Homebuyer's Guide

Lenders can often give you an initial “ballpark” estimate of whether or not you qualify for the loan you want. They do this by looking at your income and your outstanding debts.

Now you can do the same, using the two methods we provide. The Income Ratio Method multiplies your total monthly income by approximately 31%* to estimate the maximum house payment you can afford.

The Total Debt Ratio Method takes approximately 43%* of your total monthly income, then subtracts your fixed monthly debts to estimate how much you have remaining for making your new house payment.

In addition to these ratios, other criteria, such as your credit history, total projected income, and property appraisal, etc., will be taken into consideration before the lender makes a final decision.

*Formulas and percentages used are for example only and may vary from lender to lender and by type of loan. Call your lender or Real Estate agent for this figure.

How Much House Can I Afford Worksheet

As a homeowner, you are building valuable equity. No matter how much debt you have, even a small amount of equity will attract companies that want to loan you money.

Reasons to borrow against your equity*:

• to make home improvements
• to consolidate debts

Ways to access your equity*:

• a home equity loan or line of credit
• refinancing your home

What is predatory lending?
A lender intentionally making an expensive loan without considering the customer’s best interests. Predatory lenders may charge high fees and rates and require high down payment investment.

Who do predatory lenders target?

• homeowners
• elderly
• minorities
• women
• people who live in neighborhoods where there are no banks

Why is predatory lending a problem?
In recent years, credit has become more widely available. Many Americans have maxed-out their credit limits and have tarnished their credit records. These same people may own homes but are living “paycheck to paycheck.”

With blemished credit records denying access to standard, “prime/conforming,” loans or credit, predatory lenders often appear to come in and save the day by making loans where other lenders would not. However, these loans often have high interest rates, down payment requirements of up to 20% of the purchase price, balloon payments,
prepayment penalties and high fees.

If it sounds too good to believe, it probably is!
Don’t believe it when they say, “Bad Credit? No problem!” or “no closing cost loan.” The loan will include expensive “junk fees”, inflated origination and broker fees, and a high interest rate. Other types of loans to be cautious of are: Interest Only Loans, some ARM (adjustable rate) loans and 40 yr. term loans to name a few.

Ask if the loan includes a balloon payment!
A balloon payment may lower your monthly payments, but there will be a large, one-time payment at the end of the loan term. Predatory lenders will include balloon payments and then refinance the loan later…with more fees and closing costs…this is called loan “flipping.”

Beware of the home improvement scams!
Predatory lenders often approach homeowners through home improvement schemes. They make you a costly loan based on your equity and you are left with the incomplete or shoddy repair work.

Consider options to credit life insurance!
These policies cover the loan for the lender if you die. Predatory lenders usually finance the one-time insurance premium into the loan, increasing the loan amount and the amount of interest you will pay. A regular life insurance policy can be cheaper and serve the same purpose.

Remember, when predatory lenders make a loan, they do not consider your ability to repay the loan. If you cannot pay, you could lose your home & destroy your credit history!

Start with your local Real Estate professional. These professionals have a good grasp of the lending picture in your area & also maintain valuable contacts with selected lenders. In addition, you’ll can do some shopping on your own. Be sure to ask questions like the following.

• What type of loans are available?
• Fixed rate or adjustable? 15-year term? 30-year term? Bi-weekly payments?
• Mortgage Revenue Bond Loan? MHC approved?

If you’ve decided on a particular type of loan, then ask:

• What’s the APR?
  The annual percentage rate (APR) is a good gauge for comparing lenders. Federal regulations require that lenders give an annual percentage rate for every interest rate they advertise. The APR reflects additional costs such as points and fees, which will affect the total cost of financing to you.
• Are the rates quoted negotiable?
  Some lenders are willing to offer relationship discounts ­— reduced fees or points, or a slightly lower interest rate — depending on credit score and loan products. This includes refinancing. Some may offer a lower interest rate if you agree to a larger down payment or higher loan fees.
• How long should it take before my loan is approved?
  Turnaround time on your loan can be critical. If you’ve located a “good deal” it will require that you move quickly. Your ability to get all information required to the lender in a timely manner can impact the time it takes. A loan on an existing house should be processed within 30-60 days. If you choose to build a home, the loan could take up to 120 days or longer to close. Processing time can affect the actual interest rate you end up paying if your rate expires. Some lenders today won’t offer a rate guarantee during the time your loan is being processed. If they do, they may only guarantee a rate for a limited period of time. (Note: Some lenders may be willing to give you a preliminary approval on your loan, pending appraisal.)
• Is there a loan application fee?
  Many lenders charge a fee for processing your documents. If so, be sure to ask whether this fee is refundable if your loan is not approved, or you withdraw your application.

Lender & Loan Comparison Worksheet

There is a simple way to estimate the monthly principal and interest payment on you loan, if you know the interest rate and the loan term for repayment of your loan. (Does not include property taxes, hazard insurance and warranty insurance premiums.)

Use this Monthly Loan Payment Calculator to help you estimate your monthly payment.

If you’re anxious to have your loan approved - to lock in a rate, take advantage of a special opportunity, or for whatever reason - you can help, speed the approval process by knowing the documents you need, and having them ready and neatly organized. Remember people process loans, not machines.

Here is a Checklist of Documents You Should Have Ready:

• Exact name(s) in which the title is to be held
•  List of who you owe money to and the amounts
• Property access information for appraisers
• Names and addresses of current, recent employers
• Recent pay stubs from each employer
• Recent Federal tax returns, including all schedules (up to 3 years)
• Names and account numbers for financial institutions where you have deposits
• Recent financial statements, including current profit & loss (P&L statement), if you are self-employed
• Rental agreements to verify rental property income
• Copies of court decrees stipulating child support, alimony income, and property settlement
• Verification of your own down payment source (e.g., gift, sale of property)
• Copy of existing note on a 2nd mortgage loan (if applies)
• Name and address of Homeowner’s Association (for condominium/townhome)

As a homeowner, there are several types of insurance you will want - or need - to consider.

Homeowner’s Insurance protects your home, and the things inside, from various kinds of damage and theft. When you purchase a condominium or townhome, usually the condominium association’s master policy includes coverage of the structure of the building, but it will be up to you to provide a separate policy insuring your belongings inside.

Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP) is often required with certain types of loans depending on the loan type and loan-to-value (LTV) (e.g, loans with a high LTV ratio(above 80%), or small down payment). Such a policy guarantees the lender payment of a certain portion of the loan balance in the event of a default and foreclosure. Lenders require you to make monthly payments on this insurance along with your principal and interest payment if they don’t hold in escrow for you like they do for taxes and hazard insurance.

Mortgage Life Insurance is an optional policy which protects your family and estate by paying off your loan in the event of your death.

Mortgage Disability Insurance coverage is similar to Mortgage Life Insurance, except that it guarantees to make your loan payments only for the time that you are disabled. If you decide you want either type of coverage, you’ll find many lenders offer programs that allow automatic payments along with your monthly loan payment.

An escrow account is a convenient account that allows borrowers to accumulate money during the year for annual, home-related expenses, such as property taxes and insurance. Lenders offer this service, and many require an escrow account on certain types of loans and in certain higher risk situations.

When an escrow account is required, you will be making monthly payments toward your taxes and/or insurance as part of your regular monthly mortgage payment. When the amounts are due, the bills will be sent directly to the lender, who will see that they are paid on time.

In the transfer of the property from seller to buyer, a neutral third party may be appointed to see that all terms and conditions of the agreement between the two parties are met. This person is known as the closing agent or attorney.

Many lenders have their own closing department, and it may be to your advantage to request that the closing be handled by your lender.

What the closing agent or attorney does:

• Prepares closing instructions and the Warranty Deed for signature
• Accepts funds and loan closing documents
• Coordinates the flow of documents and funds
• Ensures that the lender’s requirements are met
• Figures and collects closing costs
• Makes arrangements for recording the Warranty Deed and Mortgage
• Secures a title insurance policy, as applicable

Processing time may vary, depending on the type of loan and documentation required.

• Adjustment Interval - the period of time between changes in your interest rate and/or monthly payment with an adjustable rate loan. These intervals will vary depending on the lending institution and the type of loan your are applying for.
• Adjustable Rate Mortgage (ARM) - A loan where the rate of interest is tied to a specific financial index, with both the rate of interest and the monthly payments subject to change at established adjustment intervals. (See also Index, Initial Rate, Interest Rate Cap). (Example, a 5 year ARM has a fixed rate for the first five years of the loan and is then adjusted once every year through the term of the loan to reflect the current economic conditions.)
• Amortization - This means by which a home loan is scheduled to be paid off, including principal and interest, by a series of regular installment payments. Loans are typically amortized over the term of the loan.
• Application Fee - A loan application fee, often non-refundable, charged by the lender to cover costs of processing your application.
• Appraisal - A formal, written estimate of the current value of a home.
• Annual Percentage Rate (APR) - The cost of your credit expressed as a yearly rate. It takes into account interest, points and loan origination fee. Since all lenders are required to use the same guidelines in determining APR, this is a good basis for comparing the cost of various loan programs.
• Assumability - A feature of the loan which permits you to transfer your mortgage and its specified terms to the person(s) purchasing your home. Having an assumable loan could make it easier for you to sell your home, since assumption of a loan usually involves lower fees and/or qualifying standards for the new borrower than a new loan. Assumability on fixed or adjustable rate loans varies from lender to lender and loan type.
• Bi-weekly Mortgage - Typically, a fixed rate mortgage on which payments are due and payable every two weeks. Since a total of 26 bi-weekly payments (equivalent to 13 monthly payments) are made annually, loans of this type are paid off more quickly than loans requiring 12 monthly payments per year.
• Casualty Loss - A loss from theft, fire, storm, or other similar and unexpected occurrences.
• Clear Title - A title that is free of liens or legal questions as to ownership of property.
• Closing Costs - One-time costs that must be paid before the loan can be “closed” or funded by the lender. These costs may include such things as property taxes, insurance, broker’s fees, escrow fees, title insurance premium, deed recording fees, title transfer tax, etc. Escrow instructions will stipulate which portion of the fees are to be paid by buyer or seller. A Loan Estimate (LE) of closing costs will be given to you by the lender within a few days after receiving your loan application. (All or a portion of your closing costs may be financed. Ask your lender.)
• Closing Disclosure (also known as the Settlement Statement) - Up to four page financial disclosure statement detailing the closing costs of a home purchase for the buyer and seller.
• Contingency - A condition that must be met before a contract is legally binding.
  Conventional Financing - Home loans made through a lender using VA, FHA, Rural (Development) Guaranteed, Fannie Mae or Freddie MacDeed of Trust - The document securing a loan purchase.
• Depreciation - A deductible expense for wear and tear of tangible property that has a useful life of more than one year & is used for business or income-producing purposes.
• Discount Points and Fees - A point is a charge equal to one percent of the principal amount of the loan. Points are payable at the close of escrow and may be paid by the buyer or seller, or split between them (e.g. two points charged on a $100,000 loan would equal $2,000). In addition, a flat dollar amount fee may also be charged. Under some lending programs, a buyer may be allowed to include these points and fees as part of the total amount financed. Points are not allowed with the MRB7 program.
• Down Payment Assistance (DPA) - 2nd mortgage funds given to the borrower at closing to help with downpayment and closing costs. Also, could be in the form of a grant (non-repayed)
• Escrow Account - An account for accumulating that portion of a borrower’s monthly payments designated for future payment of taxes, insurance fees, assessments, etc. Required by certain lenders or with certain types of financing. Can also be used in conjunction with buydown loans (contact your lender).
• Equity - The difference between fair market value and current indebtedness, usually referred to as the owner’s interest.
• Federal Housing Administration (FHA) - A government agency which insures repayment of a loan to the lender, with the result that the borrower is able to obtain a home loan with a 3.5% down payment and often at a lower rate of interest.
• Fixed Rate Loan - A loan where the rate of interest is fixed over the life of the loan. Payments on a fully-amortized, fixed rate will not change.
• Index - Used by lenders to calculate the interest adjustments on adjustable rate loans (ARM). Some indexes are more volatile than others; this can affect adjustments in your interest rate and, subsequently, your monthly payment. Because these indexes reflect the general movement of interest rates, they tend to keep the rate on your adjustable rate loan in line with market conditions.
• Initial Rate - An interest rate changes for the first six (6) or twelve (12) months of an adjustable rate loan. Normally, this rate will be lower than prevailing fixed market rates.
• Interest Rate Cap - A safeguard into an adjustable rate loan to protect the consumer against dramatic increases in the rate of interest and, consequently, in the monthly payment. For example, an adjustable rate loan may have a two percentage point limit per year on the amount of increase or decrease, as well as a five percentage point limit (increase or decrease) over the life of the loan.
• Late Charges - Typically five percent (5%) of principal and interest paid after the 15th day of the month.
• Liquid Assets - Funds that can be converted to liquid cash in less than 10 days (i.e., checking/savings accounts) by occupants within the household.
• Loan Estimate - Lenders are required to give you an estimate of closing costs, loan amount, monthly payments, etc.
• Margin (Spread) - An amount expressed as a percentage which is added to an index to determine the interest rate on an adjustable rate loan( e.g. index rate + 2.5% margin). Different lenders and loan programs may use different margins and indexes. With an adjustable rate loan, this margin (spread) generally does not change once it is established in your documents.
• Mortgage Credit Certificate (MCC) - The MCC is a forty percent (40%) housing tax credit on your tax liability. This is a dollar for dollar reduction of your federal tax liability, calculated by multiplying the percentage (40%) times the mortgage interest you paid for the year. The remaining sixty percent (60%) of your mortgage interest will continue to qualify as an itemized tax deduction.
• Mortgage Insurance Premium (MIP) - FHA required mortgage insurance to protect the lender in the case of buyer default.
• Mortgage Revenue Bond 7 (MRB7) - The MRB7 is a 30-year fixed rate loan. The MRB7 can be on FHA insured, VA, Rural Development, FannieMae and Freddie Mac loans depending on lender. The MRB7 provides a $7,000 interest 0% deferred 10-year second mortgage to assist the borrower with closing costs and downpayment assistance.
• Negative Amortization - A situation which may occur on adjustable rate loans which have the “payment cap” feature. (See “Payment Cap”) Because your monthly payment is capped, your adjusted payment amount may, at times, be insufficient to pay the actual amount of interest due. The unpaid (deferred) interest would then be added to your balance. This increase in your loan balance is known as “negative amortization”. A borrower usually has the option of increasing the monthly payment in any given month to avoid negative amortization or making a lump sum payment to pay off any accrued negative amortization.
• Non-Target - Census tracts that are not economically distressed areas determined by the State.
• Payment Cap - The limited amount by which the payment on an adjustable rate loan can increase or decrease at each payment adjustment interval (typically one year). A Payment Cap ensures that payment changes occur at a gradual pace. If your adjusted payment isn’t sufficient to cover the amount of interest due on the loan, due to the Payment Cap, the unpaid (deferred) interest is added to your loan balance. This is known as “negative amortization”. Since most adjustable rate loans have a maximum amount of allowable negative amortization, once this maximum has been reached, the payment will have to be adjusted beyond the Payment Cap to ensure that the loan will be paid off in the allotted number of years. Provisions for these special adjustments will be in the loan documents.
• PITI - Refers to “Principal-Interest-Taxes-Insurance.” The total of your monthly home loan payment.
• PMI (Private Mortgage Insurance) - Insurance coverage for the lender of a certain portion of the loan balance in the event of default and foreclosure. PMI may be required on FannieMae and Freddie Mac conventional loans and will be included as part of your monthly payment.
• Prepaids - Costs associated with the financing of a mortgage loan that one may be required prior to closing &/or funds to be placed in an escrow account to cover Insurance and Property/County/School taxes.
• Prepayment Penalty - An additional fee which may be charged by the lender if the loan is paid off prior to the end of the loan term. Generally associated with fixed rate loans. No penalty applies to MHC’s products.
• Processing (turnaround) Time - The amount of time required from the day you submit your loan application documents in full to the day the loan closes and loan funds are disbursed. This is the total processing time for your home loan.
• Rate Guarantee - A guaranteed rate lock, at the lender’s option, that the rate in effect on the date you submit your application, or at the time of final approval, will be the final rate on your loan when funded. This guarantee usually expires after a specified period of time.
• Real Property - Physical property that is permanent and nonmovable (ie: land and buildings).
• Refinance - Negotiation of a new loan in order to pay off an existing loan. Homes are usually refinanced in order to (a) take advantage of lower interest rates, (b) switch from one loan type to another (e.g. from adjustable to fixed), or (c) to generate cash from built-up equity. Since refinancing generally involves new loan costs, these costs must be weighed against benefits to be gained.
• Rural Development (RD) - Insurance coverage for the lender of a certain portion of the loan balance in the event of default and foreclosure called a “Guaranteed Fee” and it’s only for RD loans, not Fannie Mae/Freddie Mac, VA or FHA.
• Target - Census tracts that are declared by the State as economically distressed areas.
• Term - The number of years before your loan is scheduled to be paid off. Fifteen (15) year and thirty (30) year terms are most common.
• Title - A legal document evidencing a person’s ownership of a property.
• Title Insurance - A required policy, usually purchased by the seller of a home, ensuring that title will be held free of any liens other than that obtained by the buyer.
• Truth-in-Lending - a federal law that requires lenders to fully disclose, in writing, the final terms and conditions of a mortgage, including the Annual Percentage Rate (APR) and other charges.
• Underwriting - Standards used by a lender to determine whether a borrower qualifies for a loan. Underwriting criteria is established by the lender and by agencies such as FHA, VA, Rural Development, FannieMae, and FreddieMac depending on the loan product.
• VA Funding Fee - Insurance coverage covering the lender of a certain portion of the loan balance in the event of default or foreclosure. May be required on VA loans depending on the LTV.
• Vesting - Name(s) in which title to property is held.
• Veterans Administration (VA) - A government agency providing guarantees for a lender on approved loans to qualifying veterans.
• Warranty Deed - The legal document conveying title to a property.