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Steps to Homeownership

About Freddie Mac

Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of fundsto mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases mortgages fromlenders and packages them into securities that are sold to investors. Since its creation, FreddieMac has helped financeone in six American homes.

About CreditSmart® Asian

CreditSmart Asian is a multilingual series to guide Asian American consumers on how to build and maintain bettercredit, understand the steps to buying a home and how to protect their investment.

Special Thanks

Special thanks to the following organizations for their collaboration in the development of the CreditSmart Asian: AsianAmericans for Equality, Boat People SOS, Chhaya CDC, Filipinos for Affirmative Action, Korean Churches forCommunity Development, Nakatomi & Associates, National Coalition for Asian Pacific American CommunityDevelopment (National CAPACD), National Congress of Vietnamese Americans, National Korean American Service &Education Consortium, Inc., and Quon Design.

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� Maintain your good credit rating

� Establish your home buying budget

� Save money for a down payment and moving expenses

� Pre-qualify for a home loan

� Find the home you want to buy

� Make an offer

� Apply for a mortgage

� Complete all escrow requirements

� Move in

Freddie Mac: Steps to Homeownership

Welcome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A Home of Your Own . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4� An Introduction

Getting Started . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5� Renting a Place to Live vs. Owning a Home

Are You Ready? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6� Contacting Professionals to Help You

Your Own Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8� How Much Can You Afford To Spend?� Is Your Income Steady?� Do You Have Good Credit?� Do You Have Enough Money for a Down Payment & Closing Costs?� Do You Have Enough Cash To Move?� How Much House Can You Afford?

Qualifying for a Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15� The 4-Cs: Capacity, Credit, Capital, Collateral� Pre-Approval

Finding Your Way Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17� Making An Offer� After the Offer� Mortgage Approval

Mortgage Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20� Fixed-Rate Mortgages� Adustable-Rate Mortgages (ARMs)� Other Mortgages & Government Programs� Interest Rates: How Low Can You Go?

Your Rights as a Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25� Entering Escrow� Home Inspection� The Closing Process

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

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Table of Contents


Welcome,

or millions of families, homeownership is a route to creating wealth. It buildsfinancial security for the future.

As you begin the journey to homeownership, Freddie Mac is providing this infor-mation to help you successfully make your way through the process. We knowthe process may seem daunting, especially if you have limited English skills or ifyou don’t yet have credit established and don’t know how the system works. Wecreated this series of guidebooks to help get you started. The guidebooks coverthe importance of establishing your credit, the process of buying a home, includ-ing how to make the best financial choices for you and your family, and theresponsibilities of being a homeowner.

There are many other resources available to you, including community organizations, your local government housing agencies, real estate agents andlenders who understand and are willing to work with prospective homebuyerslike you. We strongly encourage you to seek out their professional services togather the facts so you can make the best decisions. You will face many choicesthroughout the process.

In this guidebook, Steps to Homeownership, you will learn the steps to buying ahome. You will gain important knowledge that will help you through the purchaseof your first residence. We also explain important terms used in the homebuyingprocess—which sometimes seems like a foreign language.

Having a good credit history is an important first step. If you have not yet established a credit history or need information on how to establish or improveyour credit history, you should review our companion guidebooks, TheImportance of Good Credit and Homeowner Benefits and Responsibilities to understand how to protect and grow your investment now that you are ahomeowner. Together, these books are a valuable road map addressing theissues and questions most important to you.

From all of us at Freddie Mac, we wish you great success. With proper planning,time and hard work, you can realize your dream of homeownership.

Get Credit Smart®: Steps to Homeownership

As you begin

the journey to

homeownership,

Freddie Mac is here

to help guide you

through the process.

F

ou and your family members workhard. You save your money. You

have established and maintained agood credit history.

Now, after years of dedication, you areready to give your family a valuablegift: a home. Or perhaps you are newto the United States, and you want toprepare to buy a home some day. Do you know where to start? Are youready for the responsibilities of homeownership in America?

After reading these guidelines, you willknow the steps involved in buying yourfirst home, and you will know whatquestions to ask along the way tomake sure the process goes assmoothly as possible. Because of thecomplexity of buying your own homein America, it is advisable that youseek assistance from a non-profitorganization that provides homeowner-ship education and counseling services.


Don’t rush into it. A home will be oneof the largest purchases you will makein your lifetime. With preparation andresearch, you will achieve your dreamof homeownership.

Your first home is not only a place tolive and grow together, but it also is avaluable asset for the future—one thatwill create wealth for you and yourfamily over time. While home valuescan go up and down in general, thevalue of your home appreciates (orincreases) over time; it becomes anasset that can be passed down to yourchildren. It can be an effective way toestablish financial security for yourfamily. Homeownership is more thanhaving a shelter; it can help youfinance your business or your chil-dren’s education.

DID YOU KNOW...?

Research shows that children ofhomeowners do better inschool, and neighborhoods withhigh levels of homeownershiptend to be safer (Haurin, DonaldR., T. Parcel, and R. JeanHaurin. Does HomeownershipAffect Child Outcomes? RealEstate Economics, vol. 30, issue4, 2002).

A Home of Your Own

Are you ready for

the responsibilities

of homeownership

in America?

Y


hether you currently live withfriends and family members or

rent your own apartment, you need toanalyze the pros and cons of owningyour own home versus renting.

Renting a Place to Live

Cons:

� Your rent payments do not buildequity for you—your money goesto your landlord.

� You cannot freely make improve-ments, such as upgrading yourkitchen or bathroom, to your homeor dwelling.

� There may be restrictions regardingchildren or pets.

� There may be restrictions regarding how you can decorateyour home.

� You may not feel comfortable cooking your favorite ethnic dishes.

� You do not have control overwhether rent will increase.

� Your landlord could ask you tomove because he or she has madeother decisions regarding the prop-erty (wants to sell or change use).

Pros:

� Someone else handles the repairsand maintenance.

� The landlord pays the propertyinsurance, taxes and certain utilities.

� You can move when you wantwithout having to sell the home.

Owning a Home

Cons:

� You are responsible for payingmore than just your mortgagepayment, including property tax,homeowner’s insurance, home-owner association fees, utilities andother expenses.

� You must pay for repairs and maintenance, as well as renovations,of your home and property.

� If you cannot pay your mortgage,your home may be subject to foreclosure.

Pros:

� You have an asset that you own.

� Your property builds equity overtime, giving you a valuable wealth-building tool that you can use tobuy a larger home, finance yourbusiness or perhaps fund yourchild’s education or even your ownretirement.

� It provides security. You have ahome of your own where you andyour family can live and growtogether.

� There are tax advantages (consult atax advisor for potential benefits).

� You monthly mortgage paymentswill not change if you choose afixed-rate mortgage.

� You have a recognized voice incivic affairs, allowing you to helpbuild a strong sense of community.

� You have the freedom to choosethe décor of your home.

� You have the freedom to follow religious and cultural customs thatare important to you and your family.

� You may have more room and freedom to prepare the types offood that you and your family enjoy.

Getting Started

The value of your

home appreciates over

time; it becomes an

asset that can

be passed down to

your children.

W

s you begin your search for ahome, you need a variety of pro-

fessionals to help you along the way,including non-profit homeownershipeducation counselors, a real estateprofessional (agent), a real estateattorney, a home inspector, anappraiser and more. Each is a member of your homebuying team thatwill help make your transaction pro-ceed smoothly.

Real estate agent—This person willhelp you find prospective properties,make your offer and assist youthrough the homebuying and escrow(closing) process. (See the section“Your Rights as a Borrower” for moreinformation on the escrow process.)To choose an agent, you may want toask trusted friends or relatives for theirreferrals. Or you may wish to contact aprofessional organization, such as theNational Association of Realtors(www.realtor.org) or the Asian RealEstate Association of America(www.areaa.org), for a reference in yourarea. The home seller usually pays theagent’s fees from the proceeds of thesale of the house.

Mortgage lender or mortgagebroker—When it is time to obtain yourmortgage, you need to choose alender or broker to help you select thebest mortgage option. A mortgagebroker provides a range of productsand services, allowing a borrower tocompare different mortgage productsfrom several lenders. Contact severallenders or brokers to compare


mortgage rates and terms, and askabout programs for first-time home-buyers. Be aware that the borrowerpays the broker’s service fee.

Your family and friends—This is perhaps your most valuable resourcewhen considering a home for purchase.Trusted friends and relatives can helpyou weigh the pros and cons of eachproperty and discuss their own experi-ences with the homebuying process.However, you must remember that ultimately you are responsible for yourpurchase, so always trust your owninstincts first. You are responsible forgetting the right information and forconsidering all your options.

Community-based organizations,housing counselors, local housingagencies and web sites—These areimportant resources to consider whenyou begin your research for the bestloan product or programs for you andyour family.

Other professionals—You may need a home inspector (to evaluate the condition of your home prior topurchase), contractors to handle anynecessary repairs you cannot do yourself, and movers (if you use a professional moving company ratherthan family or friends).

Are You Ready?

Your homebuying

team… will help

make your transaction

proceed smoothly.

A


QUESTIONS FOR YOUR REAL ESTATE AGENT

Here is a list of questions you should ask a prospective real estate agentwhen you begin the homebuying process.

� Are you familiar with the neighborhood where I want to buy? (Often,real estate professionals specialize in certain geographic areas.)

� Are you fluent in my language? (If you prefer to do business in a language other than English, you may want to use a bilingual agent.)

� How many buyers and sellers are you representing now? (If youragent is very busy, you may not get personalized attention.)

� Will you provide me with recent references? (You may want to speakwith a recent homebuyer who worked with the agent.)

� How many home sales have you closed in the past year? (This willgive you an idea about how successful the agent is.)

� How long have you worked in the real estate business? (This is important if you prefer working with someone with a lot ofexperience.)

To choose an

agent, you may want

to ask trusted friends

or relatives for their

referrals.

hile it is tempting to look for yourdream home right away, there

are some steps to follow before youstart shopping for a home. It often isbest to begin by determining howmuch you can afford. Your first stepshould be to talk to a homeownershipeducation counselor (see www.HUD.govfor counseling organizations) to learnthe homebuying basics and to evalu-ate your financial readiness (ask if thecounseling provider has services inyour native language). Next, begin talk-ing to a lender or a mortgage broker toreview your income and expenses,which determine the type and amountof mortgage for which you qualify.Some of the criteria you should reviewwith your prospective lender are presented here. As you gather yourinformation from experts, you need todetermine what type and how much ofa mortgage are most appropriate foryou and your family.

How Much Can You Afford to Spend?For a general idea of your homebuyingpower, multiply your annual grossincome by 3.5. For example: $47,000(annual income) x 3.5 = $164,500 (costof home). (Your annual gross income isthe income you earn in a year beforetaxes and other deductions. It also caninclude income you earn from a com-mercial or business rental property,self-employment, alimony, child sup-port, public assistance and retirementaccounts.) Remember, this calculationis just an estimate, and it does notmean you can afford the monthly pay-ments associated with this mortgage


amount. Even if you are pre-qualifiedfor a certain mortgage amount by alender, you need to decide for yourselfthe loan amount and monthly pay-ments that meet your budget and aremost comfortable for you.

Is Your Income Steady? Perhaps you are new to your job, yourincome varies throughout the year oryou have a cash business. Lendersprefer to offer mortgages to individualswho can show a steady source ofincome. Be prepared to give proof ofyour income sources with tax forms orother documentation.

Your Own Home

Before you start

shopping for a home, it

is often best to begin by

determining how much

you can afford.

W


Do You Have Good Credit? By now you should have establishedcredit in your own name and main-tained a history of timely payments.You should obtain a copy of your credit report to make sure all the information it contains is correct. Ifthere are errors, report them to thecredit bureaus immediately. If thereare negative items on your report thatare correct and require your attention,now is the time to call your creditorsand settle your debts. Ask them toreport the repayment to the creditbureaus right away. Refer to FreddieMac’s guidebook “The Importance ofGood Credit” for more information.

Do You Have Enough Money for aDown Payment and Closing Costs? Today there are many mortgage prod-ucts that allow prospective homeown-ers to buy with little money—or nomoney—for a down payment. Yearsago, a conventional mortgage requiredthat the buyer prepay 20% of the pur-chase price as a down payment. Inhigh-cost areas, home prices appreci-ate very quickly. Now, mortgage prod-ucts with a 0% to 3% down paymentare widely available, and more familiesand individuals are able to becomehomeowners. If you do not prepay20% of the purchase price, you willhave to pay a premium for mortgageinsurance (MI). This insurance typicallyis paid to the lender for home loanswith less than a 20% down payment. Itis required for all government spon-sored and conventional loans with lessthan a 20% down payment.

However, the insurance requirementdoes not apply to the entire duration ofthe mortgage loan. Under federal law,your lender is obligated to cancel MIwhen your mortgage is paid to 22% ofthe purchase price. The lender mustinform the borrower at the closingwhen the mortgage will reach the 78%mark. You also can request cancella-tion of MI coverage when your equityhas reached 20%. Talk to your lenderfor more information.

The MI premium does not reduce theprincipal loan amount. Because thisMI premium is in addition to your normal mortgage payment, you needto factor its cost into your decision tobuy a home.

You need to do your research anddetermine if it is more beneficial to youto buy sooner and pay MI or to waitadditional years and save 20% for adown payment.

Ask your lender about your options,and set aside enough money to payyour down payment and closingcosts. (Closing costs generally rangefrom 2% to 7% of the mortgageamount. Your lender will provide youwith a written estimate of closingcosts—called a good faith estimate—during your mortgage approvalprocess.)

INDIVIDUALDEVELOPMENT ACCOUNTS

In high-cost areas such asNew York, San Diego, orLos Angeles, a home purchase is not within reachfor many low- or moderate-income families unless theyhave a 20% down paymentor more. Many families arepooling resources to buy ahome together. Others takeadvantage of special home-buying programs, such asindividual developmentaccounts (IDAs), whichmatch family and individualsavings for a period of timeto purchase an asset, suchas starting a business,homeownership or a collegeeducation. For more information about IDAs and a list of organizationsoffering IDA programs, visitwww.CFED.org.


If you do not have enough moneysaved to pay for these items, ask yourlender about programs from local gov-ernment agencies or non-profit organi-zations to help first-time homebuyers.If a friend or family member gives youthe money for your down payment orclosing costs, he or she may have toprovide your lender with a letter statingthat the money is a gift, and you donot have to pay it back.

Do You Have Enough Cash to Move? Your expenses do not end when yourmortgage is funded. You need to havemoney for moving expenses, as wellas for any repairs required at your oldor new home, for any upgrades to yournew home, plus for any new furnish-ings you will need, including appli-ances and furniture. To keep costs low,find ways to do as much of the workyourself, and look for items on sale.Perhaps you can delay the purchase ofsome furniture for a few months afteryou move to your new home.

How Much House Can You Afford? One of the best ways to calculate howmuch house you can afford is to createa budget of your monthly income andyour expenses. Use the following formto help you determine your budget:

MORTGAGES TODAY

No longer must you have a 20% down payment for a house to receive a mortgage. Today there are many mortgage options availableto consumers. Some lenders have mortgage products designed specifically for individuals with non-traditional income sources, such asthose who are self-employed or those who run cash businesses. Askyour lender for information about the options available to you. Somemortgage products feature beneficial options, such as:

� Small down payments (0% to 3%).

� The ability to use additional sources of money for your down payment, such as grants or funding from a non-profit organization,your employer, a private foundation, a family member or a federal,state or local government agency. If you belong to a cultural savingsclub (for example, referred to by Chinese Americans as “su-su” andby Korean Americans as “kye”), some lenders will accept a letterfrom the treasurer or the fund administrator as documentation ofsupplemental funds and good payment history.

� Expanded debt-to-income ratios up to 42% (allowing you to qualifyfor a mortgage payment that is a larger percentage of your monthlyincome than the standard 36%).

� Special consideration for people with limited incomes in high-costareas.

� Homeownership education programs.

� Low-cost mortgage insurance.

� Contributions to your closing costs from the seller.

� Special rates or terms for buying a home within a designated area.

Consider all your options and your costs before deciding on paying20% for a down payment, or choose a financing option that allows youto pay less. There are benefits and drawbacks; consider all factorsbefore deciding which option is best for you.






nce you have a detailed picture of your monthly income and

expenses, and you have created yourbudget, you can begin to think like alender. Lenders conduct a four-partreview of capacity, credit, capital andcollateral (the four C’s) to determine ifa borrower has the ability to repay aloan and, therefore, can qualify for ahome mortgage.

CapacityCapacity is your ability to repay amortgage loan based on your incomeand work history. Your lender considersthe following:

� Do you have a stable income that islikely to continue?

� Do you have enough income tomeet the mortgage paymentexpenses?

� What is your debt-to-income ratio?Ideally, lenders want to see thatyour mortgage principal, interest,homeowner’s insurance and prop-erty taxes will not exceed 28% ofyour gross monthly income. Theyalso want to see that your mortgageprincipal, interest, homeowner’sinsurance and property taxes, aswell as your recurring monthlydebts, such as auto loans, studentloans and installment and revolvingcredit card payments, will notexceed 36% of your gross monthlyincome. (Your gross monthlyincome includes any additionalincome from overtime, part-timeemployment, bonuses, dividends,interest, royalties, pensions,Veterans Affairs compensation, net rental income, alimony, childsupport, Social Security benefits,

trusts, business activities or invest-ments, workers compensation anddisability). Talk to your lender ormortgage broker for more details.

� Do you have the ability to go fromyour present rent payment to theproposed house payment?

� Does your present financial lifestyleallow for a savings pattern forunforeseen housing expenses?

CreditCredit is borrowing money to pay forsomething you get today, such as ahome, furniture or car, with an agree-ment to pay the money back. Credit is granted through several means,including credit cards, personal loans,car loans and home mortgages. Yourcredit report will be reviewed to deter-mine if you will be granted credit (seeFreddie Mac’s guidebook “TheImportance of Good Credit” for infor-mation on credit reports). To preparefor this review, request a free copy ofyour credit report each year from thecredit bureaus—Equifax, TransUnionand Experian. Review the reports andcheck them for any errors. If there areerrors, now is the time to resolve them.If you have credit problems, startworking to resolve them now. By working with your creditors, in timeyour credit report will indicate a healthycredit history, and you will be ready fora mortgage.

If you do not have any credit accounts,ask your lender if a non-traditionalcredit history will be accepted. Youcreate an “alternative credit report” inyour name, which reflects the manner

Qualifying for a Mortgage

Lenders conduct a

four-part review of

capacity, credit,

capital and collateral

(the four C’s).

O

in which you have paid your financialobligations such as rent, utilities andcar insurance (see “The Importance ofGood Credit” for more information). It is imperative that you keep receiptsof these payments if you choose anon-traditional credit evaluation.

CapitalCapital is your wealth in terms of yourproperty or money, including anymoney you have saved for your downpayment and closing costs. Yourlender will look at your checkingaccounts, savings accounts, insurancepolicies, gifts, individual retirementaccounts, Keogh funds and otherassets.

CollateralCollateral is any property you own thatis acceptable as security for a loan orobligation, which in this case is thehome you are buying. Before signing acontract to purchase a home, considerthe following:

� Can I afford this house?

� Does this house meet the needs ofmy family?

� What kind of maintenance doesthis house require?

It is strongly advisable to hire a professional inspector to examine thehouse for you. You have the right tohire a licensed inspector to do a homeinspection at your own expense. Theinspector will answer important homecondition and maintenance questions,such as: Does the roof appear to haveat least five years of life left? Does the


plumbing work? Does the electricalsystem appear to operate efficiently? Isthe basement or crawl space dry? Is the foundation of the house in goodcondition?

If you paid for an appraisal of thehome you want to buy, you are entitledto a copy of it. Get your copy as soonas your mortgage lender receives itand review it carefully. If you have anyquestions about the property, ask yourreal estate agent (or real estate attor-ney) or inspector, before your loancloses. Every question is important.

Remember, this may be the largestpurchase you ever make. Be sure youknow what you are buying, and thatyou are comfortable with your decision.

Get Pre-ApprovedOnce you have narrowed down yourprice range for a home, and you areready to buy, you should get pre-approved for a loan. Pre-approval is aservice provided by banks or otherlenders based on a preliminary reviewof your credit report and income documents. A pre-approval lettershows a prospective seller that alender has determined that you havethe capacity (refer back to the four C’s)to be approved for a mortgage basedon the information you provided. Somesellers may see your pre-approval asan attractive part of your home offer,since it indicates that you are a seriousbuyer.

To obtain pre-approval, contact yourbank, mortgage broker, credit union orother lender.

Collateral is any

property you own

that is acceptable as

security for a loan or

obligation.


nce you know what you can afford,and you are pre-qualified for a

mortgage, you can begin shopping foryour home. There are many factors toconsider. One of your primary con-cerns should be location. Many peopleselect their home based on proximityto work, school, church and communi-ty. If a particular school is important toyour family, you should call school dis-trict officials to confirm if a prospectivehome is located within the desiredschool district. You may need to bal-ance your desire to be within a particu-lar school district with how far you arewilling to commute to your job.

When choosing a potential neighbor-hood, you also may want to considerwhat amenities are nearby, includingpublic transportation, parks, communi-ty centers, doctors’ offices, hospitalsand shopping centers. Do you want ahome on a quiet street, or would youprefer a busy location near shoppingand restaurants? Do you want neighbors who have young children forplaymates for your children? Do youwant to live in a gated community?

You also need to evaluate what type of dwelling you want: a detached single-family home or perhaps a co-op, condominium or townhouse.You might prefer a co-op or condo-minium because all the owners in thebuilding share maintenance costs. Oryou may prefer a multi-family housebecause the rental income can helpwith monthly mortgage payments.

When considering a co-op or condo-minium, inquire about by-laws, declarations and rules and restrictionson the use of units, common areas andpets.

Making an OfferOnce you have found the property youlike, you are ready to make a formaloffer. Your real estate agent will assistyou through the process. The offer willstate the down payment you proposeto pay, the price for which you want tobuy the house and how long yourescrow will last. (Escrow is a processduring which a third party holds allfunds related to the sale of the homebefore closing. During escrow, you willbe responsible for getting the homeinspection and testing for radon andtermites.) Additionally, your offer caninclude any contingencies or specialrequests, such as repairs you wantmade before the sale closes or itemsyou want to remain in the home, suchas a refrigerator or a washer/dryer.Although not required, you shouldalways include a home inspection contingency in your offer.

At the time of your offer, you will berequired to pay an earnest moneydeposit (a “good faith” deposit)—usually between 1% and 5% of thepurchase price—to show that you area serious buyer, and that you intend tomove forward with the purchase of thehouse. It is common for your first offer to be met with a counter-offer

Finding Your Way Home

Many people select

their home based on

proximity to work,

school, church and

community.

O

from the seller, unless your offer is forthe asking price or higher. Dependingon the local real estate market andyour desire for the specific home, youand your family will have to considereach counter-offer carefully. If theterms begin to be unattractive, youmay wish to refuse the counter-offerand move on to another property.

After the OfferOnce you have found your home, andyour final offer has been accepted, youmust begin the mortgage applicationprocess in earnest within an agreedupon time frame. You should contactyour preferred lender and start all thenecessary paperwork to move forward.


Here are some questions to ask yourlender:

� Do you offer any special loan pro-grams to first-time homebuyers orfor the purchase of a home in theneighborhood where I want to buy?

� Is first-time homeownership education required to be eligible forspecial loan programs?

� What is the lowest interest rate youoffer for a conventional, fixed-ratemortgage? If I were to pay one, twoor three points (one point equals1% of the loan), how does thataffect my rate? (see graph)

� How does the term of the loanaffect my interest rate (30 years vs.20 years vs. 15 years)?

� Do you offer any special loan programs if I don’t make a 20%down payment, and I don’t want topay mortgage insurance?

� What fees are included in my loan?Are these negotiable?

� When can I lock inmy interestrate? What is my rate lock period?What if rates drop further?

� What is the current adjustable interest rate for a mortgage of myamount? How is my rate calculat-ed? Is there a rate cap (annually orfor the life of the loan)?

� Is there a prepayment penalty? (Youwant to avoid loans that have aprepayment penalty.)

� How long will it take for the lenderto process my loan?

� What is the annual percentagerate (APR)?

.5 point = .5% X 200,000 = $1,000 = 6.80% interest* = $1,303.85 monthly

1 point = 1% X 200,000 = $2,000 = 6.00% interest* = $1,199.10 monthly

2 points = 2% X 200,000 = $4,000 = 5.75% interest* = $1,167.15 monthly

Points Multiplied byLoan Amount

Loan Fee InterestRate

MonthlyPayments

*These interest rates and scores are for illustration only; actual mortgage rates depend on many variables, including credit scoring.

Based on 30 year fixed-rate mortgage of $200,000

$1,167.15 monthly $1,199.10 monthly$1,303.85 monthly

2 points 1 point .5 point


Lenders want to see

that you are a good

risk and, thus, a likely

candidate to repay

your loan obligation

on time and in full.

MORTGAGE APPROVAL

The mortgage approval process can be intimidating, but not if you thinklike a lender. Remember the four C’s—capacity, credit, capital and collateral. In general, lenders want to see that you are a good risk and,thus, a likely candidate to repay your loan obligation on time and in full.

How do they determine this? First, they look at your job history. Steadyemployment is a good indicator of stability. They also may look at yourincome (including your past income tax returns) and contact youremployer for confirmation of employment and stated earnings.Additionally, they will request your credit report to determine your totaldebt. Finally, they will consider the property you wish to buy by apprais-ing its market value and considering any potential problems associatedwith reselling the property should you default on the loan. If all thesefactors show that you are a good credit risk, and your home appraisal(your collateral) is equal to or higher than the value of the loan, youshould have an easy approval process.

What if your lender questions one of these factors? Perhaps you haveswitched jobs recently, or you have a few negative items on your credithistory. It is best to begin by offering your prospective lender an expla-nation of your situation. Your new job may be because you recentlygraduated from college, and your credit history issue might be becauseof an error unrelated to you. It is important to keep the discussion openwith your prospective lender so you are not penalized with mortgagedelays or high interest rates.

hen you shop for a mortgage,you have several choices. This

section discusses some of the differentmortgage options available.

Fixed-Rate MortgagesFixed-rate mortgages lock in yourinterest rate for the length of your loan.This may be advantageous if you arewary of interest rates rising or just wanta stable payment plan. Fixed-rateloans can range from 15 years to 50years, some examples include:

� 30-year, fixed-rate loan. This is themost common fixed-rate term. Withits longer term, this loan gives youthe best chance of keeping yourpayments predictable.

� 20-year, fixed-rate loan. Becausethis loan is just for 20 years, youhave the opportunity to own yourhome debt-free sooner, with just aslightly higher monthly paymentthan for a 30-year, fixed-rate loan.

� 15-year, fixed-rate loan.With alower interest rate than a 30-year or 20-year, fixed-rate mortgage; a15-year, fixed-rate mortgage savesyou a significant amount of interest.You build equity quickly and ownyour home sooner. However, yourmonthly mortgage payment will be considerably higher than for a30-year, fixed-rate mortgage.

� Other terms. Mortgages thatextend for 40 or 50 years allow youto have a lower monthly paymentthan for the 30-year or less mort-gage term. These longer-termmortgages may make homes moreaffordable in high-cost areas suchas New York, San Francisco, or LosAngeles. Consider all the pros and


cons of these new longer-termproducts, which limit your ability tobuild equity, potentially extend yourdebt into your retirement years andincrease the amount of interest youwill pay.

Adjustable-Rate Mortgages (ARMs)Like the name suggests, the interestrate on ARMs adjusts higher and loweras financial market conditions change.An ARM may be advantageous if youdo not plan to live in your home formore than a few years. Many ARMsoffer lower initial interest rates andpayments, and they may allow you toqualify for a larger loan amount than afixed-rate mortgage.

It is important to examine all the termsassociated with an ARM carefully,especially in a changing real estatemarket. Your ARM may involve struc-tured payments that increase annuallyor initial interest-only payments. Newerhybrid ARMs offer a combination offixed and variable terms.

THINGS TO ASK YOUR LENDERABOUT AN ARM:

� Is there a cap during eachadjustment period?

� How often is my rate adjusted?

� Is there a lifetime cap?

� Is my ARM tied to a particularfinancial index? If so, which one?

�What has been the performanceof the index in recent years?

Mortgage Types

Fixed-rate mortgages

lock in your interest

rate for the length of

your loan.

W


Ask your lender about its cap duringeach adjustment period (usually onceor twice a year) and its lifetime cap. Ask if your ARM is tied to a particularfinancial index, such as treasury-indexed ARMs, CD-indexed ARMs orCost of Funds–indexed ARMs. If youdetermine which index your loan willbe tied to, you can track its perform-ance during a recent year. While thiswill not guarantee your future interestrates, it may give you an idea aboutyour particular loan.

Other MortgagesBalloon mortgages—Balloon loansoffer low interest rates for a short term.At the end of the term, the borrowermust refinance the balance or pay thebalance with a lump sum payment. Ifyou consider this loan, you must askabout all the conditions of the loan,since some lenders may not guaranteeyour loan past the balloon date. Whilethis loan may be appropriate for you ifyou plan to sell your home within a fewyears, you should consider all theterms beforehand, since the conditionsmay be strict.

Special mortgage products—Somenon-profit organizations, governmentagencies and lenders offer specialmortgage products to help first-timehomebuyers. If you have difficultyqualifying for a standard loan product,you may want to find a lender who canoffer special loans with flexible features.

Interest-only mortgages—Instead ofpaying part of the principal (the loanamount) each month plus interestcharges, interest-only loans requirethat the borrower pay only the interestfor the first 5 or 10 years. After that, theborrower must either pay the balance of the loan or start payingboth principal and interest monthly forthe remaining period, perhaps 20 to 25years. The potential risks are significantfor interest-only loans, especially if theinterest rate on the loan increases, andthe required payments of both principaland interest are well beyond your ability to pay each month. After theinterest-only period ends, the monthlypayment will be substantially higherthan if you had used a traditional 30-year mortgage loan.

Option ARMs—Also called “flex”ARMs, these loans let the borrowerdecide how much to pay from onemonth to the next based on a fewchoices. The options range from making a full monthly payment (whatyou normally would pay in principaland interest for a traditional mortgage)to a “minimum” payment that does notfully pay for the interest due, but theshortfall is added to your loan balance.If you do not have enough money foryour regular monthly payment, you cansend in a low payment and not bedefaulting on your loan.

Some non-profit

organizations, govern-

ment agencies and

lenders offer special

mortgage products to

help first-time

homebuyers.

Option ARMs may be beneficial forpeople who earn a good annual salary,but their monthly income fluctuates.Perhaps they rely heavily on commis-sion checks or sizeable year-endbonuses. But if they defer too muchinterest their total costs can go up,because they will be paying interest ona higher loan amount, and they likelywill be doing that for many years. If youend up deferring a substantial amount,you may owe more on the loan thanthe value of your home. Then if you sellduring a time of declining values, thesales price of the home may not payfor the loan balance.

Government ProgramsThe Federal Housing Administration(FHA), Department of Veterans Affairs(VA) and the Rural Housing Service(RHS) offer special mortgage plans for borrowers or properties that meetcertain restrictions. If you are a low-income borrower, a veteran or youwish to buy a home in a rural area, youshould investigate these options.

FHA Loans—The FHA, part of theU.S. Department of Housing andUrban Development (HUD), insures ahome loan, so your lender can offeryou a better loan package, includingdown payments as low as 3% of thepurchase price, low closing costs andeasy credit qualifying. To speak to acounselor call (800) 569-4287, or visitwww.hud.gov for more information.


VA Loans—The U.S. Department ofVeterans Affairs guarantees VA loans tomake housing affordable to eligibleU.S. veterans. You can apply for a VAloan with any mortgage lender thatparticipates in the VA home loan program. You will need a certificate ofeligibility from VA to prove to the lenderthat you are eligible for a VA loan. Forspecific loan-related questions, youmust contact a VA Regional LoanCenter (VA RLC). Visit www.home-loans.va.gov for more information.

RHS Loans—Rural HousingGuaranteed Loans, called Section 502loans, primarily are used to help low-income individuals or householdspurchase homes in rural areas. Fundscan be used to build, repair, renovateor relocate a home, or to purchase andprepare sites. Families must meetincome requirements and be withoutadequate housing, but they must beable to afford the mortgage payments,including taxes and insurance. In addi-tion, applicants must have reasonablecredit histories. There is no requireddown payment. The lender must deter-mine repayment feasibility using ratiosof repayment (gross) income to mort-gage and to total family debt. For moreinformation visit http://www.rurdev.usda.gov/rhs/ or call (800) 414-1226.

The U.S. Department

of Veterans Affairs

guarantees VA loans

to make housing

affordable to eligible

U.S. veterans.


U.S. citizenship is not

a requirement for

getting a mortgage.

MORTGAGES FOR NEW AMERICANS

If you are new to the United States, or if your beliefs and traditionshave prevented you from establishing a banking relationship or atraditional credit history, many lenders today will help you become ahomeowner through special underwriting guidelines and mortgageprograms. U.S. citizenship is not a requirement for getting a mortgage.

You may still qualify for a mortgage if you:

� Do not have a bank account.

� Have no (or a limited) credit history.

� Have applied for your permanent residency but have not yetobtained the status.

� Have been employed in the United States for less than two years.

� Have been paying taxes in the United States.

� Only want to share limited financial information about yourself, ornone at all.

� Pool your funds with your extended family.

When you look for a mortgage, ask local non-profit counselingagencies and lenders about the options available to you. Checkwww.hud.gov for community programs in your area.

Interest Rates: How Low Can You Go?Once you begin shopping for a mortgage, you will hear a lot aboutinterest rates. The interest rate for yourmortgage will depend on the currentmarket, your credit rating and theterms of your loan. In general, the better your credit rating, the better theterms you will be offered. You also maysee a difference in interest rates forfixed-rate mortgages (which lock inyour interest rate for the length of yourloan) versus adjustable-rate mortgages.

If you want to reduce your interest ratefurther, you may be offered the chanceto buy points on your loan. For eachpercentage point you buy (for example,one point on a $100,000 loan wouldcost you an up-front fee of $1,000),you can reduce your rate. The benefitsof this depend on how long you planto live in this home, your cash flow andyour loan terms. Weigh all your optionsbefore deciding.

You also may see a difference in mortgage interest rates depending onthe length of the loan. For example, a15-year loan may have a lower interestrate than a traditional 30-year loan.


Locking InAs you shop for a loan, you may notice that interest rates change fromtime to time. Once your loan is beingprocessed, ask your lender if you canlock in your rate. This can be beneficialif rates are rising, since you can avoidthousands of dollars of interest overthe length of your loan by locking in ata lower rate early in the loan approvalprocess. However, if rates are falling,you may want to wait to lock in toobtain the lowest possible interestrates.

The interest rate for

your mortgage will

depend on the current

market, your credit

rating and the terms

of your loan.


s a homebuyer, you have rights atevery step of the process. Your

real estate agent should disclose anyconflict of interest, such as represent-ing the home seller in addition to rep-resenting you. You also have the rightto a full property disclosure about thehouse you want to buy. This disclosurestates the physical condition of theproperty and any known potential hazards or defects. States, countiesand cities may require additional disclosures. Ask your real estate agentor escrow officer for guidelines.

During the mortgage process, you also have the right to advance noticeof any estimated closing costs and afull disclosure of all loan terms (a goodfaith estimate). By law, a lender mustprovide this to the borrower withinthree days after a formal loan application has been submitted.

Entering EscrowThe escrow process is an excitingtime. It means you are close to achieving your dream of homeowner-ship. During this period, you will havemany responsibilities, which mayinclude scheduling a home inspection,conducting repairs, obtaining homeowner’s insurance and preparingfor your move. It is important to beorganized and remember the deadlinesyou must meet.

Your real estate agent, real estateattorney and escrow officers shouldcommunicate with you frequently tokeep your escrow moving toward itsclosing date. You may be required tosign certain documents or attend vari-

ous meetings related to your homepurchase. Be sure to keep yourappointments so that your closing dateis not jeopardized.

If any problems arise during yourescrow, you will need to inform youragent, lender and escrow officerimmediately. Often, delays can beavoided by keeping communicationsopen. Remember, everyone on yourteam has an interest in your transac-tion proceeding smoothly.

ASK QUESTIONS

You are entitled to understandevery step of the homebuyingprocess. As you search for ahome, make your offer, enterescrow and finalize your mort-gage, it is common to havequestions, regardless of anypast experience with homebuy-ing. At any point in the process,you should feel free to ask yourreal estate agent, lender, escrowofficer or other party to explainany portion of the transactionyou need clarified. Pay carefulattention to fees and extracosts.

If you are asked to sign any paperwork you do notunderstand, stop and ask for an explanation. If you are notsatisfied with the answer, do notproceed. Remember, this is amajor financial transaction, onethat may involve the next 30years of your life, so you mustremain in control of the process.

Your Rights as a Borrower

As a homebuyer, you

have rights at every

step of the process.

A

Home InspectionMake your offer on a home contingenton a home inspection by a trained,licensed expert. An inspection will tellyou about the condition of the homeand can help you avoid buying a homethat needs major repairs. The inspectorwill:

� Evaluate the physical condition ofthe home’s structure, constructionand mechanical systems.

� Identify items that should berepaired or replaced.

� Estimate the remaining useful life of the major systems, such as electrical, plumbing, heating, airconditioning, roofing, equipment,structure and finishes.

As a homebuyer, it is your responsibilityto select the inspector and pay for theinspection. Ask your real estate agent,a non-profit housing program agency,family and friends for recommenda-tions of qualified inspectors.


QUESTIONS FOR YOUR HOME INSPECTOR

1. What does your inspectioncover?

2. How long have you beenpracticing in the homeinspection profession, andhow many inspections haveyou completed?

3. Are you specifically experienced in residentialinspection?

4. Do you offer to do repairsor improvements based onthe inspection?

5. How long will the inspection take?

6. How much will the inspection cost?

7. What type of inspectionreport do you provide, andhow long will it take toreceive the report?

8. Will I be able to attend theinspection?

9. Do you maintain member-ship in a professional homeinspector association?

10. Are you bonded?

11.Do you participate in continuing education programs to keep yourexpertise up to date?

An inspection will tell

you about the condition

of the home and can

help you avoid buying a

home that needs major

repairs.


The Closing ProcessThe time between your offer beingaccepted and the actual closing meeting can take longer than youthink. There are several things youneed to do before the closing meeting,including setting the closing date,reviewing the closing documents andunderstanding all the closing costs.

� The closing date is set when yourmortgage is approved and you signa commitment letter with yourlender. Make sure the closing dateoccurs before your lock-in rateexpires.

� You should ask if it is possible toreceive your closing documentsbefore the actual closing meetingand read them carefully. It may be agood idea to have a lawyer reviewthe documents with you. Before themeeting, be sure you understandthe documents you will be asked tosign. If documents are not availablein advance, it is strongly advisableto bring a reliable translator withyou to explain what you are signing.

� Closing costs can include manydifferent things and can add up to a sizeable amount of money. Beprepared. Know exactly what isincluded in your closing costs andthe total amount you will beexpected to pay at the closingmeeting. You may not be allowedto use a personal check for thepayments due at the closing meeting. You may need a certifiedor cashier’s check.

Closing meetings are standard in thehomebuying process, although thereare a few states where there are noclosing meetings. At the meeting youwill sign documents such as the clos-ing statement, the mortgage note anda truth-in-lending statement. Proof ofinsurance and inspections, as well asany payments due, will be requiredbefore you get the keys to your newhome. You will receive a settlementsheet (also known as HUD-1 settle-ment statement), which itemizes allclosing costs. This sheet also itemizesthe seller’s closing costs. The settle-ment agent or escrow agent shouldobtain this documentation on behalf ofthe lender. See the following samplesettlement statement.

Once your loan is

being processed, ask

your lender if you can

lock-in your rate. This

can be beneficial if

rates are rising.


The settlement agent

or escrow agent

should obtain this

documentation on

behalf of the lender.


ou are well on your way to reachingyour dream of homeownership. By

following the steps in this guidebook,you will be well prepared for the home-buying process.

As you research your preferred neighborhood, find the home of yourdreams, assemble your real estateteam and shop for a mortgage,remember to consider each step of theprocess carefully. Ask questions andremember your rights as a homebuyer.

The day your escrow closes will beone of the most exciting days of yourlife. Not only will you have a new homefor you and your family to enjoy, butwith proper maintenance you also willhave a valuable asset that will growand create wealth for you and yourfamily for years to come. For moreinformation on the responsibilities ofhomeownership, see “HomeownerBenefits and Responsibilities”

Congratulations—you are on your way home!

Conclusion

The day your escrow closes will be one of the

most exciting days of your life.

Y

Actual Cash Value: An amount equalto the replacement value of damagedproperty minus depreciation.

Adjustable-Rate Mortgage (ARM):Also known as a variable-rate loan, anARM usually offers a lower initial ratethan a fixed-rate loan. The interest ratecan change at a specified time, knownas an adjustment period, based on apublished index that tracks changes inthe current finance market. Indexesused for ARMs include the LIBORindex and the Treasury index. ARMsalso have caps, a maximum and mini-mum that the interest rate can changeat each adjustment period.

Adjustment Period: The time betweeninterest rate adjustments for an ARM.There is usually an initial adjustmentperiod, beginning from the start date ofthe loan and varying from 1 to 10years. After the first adjustment period,adjustment periods are usually 12months, which means that the interestrate can change every year.

Amortization: Paying off a loan overthe period of time and at the interestrate specified in a loan document. Theamortization of a loan includes in eachmortgage payment the payment ofinterest and a part of the amount bor-rowed.

Amortization Schedule: Provided bymortgage lenders, the schedule showshow, over the term of your mortgage,the principal portion of the mortgagepayment increases and the interestportion of the mortgage paymentdecreases.

Annual Percentage Rate (APR): Howmuch a loan costs annually. The APRincludes the interest rate, points, bro-ker fees and certain other creditcharges a borrower is required to pay.

Application Fee: The fee to cover pro-cessing costs that a mortgage lendercharges the borrower to apply for amortgage.


Appraisal: A professional analysisused to estimate the value of the prop-erty. This includes examples of sales ofsimilar properties.

Appraiser: A professional who con-ducts an analysis of the property,including examples of sales of similarproperties, to develop an estimatedvalue of the property. The analysis iscalled an appraisal.

Appreciation: An increase in the mar-ket value of a home due to changingmarket conditions and/or homeimprovements.

Arbitration: A process where disputesare settled by referring them to a fairand neutral third party (arbitrator). Thedisputing parties agree in advance toagree with the decision of the arbitra-tor. There is a hearing where both par-ties have an opportunity to be heard,after which the arbitrator makes adecision.

Asbestos: A toxic material that wasonce used in housing insulation andfireproofing. Because some forms ofasbestos have been linked to certainlung diseases, it is no longer used innew homes. However, some olderhomes may still have asbestos in thesematerials.

Asset: Something of value an individ-ual owns.

Assumption: A homebuyer’s agree-ment to take the primary responsibilityfor paying an existing mortgage from ahome seller.

Balloon Mortgage: A mortgage withmonthly payments based on a 30-yearamortization schedule, with the unpaidbalance due in a lump sum payment atthe end of a specific period of time(usually five or seven years). The mort-gage contains an option to “reset” theinterest rate to the current market rateand extend the due date if certain con-ditions are met.

Glossary

Bankruptcy: A legal declaration thatyou are unable to pay your debts.Bankruptcy can severely affect yourcredit record and your ability to borrowmoney.

Cap: A limit to how much anadjustable rate mortgage’s monthlypayment or interest rate can increase.A cap protects the borrower from largeincreases and may be a payment cap,an interest cap, a life-of-loan cap or anannual cap. A payment cap is a limiton the monthly payment. An interestcap is a limit on the amount of theinterest rate. A life-of-loan cap restrictsthe amount the interest rate canincrease over the entire term of theloan. An annual cap limits the amountthe interest rate can increase during a12-month period.

Capacity: Your ability to make yourmortgage payments on time. Thisdepends on your income and incomestability (job history and security), yourassets, your savings and the amountof your income that remains eachmonth after you have paid your hous-ing costs, debts and other obligations.

Closing (Closing Date): The comple-tion of the real estate transactionbetween buyer and seller. The buyersigns the mortgage documents, andthe closing costs are paid. It is alsoknown as the settlement date.

Closing Agent: A person who coordi-nates closing-related activities, such asrecording the closing documents anddisbursing funds.

Closing Costs: The costs to completethe real estate transaction. These costsare in addition to the price of the homeand are paid at closing. They includepoints, taxes, title insurance, financingcosts, items that must be prepaid orescrowed and other costs. Ask yourlender for a complete list of closingcost items.


Collateral: Property that is used assecurity for a debt. In the case of amortgage, the collateral is the houseand property.

Commitment Letter: A letter fromyour lender stating the amount of themortgage, the number of years torepay the mortgage (the term), theinterest rate, the loan origination fee,the annual percentage rate and themonthly charges.

Concession: Something given up oragreed to when negotiating the sale ofthe house. For example, the sellersmay agree to help pay for closingcosts.

Condominium: A unit in a multi-unitbuilding. The owner of a condominiumunit owns the unit itself and has theright, along with other owners, to usethe common areas. The owner doesnot own the common elements, suchas the exterior walls, floors, ceilings orstructural systems outside of the unit;the condominium association ownsthese. There are usually condominiumassociation fees for building mainte-nance, property upkeep, taxes andinsurance on the common areas, andthere are reserves for improvements.

Contingency: A plan for somethingthat may occur but is not likely. Forexample, your offer may be contingenton the home passing a home inspec-tion. If the home does not passinspection, you are protected.

Counter-offer: An offer made inresponse to a previous offer. Forexample, after the buyer presents hisor her first offer, the seller may make acounter-offer with a slightly higher saleprice.

Credit: Credit is the ability to borrowtomorrow’s money to pay for some-thing you get today. Credit is extendedbased on a lender’s good opinion of aperson’s financial situation and reliability.

Credit Bureau: A company that gath-ers information on consumers who usecredit. The company sells that informa-tion to credit lenders in the form of acredit report.

Credit History: A record of credit con-sisting of a list of individual consumerdebts and a record of whether thesedebts were paid on time or as agreed.Credit institutions have created adetailed document of your credit histo-ry called a credit report.

Credit Report: A document used bythe credit industry to examine your useof credit. It provides information onmoney that you have borrowed fromcredit institutions and your paymenthistory.

Credit Score: A computer-generatednumber that summarizes your creditprofile and predicts the likelihood thatyou will repay future debts.

Creditworthy: Your ability to qualify forcredit and repay debts.

Debt: Money owed from one person orinstitution to another person or institu-tion.

Debt-to-Income Ratio: The percent-age of gross monthly income that goestoward paying your monthly housingexpense, alimony, child support, carpayments and other installment debts,and payments on revolving or open-ended accounts such as credit cards.

Deed: A legal document transferringownership or title to a property.

Deed of Trust: A legal document inwhich the borrower transfers the title toa third party (trustee) to hold as securi-ty for the lender. When the loan is paidin full, the trustee transfers title back tothe borrower. If the borrower defaultson the loan, the trustee will sell theproperty and pay the lender the mort-gage debt.

Default: Failure to fulfill a legal obliga-tion. A default includes failure to pay afinancial obligation, but it also may bea failure to perform some action orservice that is non-monetary. Forexample, when leasing a car, the les-see usually is required to properlymaintain the car.

Depreciation: A decline in the value ofa home due to changing market condi-tions or lack of upkeep on the home.

Down Payment: A portion, usuallybetween 3% to 20%, of the price of ahome. This portion is not borrowedand is paid up front.

Earnest Money Deposit: The depositto show that you are committed tobuying the home. The deposit is notrefunded to you after the seller acceptsyour offer unless one of the sales con-tract contingencies is not fulfilled.

Equity: The value of your home abovethe total amount of liens against yourhome. If you owe $100,000 on yourhome, but it is worth $130,000, youhave $30,000 of equity.

Escrow: The holding of money ordocuments by a neutral third partybefore closing. It also can be anaccount held by the lender (or servicer)into which a homeowner pays moneyfor taxes and insurance.

Fixed-Rate Mortgage: A mortgagewith an interest rate that does notchange during the entire term of theloan.

Foreclosure: A legal action that endsall ownership rights in a home whenthe homeowner fails to make the mort-gage payments or is otherwise indefault under the terms of the mort-gage.

Gift Letter: A letter that a family mem-ber writes verifying that he or she hasgiven you a certain amount of moneyas a gift, and that you do not have torepay it. For some mortgages, you canuse this money toward a portion ofyour down payment.

Good-Faith Estimate: A written state-ment from the lender itemizing theapproximate costs and fees for themortgage.

Gross Monthly Income: The incomeyou earn in a month before taxes andother deductions. It also may includerental income, self-employmentincome, income from alimony, childsupport, public assistance payments,and retirement benefits.

Home Inspection: A professionalinspection of a home to determine thecondition of the property. The inspec-tion should include an evaluation of theplumbing, heating and cooling sys-tems, roof, wiring, foundation, and pestinfestation.

Homeowner’s Insurance: A policythat protects you and the lender fromfire or flood, which damages the struc-ture of the house; a liability, such as aninjury to a visitor to your home; ordamage to your personal property,such as your furniture, clothes or appli-ances

Housing Expense Ratio: The per-centage of your gross monthly incomethat goes toward paying for your hous-ing expenses.

HUD-1 Settlement Statement: A finallist of the costs of the mortgage trans-action. It states the sales price anddown payment, as well as the totalsettlement costs required from thebuyer and seller.


Index: The published index of interestrates used to calculate the interest ratefor an ARM. The index is usually anaverage of the interest rates on a par-ticular type of security, such as theLIBOR.

Individual Retirement Account (IRA):A tax-deferred plan that can help youbuild money for retirement.

Inflation: An increase in prices.

Inquiry: A request for a copy of yourcredit report. An inquiry occurs everytime you fill out a credit application orrequest more credit. Too manyinquiries on a credit report can hurtyour credit score.

Interest: The cost you pay to borrowmoney. It is the payment you make toa lender for the money it has loaned toyou. Interest is usually expressed as apercentage of the amount borrowed.

Keogh Fund: A tax-deferred retire-ment savings plan for small businessowners or self-employed individualswho have earned income from theirtrade or business. Contributions to theKeogh plan are tax deductible.

Liability: A debt or other financial obli-gation.

Lien: A claim or charge on property forpayment of a debt. With a mortgage,the lender has the right to take the titleto your property if you do not make themortgage payments.

Loan Origination Fee: A fee paid toyour mortgage lender for processingthe mortgage application. This fee isusually in the form of points. One pointequals 1% of the mortgage amount.

Lock-In Rate: A written agreementguaranteeing a specific mortgageinterest rate for a certain amount oftime.

Glossary

Low–Down Payment Feature: A fea-ture of some mortgages, usually fixed-rate mortgages, that helps you buy ahome with as little as a 3% down pay-ment.

Margin: A percentage added to theindex for an ARM to establish theinterest rate on each adjustment date.

Market Value: The current value ofyour home based on what a purchaserwould pay. Sometimes an appraisal isused to determine market value.

Mortgage: A loan using your home ascollateral. In some states the termmortgage also describes the docu-ment you sign (to grant the lender alien on your home). The term also mayindicate the amount of money you bor-row, with interest, to purchase yourhome. The amount of your mortgage isusually the purchase price of the homeminus your down payment.

Mortgage Broker: An independentfinance professional who specializes inbringing together borrowers andlenders to complete real estate mort-gages.

Mortgage Insurance or PrivateMortgage Insurance (MI or PMI):Insurance needed for mortgages withlow down payments (usually less than20% of the price of the home).

Mortgage Lender: The lender whoprovides funds for a mortgage.Lenders also manage the credit andfinancial information review, the prop-erty and the loan application processthrough closing.

Mortgage Rate: The cost or the inter-est rate you pay to borrow the moneyto buy your house.

Mutual Fund: A fund that pools themoney of its investors to buy a varietyof securities.


Net Monthly Income: Your take-homepay after taxes. It is the amount ofmoney that you actually receive in yourpaycheck.

Offer: A formal bid from the homebuy-er to the home seller to purchase ahome.

Open House: When the seller’s realestate agent opens the seller’s houseto the public. You do not need a realestate agent to attend an open house.

Point: 1% of the amount of the mort-gage. For example, if a loan is madefor $50,000, one point equals $500.

Pre-Approval Letter: A letter from amortgage lender indicating that youqualify for a mortgage of a specificamount. It also shows a home sellerthat you are a serious buyer.

Predatory Lending: Abusive lendingpractices that include making mort-gage loans to people who do not havethe income to repay them, or repeat-edly refinancing loans, charging highpoints and fees each time and “pack-ing” credit insurance onto a loan.

Pre-Qualification Letter: A letter froma mortgage lender that states that youare pre-qualified to buy a home, but itdoes not commit the lender to a par-ticular mortgage amount.

Principal: The amount of money bor-rowed to buy your house, or theamount of the loan that has not yetbeen repaid to the lender. This doesnot include the interest you will pay toborrow that money. The principal bal-ance (sometimes called the outstand-ing or unpaid principal balance) is theamount owed on the loan minus theamount you have repaid.

Private Mortgage Insurance (PMI):See Mortgage Insurance.

Property Appreciation: SeeAppreciation.

Radon: A toxic gas found in the soilbeneath a house that can contribute tocancer and other illnesses.

Rate Cap: The limit on the amount aninterest rate for an ARM can increase ordecrease during an adjustment period.

Ratified Sales Contract: A contractthat shows both you and the seller ofthe house have agreed to your offer.This offer may include sales contingen-cies, such as obtaining a mortgage ofa certain type and rate, getting anacceptable inspection, making repairsand closing by a certain date.

Real Estate Professional: An individ-ual who provides services for buyingand selling homes. The seller pays thereal estate professional a percentageof the home sale price. Unless youspecifically have contracted with abuyer’s agent, the real estate profes-sional represents the interest of theseller. Real estate professionals may beable to refer you to local lenders ormortgage brokers, but they generallyare not involved in the lending process.

Refinance: The process of getting anew mortgage and using all or someportion of the proceeds to pay off theoriginal mortgage.

Replacement Cost: The cost toreplace damaged personal propertywithout a deduction for depreciation.

Securities: A financial form that showsthat the holder owns shares of a com-pany (stock) or has loaned money to acompany or government organization(bond).

Title: The right to, and the ownershipof, property. A title or deed sometimesis used as proof of ownership of land.

Title Insurance: Insurance that pro-tects lenders and homeowners againstlegal problems with the title.

Truth-in-Lending Act (TILA): A federallaw that requires disclosure of a truth-in-lending statement for consumerloans. The statement includes a sum-mary of the total cost of credit, such asthe APR and other specifics of theloan.

Underwriting: The process a lenderuses to determine loan approval. Itinvolves evaluating the property andthe borrower’s credit and ability to paythe mortgage.

Uniform Residential LoanApplication: A standard mortgageapplication your lender will ask you tocomplete. The form requests yourincome, assets, liabilities and adescription of the property you plan tobuy, among other things.

Warranty: A written guarantee of thequality of a product and the promise torepair or replace defective parts free ofcharge.


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Documents

Full Page Organization - Freddie Mac PanAsia… · CreditSmart Asian: Steps to Homeownership 1 Maintain your good credit rating Establish your home buying budget Save money for a