Resources
As soon as you have made the decision to purchase a home one of your first steps should be to get a clear picture of your financial situation. Be sure to do the following: Look over your credit report from all three of the major credit reporting agencies. Most people’s credit reports contain at least one error, and these mistakes take time to clear up. Analyze your current financial situation. Determine where the money comes from and how you spend it. Create a budget that works for you, keeping in mind that you will need 3 to 6% of your mortgage amount for closing costs.Determine how the house purchase will affect your budget. Be sure to factor in not only mortgage payments (including insurance and taxes) but also funds for items such as repairs and maintenance. Gather your financial documents from the last 3 years. These should include: Income Tax returns, current copies of pay stubs, records of any past derogatory credit history that has since been paid off, and records of any supplemental income you may have. If you are self employed, you will need all business records and tax returns for the last 3 years. Having these items close at hand will save time when the Mortgage Company begins to ask for them. If it is possible to do so without adversely affecting your down-payment situation, pay off minor debts. The less debt you have the easier your mortgage will be to obtain. Do not incur any new debt. Mortgages are based on debt to income ratios (the amount you pay out monthly versus the amount you bring in) a newly acquired debt could be enough to throw the ratios off and make the mortgage unobtainable. BUYER'S “Glossary of Real Estate Terms ”BUYER'S Loans and Down Payments “Glossary of Real Estate Terms.” Agent--An individual who represents a seller, a buyer or both in the purchase or sale of real estate. Amortization--The schedule of loan payments that establishes the amount of payment to be applied to the principal and the amount to be applied to interest, usually on a monthly basis, for the full term of the loan. Annual Percentage Rate (APR)--The TOTAL interest rate of a mortgage, including the stated loan interest as well as any upfront interest paid in securing the loan. The APR will invariably differ from the mortgage rate quoted due to the inclusion of these items. Appraisal--An estimate of value of a Real Estate property by a professional third party. Virtually all non-owner financed mortgages will require an appraisal and is generally paid for by the buyer. Adjustable Rate Mortgage (ARM)--A mortgage in which the Interest rate is adjustable, meaning that the rate can go up or down according to prevailing financial market conditions. Assessment--The value of a property as determined by the local tax jurisdiction which is used to determine the amount of your property taxes. Buyer's Agent--A Real Estate Agent that has made an agreement to represent the buyer exclusively, rather than the seller. Comparable Market Analysis (CMA)--A comparison of the prices of similar houses in the same general geographic area. A CMA is used to help determine the value of a property, either for a seller or a buyer. Closing--The process that effects the final transfer of the deed from the seller to the buyer, as well as finalize all aspects of the mortgage of the property. Closing Costs--Funds needed at the time of closing (separate from and in addition to the down payment). Loan origination fees, discount points, Attorney fees, recording fees and pre-paids are some items that may be included. They often will total from 3% to 5% of the price of the home, payable in cash. Contingencies--These are conditions--or "safety valves" written into Real Estate offers and contracts to prevent a buyer from being forced to buy a house that is unsatisfactory--either structurally or financially. Examples of contingencies are "This contract is subject to the buyer obtaining a satisfactory whole house inspection." or "Subject to the buyer being able to obtain a mortgage." Condominium--Housing where the owner owns only the unit in which they live--from the interior walls inward, generally--as well as a portion of the common area. Debt to Income Ratio--The ratio of a borrowers total of debt as a percentage of their total gross income. Deed--The document that, when recorded with your local government, determines ownership of a property. Transferred from seller to buyer at closing. Earnest Money--Money that is submitted with an offer to purchase which indicates a buyer's seriousness and good faith. In virtually all cases, earnest money will need to be submitted at the time of the offer and remains in escrow until the time of closing, at which time it becomes part of the downpayment. Equity--The difference between the value of a property and the total of any outstanding mortgages or loans against it. Escrow--Funds held in reserve both prior to closing (for example the earnest money and deposit) by a third party and after closing by the mortgage company to pay future taxes and homeowners insurance. In some areas, "escrow" also refers to the closing process. Fixed Rate Mortgage--A mortgage loan where the interest rate is established at its origination and continues unchanged through the life of the loan. FSBO (For Sale By Owner)--Real Estate that is sold without the assistance of an Agent. FSBO can refer to both the individual selling the property "They are a FSBO," or the property itself "that house is a FSBO." Foreclosure--The process through which a lender takes back property from a defaulting owner and re-sells it. Homeowner's Association--An owners group, whether in a condominium, townhouse or single family subdivision that establishes general guidelines for the operation of the community, as well as its standards. Inspection--A whole house inspection of a home being considered for purchase which looks for defects in the property. Interest--That portion of a mortgage payment that is the "charge" for using the lender's funds. Lien-- A legal claim against a piece of property that can prevent it from being sold unless the lien is satisfied (paid off). Liens can be filed by unpaid contractors or other debtors in a legal process so that they will be paid when a property is sold. Listing--A property for sale by a Real Estate Brokerage and Agent. Loan Origination Fee--A charge imposed by the lender, payable at closing, for processing the loan. See Points. Lock-in--An agreement by the lender at the time of mortgage application or shortly thereafter, to write the mortgage at a specific interest rate, whether rates rise or fall up to the date of closing. Obviously a good move if rates are rising, not so good if they are falling. Lock-ins have specific expiration dates, such as 30, 60 or 90 days in the future. LTV (Loan to Value)--The ratio of the amount of the mortgage as a percentage of the value of the property. MLS (Multiple Listing Service)--A listing (almost always computerized) of all the properties for sale by Real Estate Brokerages in a given geographical area. PMI (Private Mortgage Insurance)--Required on virtually all conventional loans with less than 20% downpayment. Although the payments for PMI are included in your mortgage payment, it protects the lender should you default on the loan. On FHA loans, you will pay a MIP (Mortgage Insurance Premium) which accomplishes the same purpose. Points--1 point is equal to 1% of the loan value, paid at closing. Points can be loan origination fees or "discount points" which reduce the interest rate of the loan (you are actually paying a finance charge up front). When a lender, for example, quotes a rate of 8 1/2% with 1 + 1 points, 1 point is for the origination fee and 1 point is for the discount fee. Prequalification--The first stage of a mortgage application where the lender will run a basic credit report and determine your debt to income ratio in order to see how much mortgage you qualify for. Pre-paids--Paid for (in cash) at closing for such items as homeowners insurance for one year and real estate taxes for several months. Principal--The amount borrowed for a mortgage loan. Your monthly mortgage payment will be applied to both the interest and the principal (be assured, though, that the lions share will go to the interest portion in the first years of the loan). Property Tax--An annual or semi-annual tax paid to one or more governmental jurisdictions based on the amount of the property assessment. Generally paid as part of the mortgage payment. Recording--The act of entering deed and/or mortgage information into public record with your local government jurisdiction. Title Insurance--Protects your title--your ownership rights--from claims against it. Paid at closing, title insurance may be the responsibility of the buyer, the seller, or both, depending on what is traditional in your locality. Warranty--Covers either most of the house in a new home, or selected items (for example the heating and air conditioning system or the water heater) in a used home. Warranties can vary widely and are optional in used homes (paid for by either the buyer or the seller). Zoning--Laws that govern specifically how a zoned area can be used. For example, an area may be zoned for single family residential, condominiums, commerical or retail, or a mix of two or more uses. Loans and Down Payments "Neither a borrower nor a lender be" could be translated as: Maybe it's time to stop renting (borrowing) and buy a home of your own. But how do you know what you can afford? And how do you make the leap from renter to good loan risk? There are many types of loans, but there are two main criteria for qualifying: Good credit. A good credit history with no or low debt is the ideal. Even if you're way ahead of the repo man, if you're carrying high debts you need to reduce them. Contact creditors and establish realistic payment schedules. Start paying new bills on time and in full. If it takes a year to get your debts under control, put off house-hunting, find the bliss of discipline, and know it will be a year well-spent. Income. Have you held your current job for at least two years? As a loan prospect, you're considered a better risk if you have a low but steady income rather than a short-term higher income. Will you be secure (and content) for the next three years? Are you confident in your company's stability? Let's start with the main chunk of change: the down payment. There's some wiggle room here, but for a conventional loan you're looking at 5, 10, or 20 percent of the purchase price. (At 20 percent, you avoid mortgage insurance, which is otherwise up to 1 percent of the home's purchase price.) Change Your Habits Adjust withholding taxes. If you're qualified to do so, changing your salary withholdings can give you more cash for your house piggybank. Simplify. What luxuries can you live without as you beef up your savings? Think cable, cell phone, Italian shoes, handheld computer, caller ID, and music and books hot off the presses. Hit up the library for music and literature. Sail past the mall and head for a discount mall—or try consignment shops for clothing and furniture. For essential items, wait for sales. Shop at less expensive grocery stores, compare prices per ounce, and adapt your diet: Alternate expensive meats, seafood, and store-bought sauces with produce and grains. Cut up your cards. If you have more than one or two credit cards, consolidate. Use the cards with the lowest APR, and give the boot to your "spares." You'll be less tempted to charge, and you'll save on annual fees. Earn interest. Certificates of Deposit (CDs) and treasury notes are secure and earn a higher interest rate than do savings accounts. Talk to a representative at your bank about your options. Ask for help Find a partner. Is a friend or family member looking for a long-term investment with low responsibility and high-yield potential? They could pay the down payment if you carry the mortgage payments—or you can split all costs and divide any profits when you resell the house. Sell, sell, sell Collectibles. As a last resort, consider selling valuable collectibles or heirlooms. Give family members the first bid on items with sentimental value. Explore low-cost loans. Contact state housing agencies and your credit union. The government also sponsors some loan programs, such as those offered by the Veterans Administration (VA) and the Federal Housing Administration (FHA), to make home buying affordable to low- and middle-income buyers. Benefits from these sources range from low down payments to reduced interest rates to paying few or no points. If you have an impeccable credit record, look into Fannie Mae or Freddie Mac loans, which offer zero-down terms to qualified borrowers. Refinance existing loans. If you're making payments on other loans, refinance and add the savings to your down-payment kitty. Look into foreclosures. If you have a decent credit record, and the lender or government agency wants a quick sale, you may be able to buy a foreclosure with a zero down payment. Ask if value-enhancing skills such as landscaping or carpentry are acceptable in lieu of cash. Borrow. Whether from parents, friends, or a nonprofit group, it never hurts to ask. If you have life insurance, consider cashing it in or borrowing against it. You can also borrow against your retirement funds. But keep borrowing in balance: debts are a red flag to lenders. Barter. If you have something of value to trade—from boats to specialized services—offer it to the seller in lieu of a full or partial down payment.
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