating. Your broker will help
you. You may have to offer more money, but you may ask the seller
to cover some or all of your closing costs or to make repairs that
wouldn't normally be expected.
Often, negotiations on a price go back and forth several
times before a deal is made. Just remember - don't get so caught
up in negotiations that you lose sight of what you really want and
can afford!
So what will happen at closing?
Answer: Basically, you'll sit at a
table with your broker, the broker for the seller, probably the seller,
and a closing agent.
The closing agent will have a stack of papers for you
and the seller to sign. While he or she will give you a basic explanation
of each paper, you may want to take the time to read each one and/or
consult with your agent to make sure you know exactly what you're
signing. After all, this is a large amount of money you're committing
to pay for a lot of years!
Before you go to closing, your lender is required to
give you a booklet explaining the closing costs, a "good faith
estimate" of how much cash you'll have to supply at closing,
and a list of documents you'll need at closing. If you don't get
those items, be sure to call your lender BEFORE you go to closing.
Be sure to read our booklet on settlement costs . It
will help you understand your rights in the process. Don't hesitate
to ask questions.
Which Mortgage is Right for You? |
PROGRAM |
Loan Characteristics |
Appropriate
for borrowers who: |
|
FIXED RATE
MORTGAGE
(30,10,15,10 years)
|
- Interest rate &
monthly payment
remain the same for the entire term of the loan
|
- plan to live in property more than 10 years
- like total payment stability
|
|
10/1 YEAR
ADJUSTABLE RATE
MORTGAGE
|
- Interest rate &
monthly payment remain
the same for 10 years
Starting the 11th year, interest rate adjusted every
year, so payment is subject to change every year
for remainder of loan
|
- plan to live in property more than 10 years
- like initial payment stability, can accept later
changes
OR
- plan to move within 10 years
- want loan to remain in force in case plans change
|
|
7/23 (2-Step)
or
'30 due in 7'
MORTGAGE
|
- Interest rate & monthly payment remain the
same for 7 years
Conversion option: On the 8th year, interest rate
adjusted to reflect prevailing interest rates, resulting
payment will remain the same for remainder of loan
|
- plan to live in property more than 10 years
- can tolerate one payment adjustment
OR
- plan to move within 7 years
- want to remain in force in case plans change
|
|
7/1 YEAR
ADJUSTABLE RATE
MORTGAGE
|
- Interest rate & monthly payment remain the
same for 7 years
Starting the 8th year, interest rate adjusted every
year, so payment is subject to change every year
for remainder of the loan
|
- plan to live in property more than 7 years
- like initial payment stability, can accept later
changes
OR
- plan to move within 7 years
- want loan to remain in force in case plans change
|
|
7 YEAR
BALLOON
MORTGAGE
|
- Interest rate & monthly payment remain the
same for 7 years
- At the end of 7 years, loan is due in full. Borrower
must refinance into new loan at prevailing interest
rates
|
- plan to live in property more than 7 years
- are willing to refinance at prevailing market rates
OR
- plan to move within 7 years
- like payment stability
|
|
5/25 (2-Step)
or
'30 due in 5'
MORTGAGE
|
- Interest rate & monthly payment remain the
same for 5 years
Conversion option: On the 6th year, interest rate
adjusted to reflect prevailing interest rates, resulting
payment will remain the same for remainder of loan
|
- plan to live in property more than 5 years
- can tolerate one payment adjustment
OR
- plan to move within 5 years
- want loan to remain in force in case of plans change
|
|
5/5 & 5/1 YEAR
ADJUSTABLE RATE
MORTGAGES
|
- Interest rate & monthly payment remain the
same for 5 years
Starting the 6th year, interest rate adjusted every
5 years (for 5/5 ARM) and every year (for 5/1 ARM)
|
- plan to live in property more than 5 years
- like initial payment stability, can accept later
changes
OR
- plan to move within 5 years
- want loan to remain in force in case plans change
|
|
5 YEAR
BALLOON
MORTGAGE
|
- Interest rate & monthly payment remain the
same for 5 years
At the end of 5 years, loan is due in full. Borrower
must refinance into new loan at prevailing interest
rates
|
- plan to live in property more than 5 years
- are willing to refinance at prevailing market rates
OR
- plan to move within 5 years
- like payment stability
|
|
3/3 & 3/1 YEAR
ADJUSTABLE RATE
MORTGAGES
|
- Interest rate & monthly payment remain the
same for 3 years
Starting 4th year, interest rate adjusted every 3
years (for 3/3 ARM) and every year (for 3/1 ARM)
|
- plan to live in property more than 3 years
- like initial payment stability, can accept later
changes
OR
- plan to move within 3 years
- want loan to remain in force in case plans change
|
|
1 YEAR
ADJUSTABLE RATE
MORTGAGES
|
- Interest rate adjusted every year, so monthly payment
is subject to change every year for entire 30 year
loan term
|
- want to take advantage of lowest rate possible
- are willing to accept yearly payment changes
OR
- cannot qualify at higher rate programs
|
|
