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WARNING If you are not serious about owning your own home, and feeling committed to taking the necessary steps to act on probably your largest financial decision, then please give this book to someone who does. But if you are serious,
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Introduction Congratulations on your decision to purchase your new home. If this is your first purchase, the experience will be a rewarding one. If you have done this before, then welcome to the road again. Buying a house is like a journey. To get to the end with the best experience, you need to plan, prepare, and act. Abraham Lincoln once said: “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” The meaning here of course, is that with a sharper axe, you will spend less time chopping, and ultimately use less energy to achieve your goal. But even before you start chopping, you will need to find the tree. That one tree which is the right size, right height, and in the right part of the forest. This book will be your guide to that “special tree.” It will provide you with some important tips and guidance for the journey; giving you the best practical information to help you plan, and execute the plan for your dream home. One of the fundamental objectives of the book is to help you get the best possible home while spending the least amount of money. Please read that one more time. Whether you have a little, none, or a lot of money, this is important. It is foolish to spend more on something when you don’t need to. Imagine what that extra cash could do for your wealth-building portfolio or some other dreams you have. It may also help you avoid scams, that have robbed thousands of home owners in the past. In the end, you will have fewer challenges, less stress, and the confidence that you made the best decision. It was written to take you from the mere thought of buying a home, to enjoying your life in it. Welcome to The Latest Homebuying Guide.
Patrick Green Author 3
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No part of this book may be shared or copied without consent from the author. Disclaimer The information presented in this book is not intended as legal or financial advice and should not be solely relied on to make your decisions without consulting those professionals in mortgage, law, and real estate. The information in this guide is the latest we have up to the time of publication. The author and publisher reserve the right to update or change the information anytime.
Acknowledgement Thanks to expert mortgage broker Phillip Wallace, (americanmortgagegrp.com) who helped to ensure the accuracy of the information provided.
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About the Author Patrick Green is a Certified Professional Life Coach with specialization in goal setting and success. As a goal setting and success coach he created SAC Your Goals, a program that empowers people to Set, Achieve and Celebrate their goals towards their Ultimate Life. He is also a Certified NLP Practioner and Certified Associate Negotiator (University of Michigan and VMEdu). He attended Baruch College. Patrick is a published author, having three titles so far. They are: Jamaica - History, Culture & Achievements, Welcome to the Orgasmic Zone , and The Latest Homebuying Guide. He spent seven years in the banking sector, owned multiple businesses, including a construction company that designed and installed kitchen cabinets in South Florida. Additionally, he worked as a sales professional for various nationally recognized companies in the United States. As a homebuying coach and graduate of the HUD Home Counseling Certification Program, he advises clients on pre-purchase through to post-purchase strategies on home ownership. This includes Financial management, home affordability, ownership, housing rights and foreclosure avoidance. Patrick also studied and successfully completed the prerequisite mortgage course, in preparation for the Florida Mortgage Loan Originator's license. Patrick has a deep passion for helping people empower themselves to achieve their ultimate goals, and strongly believes that "service to humanity is the best work of life."
Patrick Green
Patrick Green
June 8, 2020
June 6, 2020
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Typical questions from a new homebuyer What type of home?
Do I need to buy a home?
Which neighborhood?
What features do I want?
Am I financially ready?
What about my credit score?
Will I qualify for a mortgage?
How much can I borrow?
How do I prepare for lenders?
15 or 30 year mortgage?
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Which professionals do I need?
How much down payment do I need?
What is a proper walkthrough?
How do I search?
What inspections are needed?
How do I make an offer?
What is expected at closing?
How difficult is the process?
Where can I get help?
How can I get the best deal?
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Course Goals ◙
◙ ◙ ◙
Provide you with the education to understand the homebuying process and confidently apply it to get the best value Help you answer the above questions Provide you with the latest best practices and tools to buy your home Allow you to grasp the importance of preparation in the home-buying process
Expected outcomes At the end of the course you will be able to: 1. Write at least three reasons why you need to purchase a home 2. Decide if you should buy a “detached” or ‘attached” home 3. See the differences and similarities between condominiums and townhomes 4. Search neighborhoods for crime rates and livability data 5. Create your new home’s wish list 6. Create a budget worksheet to assess the state of your finances 7. See which of the four main mortgage programs you may qualify for 8. Calculate your housing and debt-to-income ratios (lenders use this for approval) 9. See the financial benefits of a down-payment and how you can get it 10. Understand your financial obligations in the mortgage process 11. Compare the benefits and costs of a 15/30 year mortgage 12. Create your home-buying goals and plan of action 13. Understand the four “C’s” that lenders use to approve your loan 8
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14. Put your financial house in order, including your credit score and report 15. Create your home-buying “success” team 16. Use a simple system to search, assess and choose your home 17. Understand and use a simple process to make an offer 18. Know what to look for in a home inspection report 19. Know the basic criteria in a home appraisal 20. Systematically conduct a thorough home walk-through and assessment 21. Understand and prepare for the closing process 22. Learn 145 ways to make moving more organized and less stressful 23. Learn the most important keywords and language of the home-buying process 24. Get access to exclusive and important forms to help you make home-buying fun and easy
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Section 1 HOW TO PREPARE FOR THE HOMEBUYING JOURNEY ◙ Are you ready? ◙ Why do you want to buy a home? ◙ The home types ◙ Where do you need your home? ◙ Creating your wish list ◙ What is the state of your finances? ◙ Qualifying for a mortgage ◙ The importance of a good downpayment ◙ Know your financial obligations ◙ How long should you take to pay for your home? ◙ Don’t forget the moving expenses
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Section 2 HOW TO TAKE THE JOURNEY ◙ Setting your goals and plan of action ◙ Putting your financial house in order ◙ Building your success team ◙ Getting pre-approved ◙ Searching for your home ◙ Choosing a home ◙ Making the offer ◙ Bringing in the Inspectors ◙ Getting the appraisal ◙ Doing the walk-through and assessment ◙ Closing the deal ◙ Moving in
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◙ Important Forms to use in homebuying
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Section 3 IMPORTANT KEY WORDS TO KNOW ◙ Keywords & the language
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Section 1 Preparing for the Journey
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Are You Ready for The Journey? Purchasing a home is one of the biggest financial decisions you will ever make. It involves a lot of time, money and other resources. As such, you want to make sure that you are ready to handle the experience. You will have a tremendous responsibility, and this will require discipline, and in some cases sacrifices. You will have to manage relationships with quite a few persons, some of which will last for a lifetime. Then there is the added responsibility of maintaining your home and ensuring that the value does not depreciate. Most importantly, you have to ensure that your home is not foreclosed on, because of non-payment. These are all important responsibilities. So, the big question you need to ask yourself before you decide to buy a house is: Am I really Ready for this Journey? Here are some questions to help you decide. ◙ Why do you want to buy a home? ◙ What type of home should you choose? ◙ What neighborhood will you feel comfortable in? ◙ How should your home look? ◙ What is the state of your finances? ◙ Will you qualify for a mortgage ◙ Will you have the downpayment ◙ How long should you choose, to pay off your mortgage? ◙ How will you deal with the move in?
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Why do you want to buy a home? Like everything else that you do in life, you need a big WHY? A reason that is compelling and motivating enough, to keep you wanting it? One that blinds you to the distractions and keeps you focused. It must be strong enough to keep you going when the going gets tough, and inspiring enough to stop you from giving up. Your reason could be unique to you or It could be any or a combination of the following: 1. Having your first child or another one 2. Marriage 3. Divorce, separation or death 4. Current home has gotten too expensive to live in 5. Retirement 6. Building wealth 7. Tax benefits due to mortgage interest and other deductions 8. Job – Quicker, more convenient access to work 9. Health – Access to better health and living care 10. Upgrade – Lifestyle change 11. Transportation and access to better amenities 12. More yard space - gardening, play area, social needs 13. Need to own something
14.Better than renting
{Whatever your reason is for purchasing a house, it has to make sense. There has to be a deep-rooted need that will bring you more benefits than your current situation.} 13
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The home types So now that you are certain you need a new home, what will your new home look like? How many beds and bathrooms? The type of flooring? Will the kitchen countertop have marble or granite? Do you want a place to socialize and host your guests? What about a pool and a gazebo? These are all important questions to answer, as you prepare for the next phase of getting your dream home. The basics One of the fundamental questions you need to answer when buying a house is, “what type of social space will I be comfortable with?” Do you mind sharing common space with others or are you more comfortable with your family being on your own lot, sharing only a fence? The answer to this question determines whether you want a detached or an attached home. Detached homes share only a fence with neighbors. Typically, you will own the building and the lot, to which you may make improvements or additions. If you live in a neighborhood with a homeowner’s association, you may be affected by how much, and what type of improvements you can make.
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The Good
The Challenges
Large yard space Privacy Some maintenance More recreational space Landscaping More play space for pets and children Some repairs No shared space, walls, ceilings or floors Snow removal Make additions later Safety concerns, especially on No disturbance for and from neighbors vacations Garden space available Cost of your own amenities (eg gym) Space for hobbies, eg woodwork More storage
Attached homes usually share at least one structure wall on one side. They may also share roofs, walls on both sides or above. You will generally share common spaces that may include parking, amenities, and areas outside of your home. Examples include duplexes, triplexes, quadruplexes, etc.
Duplex
Triplex
Fourplex/quadruplex
Apartment building
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Attached Homes The Good
The Challenges
Ability to earn income to offset mortShared yard space (depends) gage payments Smaller yard space Close neighbors for emergency Pest infestation from neighbors Less landscaping Some major repairs done by HOA At the mercy of neighbor’s activities Less privacy Easier mortgage qualification Neighbor disturbance Access to community amenities Less storage Source of retirement income May not be able to make additions Tax benefits from expense right-offs
Townhomes, Condominiums and Co-ops Townhomes belong to the family of “attached” homes. They are independently-owned single-family units that share one or more walls with other units. They are usually in rows, typically two stories tall with a shared roof. A Condominium is a term used to describe the type of ownership relating to a property, and not the structure or design. Condominiums can be a single building or a set of buildings with each unit having separate owners. The most distinctive feature of a condominium is that the owner only owns the inside of their unit, and shares the ownership of everything outside with others. A Co-operative or Co-op is a type of home ownership where you are allowed to buy shares in a non profit that owns the units. As a result of your shares you lease your unit, and have equal rights to your community. With a Market-rate co-op you can sell your shares without any limits on profits. Limited-equity co-ops is geared towards affordability and so there is a limit on how much you can make on your shares when you sell. Zero-equity co-ops have no equity value but you get to pay rent at below market rates. 16
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Comparison of Townhomes, Condos and Co-ops Features
Condominium
Classification
Refers to type of ownership
Structure
What you own
What you share
Townhouse
Co-op
Refers to type of Refers to a type of structure ownership Typically a row of Can be apartments houses with your and or townhouses. own outside door, Multi-unit building Not specific to multiple floors, a structure type shared roof and side wall Your unit, a Shares in nonprofit You own the percentage of the that owns the structure and the structure, land and units. You lease land of your unit amenities your unit The use of ground The use of ground and amenities and amenities
The use of ground and amenities
Manages fees, Home owners common areas association (HOA) including roofs and amenities Less than townhouses & Cost single family homes
Manages fees, Manages fees, building, common building, common areas, and areas, and amenities amenities More than condos, Cheaper than less than single condos & family units townhomes
Privacy
Less than single family
Less than single family
Less than single family
Space
Less than single family
Less than single family
Less than single family
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Examples of townhouses Photos used with permission from www.houseplans.pro
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Where do you need your home? One of the most important decisions you will make is, deciding where to buy your home. This is so because it is much harder to change the location of your home than the the condition. Where your house is located will also have an impact on the price you pay, the appreciated value, and the selling price. The location also determines other considerations such as safety, security, amenities, schools, leisure activities, employment, transportation, healthcare access, shopping, and entertainment. Consider the most important features of a location and then rank them to decide what would be necessary and what would be “nice to have.” You also want to make sure that the location is safe and secure. Use the following websites to check crime statistics and livability status: www.neighborhoodscout.com - provides crime statistics and other important local data to help you decide if a neighborhood is right for you. www.areavibes.com – provides livability scores, crime rates, cost of living, education etc www.spotcrime.com – data on where crime happens in the USA www.familywatchdog.com – sex offenders
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Creating your wish list You have heard the saying before: If you fail to plan then you are planning to fail. Since failure is not an option you want in this home buying process, it is highly recommended that you plan with as much detail as possible. Put on paper, your goals, dreams, and desires for the house you want. Why? Because according to Dr. Gail Matthews, a psychology professor, you are 42% more likely to achieve them. Luckily for you, our Home-Buyers Wish List will help you with that.
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What is the state of your finances? Buying a home is a huge financial responsibility. It requires your commitment for anywhere between 15 and 30 years. To avoid any pitfalls along the way, it is important that your financial house is in order. Take a snapshot of your financial picture by using the following worksheet. It will show you how much funds you have left to cover any increased debt, major purchases or other living expenses after the purchase of your new house.
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Qualifying for a mortgage The best person to answer a question regarding a mortgage is your mortgage loan officer, who will give you an answer after assessing your current situation. The qualification process involves an analysis of your credit, income, and employment. It looks at your ability to take care of down-payment, closing and related expenses, as well as the value of the home you are interested in buying. Your income will be the primary factor in determining the price of the home you qualify for. Along with your expenses and debts, it is also used to calculate financial ratios that are vital for mortgage qualification. {There are four main mortgage programs available to home buyers. This means that you have ample opportunities to qualify and get the required financing for your home. }
CONVENTIONAL LOANS Features
Requirements
Down payment
Minimum 3%
Credit Score
Minimum 620
Insurance
Private mortgage Insurance (PMI) required if down payment is below 20%. Stops with 20% equity
Debt-to-income ratio
Up to 50%
Income
Eligible properties
Proof of steady income for 2 years (unless you are a college graduate) Pay stubs for 30 days 2 years tax returns Single-family homes Planned Unit Developments (PUDs) Condominiums 2, 3, and 4-unit properties 22
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Conventional Loans These are loans offered by the private sector that are not insured or backed by the government. Convention loans that follow the guidelines set by the government-sponsored entities (Fannie Mae and Freddie Mac) and are called “conforming.” Non-conforming loans have their own standards. FHA Loans The Federal Housing Administration (FHA) provides an easier opportunity for potential home buyers to qualify for loans. These loans are insured by the FHA but provided by lenders who must meet the FHA’s standards.
FHA LOANS Features
Requirements 3.5% with 580 credit score
Down payment 10% with credit score 500-579 Credit Score
Minimum 500
Insurance
One-time payment of 1.75% Annual fee of 0.8% to 1.05% Pay insurance premium for 11 years with 10% down payment
Debt-to-income ratio
Up to 50%
Income
Proof of steady income for 2 years Pay stubs for 2 months 2 years tax returns
Eligible properties
Single-family homes Planned Unit Developments (PUDs) Condominiums 2, 3, and 4-unit properties
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VA Loans Members of the military, veterans, reserves and their families can get loan guarantees on portions of their home loans from the Veterans Affairs department.
VA LOANS Features
Requirements
Down payment
Zero
Credit Score
No minimum but 620 is typically used
Insurance
No insurance. Funding fee of 1.25%-3.3%
Debt-to-income ratio
Up to 50% or higher depending on profile
Income
Residual income based on family size and region
Eligible properties
Single-family homes Planned Unit Developments (PUDs) Condominiums 2, 3, and 4-unit properties
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USDA Loans The US Department of Agriculture provides loan programs to persons who have a low to moderate income. The department does this by guaranteeing loans issued by lenders. These guarantees from the USDA allow a home buyer to get a home with 100% financing. USDA LOANS Features
Requirements
Down payment
Zero
Credit Score
No minimum but 640 is typically used
Insurance
Up front fee of 1% and annual fee of 0.35%
Debt-to-income ratio
Standard 41% but up to 44%
Income
Vary by city, county and family size
Eligible properties
Single-family homes Planned Unit Developments (PUDs) Condominiums/townhouses 2, 3, and 4-unit properties Must be located in USDA designated area
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Qualification Ratios Lenders want to ensure that there is enough money left from your income to cover your mortgage payment, and that there is no risk of you repaying the loan. The two most important financial ratios your lender considers are your housing expense ratio (front-end) and your debt-to-income ratio (back end). Different loan programs will have different ratio requirements and both ratios are considered together at the time of application. The benchmark front-end ratio is 28 percent. This means that your mortgage expenses should not exceed 28 percent of your total income. The standard back end ratio which considers all your debts (except those due in 6-10 months) against your income is 36 percent.
{The lower your numbers the better your chances of qualifying.} How to calculate your housing expense ratio Your housing expense is made up of your mortgage payment, property insurance, homeowner's association fee, and property taxes. Divide your monthly housing expense, by your gross monthly income, then multiply by 100. Example: Your gross monthly income (income before taxes) is $3,500.00 and your expected housing expense is $900.00. Your housing expense ratio would be (900/3500)x 100=25.71% How to calculate your debt-to-income ratio Your debt-to-income ratio adds all your monthly debts to your 26
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housing expenses and divides that figure by your gross monthly income. Add your total debt to your housing expenses as stated above. Divide your gross monthly income by the total, then multiply by 100. Example: Your total other monthly obligation is $350. This is added to your expected mortgage payment of $900 to give you a total debt of $1250. Your gross monthly income is 3500. Your debt-to-income ratio would be (1250/3500)x 100=35.71 How to lower your ratios As stated before, the lower your qualification ratios, the better your chances of getting a loan. If your ratios are high it is better to reduce them before you apply. Three ways to reduce your ratios are: 1. Stop taking on debt 2. Paying off your current debt 3. Increasing your income
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The importance of a good down-payment There may be lenders out there who want to lend you 100% of the price of your home. While this looks good on the face of it, you will be doing more harm to your future and your financial health if you choose this option. Remember that the more you borrow, the larger your debt will be, and the more you will have to pay back. This leaves less in savings to enjoy life, and take care of other important activities. Minimum downpayment ranges from 3% for Conventional loans to 3.5% for FHA loans. Here is how down-payment will affect you on a $250,000.00 home: Down Down Interest payment payment Principal rate % $
Term
Monthly Interest Payment
Total payment
0
0
250,000
4%
30
1,194
179,674
429,674
3.5
8,750
241,250
4%
30
1,152
173,385
414,635
20
50,000
200,000
4%
30
955
143,739
343,739
3.5% down
$429,674-$414,635 = savings of $15,039
20% down
$429,674-$343,739 = savings of $85,935
{The more you pay down means the less you will borrow, and the more money will stay in your pocket from interest savings.} 29
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Where to get your downpayment The best place to get your downpayment is from yourself. Providing your own downpayment gives you a sense of command and control. It gives you a sense of purpose, knowing that it was your energy, your decisions and your commitment that allowed you to save for this important contribution towards your new home. Downpayment help But if you cannot come up with the downpayment, don’t despair. There are tons of places available to offer you help. The required down payment cannot come from the seller, anyone who will benefit financially from the transaction or persons who will be reimbursed from prohibited sources. You can however, get a “gift” or a grant from: ● An unmarried partner ● Religious nonprofit ● Friends ● Relatives ● Your employer or labor union ● Charitable organizations ● A government agency or public entity that provides such assistance in your state Any funds given as a gift towards down payment cannot be a loan and should not be paid back. You will need a letter from the donor stating so, and the nature of your relationship. 30
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Do you know your other financial obligations? Here are the most popular expenses that are charged during a home purchase. Not all of them are paid each time. Application Fee: This includes the costs associated with processing your application by the lender or their representative. Application fees are usually non-refundable. Appraisal: You pay an appraisal fee to a qualified appraiser to ensure that your house is worth what the seller is asking. You don’t want to pay more than the market price for your house, and your lender does not want to lend you more money than the house is worth either. Attorney Fee: Some states require that an attorney reviews the documents to ensure legality. Some home buyers use attorneys to ensure that they get the best contract terms. Closing costs are the fees that you pay to companies and individuals for services rendered during the purchase of your home. On average, these fees normally run between 4 and 6 percent of the purchase price of the home. Example: Your home’s purchase price is $240,000.00. Expect to pay between $9,600 and $14,400 in closing costs. Courier Fee: Most documents are sent and signed electronically nowadays but circumstances may require the use of couriers to transport documents. Credit Report: Lenders want to ensure that you can pay back the money they lend you. They can determine this when they pull your credit report to see your history and scores, from all three bureaus. 31
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Discount Points: You may choose to pay a lump sum for “points” at closing, to reduce your monthly payment. One point is worth one percent of your purchase price. Escrow Deposit: You may have to pay a portion of insurance and property taxes into an escrow account. The monthly obligations are then turned over to the taxing authority and insurance company on the due dates. FHA Up-Front Mortgage Insurance Premium (UPMIP): For an FHA loan, you will be required to pay 1.75% of the base loan amount. This can either be paid at the closing or included in your loan. Flood Insurance Research: Research is required to determine if your house is in a flood zone. This fee covers the cost of the research. Home Inspection: It is strongly advised and mandated by almost every lender that you inspect your house before closing. This ensures that there are no major surprising repair costs after you move in. Home Owners Association Transfer Fees: If your home has a homeowners association, you may be required to pay the dues at closing. Homeowners’ Insurance: This offers protection for your property. Lender and Owner Title Insurance: This is insurance that protects both the lender and the owner if there is a problem with the title. Origination Fee: This covers the administrative cost of the lender. It is typically about one percent of the loan. Pest & Hazard Inspection: This is the fee for termites or related infestation inspection. 32
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Prepaid Interest: This covers any interest that will accrue between closing and the date of your first mortgage payment. Private Mortgage Insurance (PMI): This insurance protects the lender and is required If you are making a down payment that’s less than 20% of the home’s purchase price. Property Tax: This covers taxes imposed on your home by the local government. Recording Fees: A fee charged by your city or county to put your property among public land records. Survey Fee: Survey companies ensure that all lines and boundaries are where they are supposed to be; ensuring that you get all the lands you are entitled to. Title Company Title Search Fee: The title company research ensures that no one else has a claim to the property. Transfer Taxes: This is the tax paid when the title passes from seller to buyer. VA Funding Fee: If you are a Veteran, there is a one-time up-front fee that is charged by the VA for processing. This can also be added to your loan if you choose.
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How long should you take to pay for my home? The longer you take to pay off your loan, the more it will cost you in interest. Longer payment period usually means less in monthly payments, but you pay more overall. There are strategies for paying off your loan early, especially if there is no penalty to do so in your agreement. Your specific situation may be the deciding factor however. Speak with your loan officer to see your options. The maximum period you will get to pay off your loan is 30 years. If you can afford the higher monthly payments in a 15-year mortgage, then by all means, go for it. Your mortgage broker will go through the options with you so you can make the best choice. Compare the two tables to see how paying off in 15 or 30 years will affect your monthly payment, interest payment, and total payment. Down Down Interest payment payment Principal rate % $
Term
Monthly Interest Payment
Total payment
0
0
250,000
4%
30
1,194
179,674
429,674
3.5
8,750
241,250
4%
30
1,152
173,385
414,635
20
50,000
200,000
4%
30
955
143,739
343,739
Down Down Interest payment payment Principal rate % $
Term
Monthly Interest Payment
Total payment
0
0
250,000
4%
15
1,849
82,860
332,860
3.5
8,750
241,250
4%
15
1,785
79,959
321,209
20
50,000
200,000
4%
15
1479
66,288
266,288
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Important take away using 20% down 30 year mortgage
Pay back $343,739
15 year mortgage
Pay back $266,288
Saving 77,451 Don’t forget the moving expenses Moving is one of the most important activities that does not affect the price of your home but is critical to the overall process and expenses. After getting your keys it’s time to live in your new home. If this is your first, and you were staying with family, then your moving may only include your clothes and other small items. Your beautiful empty home will soon be furnished from your purchases at the stores. The cost of new furniture or moving the old ones must be included in your home-buying plans. If you are buying new furniture and appliances, depending on your needs, you may be able to buy furniture in piecemeal. Otherwise, you need to get items for the entire house. If you are moving from one home to another, then factor in the cost of professional movers or an amount to do it yourself. If you already have furniture then you will need to factor in the cost of professional movers and or storage. If you will be doing it yourself then consider the cost of supplies, truck and “helping hands.”
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Section 2 Taking the Journey
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Let the Journey Begins Now that you have looked at the things to consider when buying a home, let’s start the journey. Here are the 12 steps you should take to ensure a successful house hunting journey: 1. Create your goal & plan of action 2. Put your financial house in order 3. Build your success team 4. Get approved 5. Start looking at houses 6. Make your choice 7. Make an offer 8. Inspection 9. Appraisal 10. Pre-close walk through 11. Close 12. Move in
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Step 1 – Set your goals & plan of action Purchasing your home is undoubtedly one of the biggest financial decisions you will ever make. Failure is not an option on this journey. While The Latest Home-buying Guide provides you with all the information you need to succeed, your commitment and declaration of intent are very important tools for success. This chapter will walk you through the creation of your objectives and plan of action to achieve them. You will use your Home-buying Action Plan form to help you document your goals, and the steps to achieve them.
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Your current situation Before deciding on what your new home should be, it is important to understand your current situation. This will determine: ● If this journey is for you ● If you are mentally ready for the journey ● If you have the resources to take you to the end ● If you can satisfy the requirements of lenders In looking at your current situation it is essential that you consider your: 1. Gross and net income from all sources 2. Total expenses 3. Total debts 4. Savings 5. Housing ratio 6. Debt-to-income ratio Making your goal a SMART one Experts recommend that if you want to achieve your goals, they should be: ● Specific ● Measurable ● Achievable ● Relevant ● Time specific
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With the information and deliberation from your Home-buyers Wish list, it will be easier to create your SMART goal. Here is an example: “ I will purchase a three bedroom house worth $280,000 in Luton City by June 30th 20_ _.” Based on your current situation, you may also have to create goals to ensure that you meet three of the four C’s that lenders consider, when deciding to approve you for loans. Here are some considerations: Credit ● Improve your credit score by a certain amount by a certain time ● Remove items from your credit report by a certain time
Cash ● Save a certain amount for down-payment by a specific time ● Save an amount for closing costs by a specific time ● Save an amount for Earnest Money by a specific time
Capacity to Repay ● Increase your income by a specific amount by a specific time ● Find an additional source of income by a certain time ● Reduce/eliminate your debts by a certain amount by a specific time
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● Reduce your expenses by a certain amount by a specific time
Challenges Spend some time looking at the challenges you will face in achieving your home-buying goals. As you write them down, you will also begin to think about ways to mitigate them, and this will help you to formulate your action steps. Some of the challenges you could face may include: ◙ Not having enough savings or none at all ◙ Having bad credit or issues on your credit report ◙ Not earning enough ◙ Having too much debts ◙ Having too much expenses
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Action Steps Of all the things you will do throughout this process, perhaps the most important are your action steps. Why? Because this is where you put into action all the things you decided to do. Without taking action, nothing gets done, and your beautiful home remains only in your head. Your action steps should be everything you need to
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do, in order to achieve your goals. If your goal is to reduce your expenses, your action step may be, “drink the office coffee each day,” or “spend no more than a certain amount on lunch each day.” If your goal is to improve your credit, your action step may be, “set up automatic payment for all credit cards,” or “spend no more than 30% of credit card limits.” Goal Achievement Agreement This agreement physically and mentally holds you responsible for the outcome of your main goal. It also reaffirms the important reasons why you want to achieve it. Included in this agreement is an action to inform your “accountability partner” of your progress. This is someone who you can share your goal with, who provides feedback and checks to make sure you are making progress towards success. According to Pearson’s law, "When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates." By providing updates to your accountability partner you therefore increase your chances of success. And according to research by Professor Gail Mathews, you are 76% more likely to achieve a goal when you write them down and send updates to a friend.
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Step 2 – Put your financial house in order Lenders are mandated by law to ensure that you satisfy the “Four C’s of underwriting.” These are: 1. Credit history. This shows your demonstrated responsibility to manage debt 2. Capacity to repay. Regular income and employment 3. Cash assets. Needed to cover down-payment and closing cost 4. Collateral. Value of the home you wish to buy. The first three C’s are totally within your control and that is where you should start.
Credit History Credit is your ability to get goods and services now and pay for them later. Credit is a powerful financial instrument, and if managed properly, it can give you a really good financial standing in life. It can also save you a lot of money in interest, especially on a mortgage. Used carelessly however, credit can be a nightmare. It can suck the breath out of your financial standing and cost you thousands of dollars with higher interest rates. Ranking your credit Score 800 – 850 740 – 799 670 – 739 580 – 669 579 – below
Rank Exceptional Very good Good Fair Poor 44
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Compare the cost of a mortgage at various credit scores: Interest rate
Term
Monthly payment
Total Interest
Total payment
Exceptional 200,000
4.16
30
973
150,413
350,413
Good
200,000
4.56
30
4258
167,385
367,385
Poor
200,000
6.45
30
1479
252,724
452,724
Credit
Principal
In the above example, the difference between poor credit and one that is exceptional, is $102,311. Let that sink in for a minute! Think about what you could do with $102, 311.
{Make it your commitment in life to always have exceptional credit, and to do the things that help you to achieve it.} The anatomy of your credit Your credit is made up of your credit history and your credit score. Your credit history is a record of everything you have taken on credit, and how you honor your promise to repay. If you pay back as you promised, you will have a good credit record and score, provided you manage the other aspects of your historical report. Each time you buy something on credit and make the payment, the lenders and or businesses report it to one or a combination of the three credit bureaus. These are Experian, Equifax, and TransUnion. These credit reporting agencies then put together all of your activities and create a record of your payment history and relationships, which become available for the lenders to see, and use for your future credit applications. These payment histories and overall management of the accounts are then graded, which 45
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You Thej our ney t oyour cr edi tscor e
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become your credit score. Good relationships give good scores, and bad relationships give bad scores. One of the biggest credit score creators used by the bureaus is FICO, which stands for Fair Isaac Corporation. Factors that affect your credit score FICO uses five factors that affect your credit score: 1. Payment history – Making on-time payment (35%) 2. Credit utilization - Amount owed (30%) 3. Length of credit history - How long account is opened (15%) 4. Types of credit used – The mix of accounts (10%) 5. New credit - Recently opened accounts and inquiries (10%) {Your FICO scores range from 300 to 850. This means that you can move your score by 500 points in either direction. Your commitment should be to always move towards 850!} Getting Credit and Improving the one you have Without a credit history, lenders have no idea whether they can trust you to repay them. Almost all financial activities require some level of credit or credit history. If you want to purchase a home, your credit must be ranking at least in the “good” category or else you will pay severely for it. If you have never done anything with your credit, the first thing you want to do is establish a credit record, and be responsible with it. Here is one option to establish or improve your credit: Contact your bank and let them know that you want to build your credit, using one of their “secured” credit cards. If they don’t offer
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“secured” credit cards then you can find one of the reputable credit card companies online with these offers. You will need to put a deposit down which will be used to “secure” your trust and commitment to repay the money you use. This amount can be as little as $100.00. This money will not be available to you for up to a year. The card company will give you a credit limit equaling the $100.00 less any fees. So if the fee is $20.00, your limit will be $80.00. This is the amount that you will have to buy goods and services on credit. How to use your new credit card Use your card to manage your credit wisely and carefully. With your available credit of $80.00 here is how you build your credit: 1. Set up an automatic payment from your checking account to your credit card account on a date that is 2 days before your due date. This will ensure that you never ever miss a payment. Remember that 35% of your credit score depends on paying on time. 2. Spend no more than 30 percent or $60.00 each month 3. Pay back the entire amount spent, using your automatic payment. Remember that 30 percent of your credit score depends on how much you owe. 4. Use one of the reputable online services to get access to your credit record. This will allow you to monitor and ensure that your transactions are being correctly posted. You should start to see movements in your score within three to six months. 5. Within one year the card company usually removes the “security” from the deposit, and grant you an increased 48
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spending limit with an “unsecured” status. This will have a positive effect on your credit history and your credit score. 6. Spend no more than 30 percent of the new limit and increase your automatic payment to the new amount. As your credit is being built, more credit card companies will start sending you “pre-approved” and “pre-qualified” letters with applications. Some will have “introductory” rates, and others will have “no fees for one year.” Remember that 35 percent of your score depends on a combination of how long you open the accounts (15%), the mix of accounts (10%) and new credit (10%). New cards will help you with points in this area. Be very careful which ones you accept though. Read all the fine prints and make sure that you are not sucked into something that will make you spend more money or have negative effects on your credit.
{You do not need more than three credit cards, and you certainly do not need to be spending more than 30% of the available credit, which you need to pay back every month.} Follow the above procedure until you achieve your credit goals. Fixing your credit Buying a home with bad credit is not impossible. It’s just not advisable because of how much more it will cost you. If you have any intention to buy a home, and you have bad credit the only thing you should do is fix it. Fixing your credit is not hard. It may take some time but millions of people have done it before and so can you.
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How long items stay on your credit history ITEMS
YEARS ON REPORT
Hard Inquiries Late payments Charged off accounts Collections Civil judgements Chapter 7 bankruptcy Chapter 13 bankruptcy Open, positive accounts Closed, positive accounts
2 years 7 years 7 years 7 years 7 years 10 years 7 years Forever 10 years
If you pay your bills on time, owe below 30 percent of your credit limit, and you have no more than 3 cards over time, then you should have an excellent credit record and score. You will only need to check and worry about what is on your report for fraud purposes. Generally, most items stay on your credit report for seven years. The list above will give you a better understanding of the most popular items that get reported. Your first order of business to fix your credit, is ordering copies of your credit report from the three bureaus. By law (FACTA), you are entitled to a free credit report each year from www.annualcreditreport.com or when you call 1-877-322-8228 Fixing your credit means cleaning your report of items that do not belong there. These errors can be there for several reasons. Here are some of the most common errors: ● Incorrect personal information. These include your name, social security number, birth date, and address. ● Incorrect accounts. Check to make sure the only accounts on your file are the ones that belong there. 50
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● Incorrect balances. ● Duplicate accounts. This happens when charged-off accounts are sold to other companies and they all report the same amount. ● Late payments listed that you know were paid on time ● Wrong account ownership. You are showing as the owner when you are only authorized ● Aged items. Items that are supposed to fall off are still hanging around. If you find errors on your report, file a dispute with the credit report agency. You can file your dispute by phone, mail or online. The best way to do so however, is via mail. This method is longer but gives you the best options, especially for record-keeping. Additionally, when you dispute online, the bureaus want you to register and you become a target for their other services via your email. Use the following information to file your dispute for each bureau: TransUnion
Equifax
TransUnion Consumer Solutions P.O. Box 2000 Chester, PA 19016-2000 800-918-8800 www.transunion.com/credit-disputes/dispute-yourcredit Equifax Information Services LLC P.O. Box 740256 Atlanta, GA 30374-0256 866-349-5191 www.equifax.com/personal/disputes 51
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Experian P.O. Box 4500 Allen, TX 75013 888-397-3742 (or use phone number listed on your credit report) www.experian.com/disputes
What to include in your dispute: ● Your full name (include generation such as SR, JR, II, III etc.) ● Current address ● Social Security number ● Date of birth ● Account number ● File number ● Name of company that reported the item (as listed on report) ● Reason for your dispute ● Supporting documents for the dispute ● Addresses you have lived in the past 2 years ● Copy of government issued ID ● Copy of utility bill, bank or insurance statement
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What to expect when you file a dispute When you file a dispute the credit reporting agency has 30 days to investigate, act, and respond to you, by law. If you send additional proof during the 30 days, their response time goes up to 45 days. After investigation, the bureau will send you a response stating that the disputed information is corrected or verified as true. They will also send you a copy of your report with the updated information. {Do not expect correct negative information to be removed when you file a dispute, even though this can happen if the bureaus fail to act within the stipulated time frame.} Will a dispute change your credit score? It depends. Changing your personal information will not change your credit score. Only information that affects your accounts will produce such changes. Examples include: ● Accounts that was paid off but still showing balances ● Accounts reported as yours but they are not ● Accounts reported as late when you have proof saying otherwise ● Negative items that have passed the regulatory period (chapter 7 bankruptcy of more than 7 years.)
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Here are some examples of how to word your letters: Sample 1 After reviewing a copy of my credit report I found an error with account in name of (name of company) with account number (account number). The account is listed as 30 days late. I have never been late on this account and have included proof as verification. Please remove this inaccurate information. Thanks (Your signature) (Your name) Sample 2 After reviewing a copy of my credit report I found that the following are older than seven years: ABC account, account XXXXX DEFG Insurance, account XXXXXX Please remove these accounts from my credit report. Thanks (Your signature) (Your name)
Sample 3 After reviewing a copy of my credit report I found the account in name of (account name) and account number XXX-12345 is not my account. Please remove this account from my credit report.
Thanks (Your signature) (Your name) 54
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Sample 4 After reviewing a copy of my credit report I found an error with account in name of (name of company) and account number (account number). The account is listed with a balance of (put amount here). The correct balance is (list amount. I have included proof as verification. Please remove this inaccurate information.
Thanks (Your signature) (Your name)
Important considerations about your credit score ◙ “Checking your own scores will never impact your scores.” (FICO) ◙ “Don't close unused credit cards in an attempt to raise your scores” (FICO) ◙ Having multiple inquiries on your credit for the same type of application will not have a significant impact on your score ◙ Closing out old credit cards does not improve your score. The length of your credit history can have positive effects however.
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Capacity to Repay Now that your credit improvement is on its way, let us turn to your Capacity to repay. Lenders want to ensure that you (and your co-borrower) are working, and you have a stable, dependable source of income. Here is the important information that they will need to see: Employment Details about your current and previous employment over the last two years. This includes the type of work, type of business and contact information. If you are self-employed, you must own at least 25% of the business. Monthly income & Expenses Be prepared to provide all information regarding your income. Gather proof of all your earnings, including gross income, overtime, bonuses, commissions, dividends, income from rental properties and all other sources. A good proof of your income is your W-2 for the last two years, and your most recent pay stub covering 30 days. If you are self-employed then have your personal and business tax returns for the last two years. It would also be a good idea to have your business’s financial statements ready as well. To show your monthly expenses, have figures that represent your rent or current mortgage, insurance, real estate taxes, and other expenses. A warning about your reported income and taxes One of the difficulties that new home buyers face, is proving that they earn enough to qualify for a loan. Prior to making the decision to invest in a house, some taxpayers who have income that is not reported on a W2, try to report the least amount of income. This reduces their tax liability and increases their refund. Unfortunately, this equation does not help your cause when purchasing a home. 56
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Your income plays a very important role in helping lenders decide how much you can borrow or home much you can afford to pay monthly for a home. You must report your income truthfully, so that it can count in your favor for lenders. Assets and Liabilities Have a list of all your assets and liabilities. Your assets are those items of value that you own. These include cash in the bank, investments, real estate, retirement funds, trust funds, cars, and other personal property. This will be placed against your liabilities such as loans, credit card balances, mortgages, student loans, child support, alimony, and anything else that you owe, financially. Important Declarations When applying for a mortgage, lenders will seek to find out the following: ● Outstanding judgments such as bankruptcies, foreclosures, and lawsuits ● Defaults or delinquencies on any federal loans ● Child support and alimony ● Money borrowed for down-payment ● Whether you are a co-signer on other debts ● Your residential status ● Ownership in other properties ● How you will be using the property Have this information ready, and speak truthfully. 57
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Cash Assets Thirdly, after looking at your credit and capacity to repay, a lender will want to ensure that you have enough cash assets to cover closing costs and other related expenses such as moving. Not only will you have to show the funds, but you also need to show the source as well. Funds can be borrowed to take care of your down-payment and closing obligations. Most lenders will only allow secured loans from an IRA or your 401K. Any unsecured loans taken will be considered in the calculation of your debt-to-income ratio. You can also use funds given to you as a gift. Any such gift must be accompanied by a “gift letter’ signed by your donor. The letter must state that the money is a gift, and repayment is not expected. Gifts can be given by: ◊ An unmarried partner ◊ Religious nonprofit ◊ Friends ◊ Relatives ◊ Your employer or labor union ◊ Charitable organizations ◊ A government agency or public entity that provides such assistance Lenders will also want to see verification from the donor. This will be a check, deposit receipt and bank statement that shows the donated funds. 58
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Reserve Funds Sometimes lenders ask to see at least 2 months’ worth of Mortgage payments covering principal, interest, taxes, insurance, and condominium fees (if applicable). This amount represents your reserve. Verification of Deposits To verify your assets, lenders will need to see the two most recent months of your bank statements and a completed Verification Of Deposit (VOD) form. This form will confirm: ● The information on the loan application ● The availability of money to pay costs associated with the purchase ● How long since your bank account was opened ● If the bank balance is much higher than the average balance Funds in the account should be there for at least two months Insurance Three types of insurance policies are important when you purchase your home. Flood Flood insurance is required when a property is located in zone A or V in a federally-designated special flood hazard area (SFHA). Hazard Hazard insurance covers your home for loss or damage from fire, tornado, hurricane, snow, hail or other disasters. You will be required to pay 12 months’ worth of insurance. This amount is not included in your closing costs and is paid to the insurance company. 59
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Each year when the premium is due, the lender will pay the insurance from the escrow account. If you do not maintain your insurance coverage the lender has the right to use forced-placed insurance to protect their interest. Private Mortgage Insurance PMI is provided by private insurance companies to protect a lender’s interest in case you default on your loan. If you get a loan that covers more than 80% of the purchase price, you are obligated to get PMI. Coverage normally goes away when your equity in the property reaches 20 percent.
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Step 3 – Build your “success” team Your success team should be made up of experienced members who have proven track records in their fields, who are highly recommended, and possess the vigor and drive to help you win the prize of owning your home. Who should be on your team Mortgage broker/ officer This is the first person you want on the team. Their most important job is to get you the best funding deal. Their function involves accepting your application, getting you pre-approved, providing funding options and related information. They will answer your financial questions and help you navigate any financial hurdles that pop up. They may also be a good source for your next team member – your realtor. A good mortgage broker is someone who always makes your interest their own. They act as if they are the ones getting the loan, and do everything as they would for themselves. Here are some other qualities to look for in a mortgage broker: Certified
Each mortgage broker/loan officer must attain certification from the Nationwide Multi-state Licensing System (NMLS). This tells you that they have studied and understood the regulations and preferred practices of the industry. This ensures that you are getting the right guidance, you are within the laws and you won’t be misguided or worse, scammed. Each broker has a unique NMLS number, which must be available for your viewing, and should be placed on all promotional material, including business 61
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cards and websites. If you don’t see it, ask for it. Confidence
A confident mortgage broker does not use words such as: “I will see,” “Maybe,” “probably,” “Chances are.” They instead use words like: “I will,” “I know that…,” “Certainly,” “I’m absolutely sure,” “I’m positive that…,” I have no doubt that…,” and “You will.” This level of confidence comes from their knowledge of the business they are in, and the experiences they have had. This confidence will tell you that they know their business and that you are in good hands.
Experienced
An experienced broker has seen many scenarios from working with different types of cases over their lifetime in the business. This experience will allow them to deal with your unique situation confidently, if you have one.
Knowledgeable
Knowledge does not only come from what your broker learnt about rules, regulations, and solutions in books. Your broker should be knowledgeable about the industry, including both historical and expectations. As a result, they can apply the best solutions to your case and get you the best deal ever.
Transparent
A good broker will not hide important information from you. They lay everything on the table so you can understand how they arrive at your solution. They don’t wait for 62
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you to dig out information from their clutches. They willingly volunteer it. Trustworthy
A mortgage broker’s confidence, experience, knowledge, and transparency will allow you to trust them more. This trust also gives you the confidence that you will be getting the best advice, guidance, and solution.
Honest
One of the reasons why the mortgage industry is so heavily regulated now, is because of how unscrupulous some mortgage brokers were, prior to the 2008 real estate meltdown. An honest broker won’t try to overcharge or mislead you. Not only because it is against the law but because of their integrity.
Has testimonials
You don’t want a rookie broker to be handling your $300,000.00 investment, unless there is a solid team or experienced partner is in full support. You judge your broker on the number of persons they have helped before you. Don’t be afraid to ask for referrals and testimonials.
Realtor (especially for your 1st home) Your realtor is the person who will find your home in the neighborhood you want, and at the price you want. They will submit your offer price and negotiate with the seller to get you the best deal. They will travel around your neighborhood searching, inspecting and recommending. And of course, they will provide you with important information about the properties you see. 63
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In addition to the qualities that you look for in a mortgage broker, your realtor must also be certified, have a very good knowledge of the industry, patience to ensure that you get the home of your choice, have a thorough understanding of the local real estate market, and the skill to negotiate. Here are some questions to ask your realtor before putting him/her on your team: 1. What is your experience with residential real estate? 2. How many buyers did you work with last year? 3. What type of qualifications, certifications or designations do you have? 4. Do you normally work with buyers and sellers in a transaction? 5. What is your average difference between your initial offers and your final selling price? 6. Why should I include you on my team? Real estate attorney (optional) In some states it is mandatory to have a real estate attorney present at the closing. These include: Alabama, Connecticut, Delaware, District of Columbia, Florida, Georgia, Kansas, Kentucky, Maine, Maryland, Massachusetts, Mississippi, New Hampshire, New Jersey, New York, North Dakota, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and West Virginia. These attorneys only represent the lender though. You will need to hire an attorney for yourself if you think you need one. Home inspector This person inspects the structure and mechanical systems of the 64
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house to make sure they are all in good working order. This helps you avoid costly repairs in the future. Insect inspector Termites can destroy the wood portion of your home and cost you substantially. It is important to have your new home inspected for termite as soon as you can, and certainly before you close. The same person will also check for other bugs and insects Contractor/Handyman Home-buyers hardly ever include these members on their team until the fix is needed. Big mistake! With the system that you have now to check your home, it is very important to have a good contractor or great handyman ready to work if necessary. After you identify the things that need fixing, you will want to send the list to your “fixer” as soon as possible, so that you can include their estimate in the cost of the house. This will exclude anything the seller agreed to take care of. Where to find team members Your best source for finding good quality team members is your list of family, friends, and co-workers who have had experience with their work. You may also find team members online through Facebook, searching Google in your city, and websites of representative organizations. Ask your friends, families, and co-workers about attitudes, efficiency, knowledge, friendliness, promptness, and results. Check out social media profiles and Google reviews to get additional proof of how well each team member has performed.
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Use the following form to record important information about your team members. See section 4 for more information about download
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Step 4 - Get Pre-approved If everything is good up to this point, speak to your mortgage officer about getting you pre-approved. Getting a pre-approval is important for the following reasons: 1. You’ll know how much money you can get 2. You’ll know how much you can spend on your new home 3. Your realtor will take you more seriously. No one wants to drive around looking at houses, then find out you can’t afford them. 4. Sellers will take you more seriously because they know you have the money and you are ready to buy. They can anticipate getting their check faster. 5. You will have a competitive edge in the marketplace. Sellers will keep you on their list of buyers. Now while pre-approval gets one foot in the door, be mindful that you can still be turned down for a loan later. This can happen if your financial situation changes or new information is available to the lender which did not come up during the pre-approval process. It is very important that you get “Fort Knox security” to protect your current financial status. Don’t do anything stupid like buying a car, running up debts or spending your deposit, etc. Be very open and honest in the pre-approval application process. If there is something that previously existed that does not show up on your credit report such as a past foreclosure, be sure to mention it to your mortgage loan officer.
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The Approval process Getting pre-approved means that your lender has made a commitment to provide you with a loan, based on your current financial status, credit, income and employment. Items used for pre-approval includes: ● Copies of Driver’s Licenses ● Copies of Social Security Cards ● Place of residence ● Mortgage Statement (if you have a current mortgage) ● Most Recent Bank Statements ● Pay Stubs ● Retirement/Investment Account Statements ● Tax Returns (1040) ● W-2 Forms for the Past Two Years (or 1099) ● Profit and Loss Statements (if you own a business) It is highly recommended to get approval from at least 3 lenders. To minimize the impact on your credit, get these approval within thirty days. In order to make a worthwhile comparison among lenders it is advisable to get Loan Estimates. This is the estimates of the terms and cost of your loan. Getting a loan estimates requires an application. This application is made when you provide your lender with six pieces of information. These include: 1. Your name 2. Your social security number 3. Your income 4. The address of the property (or one similar) you wish to buy 5. Value of the property 6. Amount you wish to borrow
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Once this is done the lender is required to sent you a Loan Estimate within three business days. Compare each loan estimate to make sure you get the best deal.
Source: consumerfinance.gov 69
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Step 5- Search for your home So you have been pre-approved. Congratulations! Now comes the other sweet part of the buying process. It’s time to look for your new home! Remember that wish list you created earlier? Now is when you’ll put it to its second use. Set up a meeting with your realtor and give him/her a completed copy of the wish list. This is what will be used to find your house or the closest match to it. You would be lucky if you get everything you want, so be prepared to compromise. Let your realtor know what is important to you, and discuss what you can do without. Ask your realtor to include your realtor checkpoints (included on your Home-buyers Assessment Form), with every listing that is recommended. Use your wisdom to make the best choice. You may live in this house until you die, so your decision now will stay with you for a very long time. Make one that will give you happiness and peace of mind for as long as you live in it. Pre-walk through As your realtor begins to search for your new house, you will start to get several listings in your email. Review them carefully and check to make sure they match what your Home-buyer's Wish List has. Go back through the crime report websites you use earlier and check for safety and livability status. Type the name of the neighborhood into Google to see if there are any significant news stories, such as flooding, infestation, water problems. You may also find news about future development that may make you happy or disappointed. Check online to see if there are any weird town ordinances that will cramp your living lifestyle.
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Look through all the pictures from the listings you get, and note anything unusual or unique. You will need to check these when you get there. Some properties may have unbelievable photos, and some will look like they were taken by grandma. Don’t be fooled either way. Important considerations for your walk-through ● Plan your initial walk-through to maximize both you and your realtor’s time. ● Set appointments with sellers so that you have enough time to drive to each. ● Before leaving your home make sure your cell phone is working and has a full battery. Take your charger with you. ● Have measurements of your important furniture pieces such as bedroom sets, sofas, and other large pieces. ● Plan to visit the homes you have rated at the top of your list more than once ● Plan to take photos and videos, but ask before you do so ● Take a notepad, pens, measuring tape, drinking water, and your Home-buyer's Walk-through Assessment Form Initial walk-through Ready to go? Let’s begin. Your walk-through should be thorough. Think about the size of the check you will place in the hands of the seller. What is it? Two, three, four hundred thousand dollars? Is it worth making sure that you know what you are paying for, and that you will love it? Absolutely! ● Start your assessment even before you get to the house. Notice the neighborhood, including the people, homes and
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landscape. Think how you will feel each evening as you drive or walk home. ● Depending on the type of house, look from the driveway going in. Are there sinks or major cracks in the driveway? Is the driveway big enough for your cars? ● Are there pools of water on the lawn? Is the area prone to flooding? Look at the sides of walls to see signs of watermark ● Look at the roof if you can or as much as you can. Are tiles missing? Any sign of damage? Fascia boards still looking tough or are they rotting? ● As you open the front door, feel how easy or hard it is to open and close. Look for places where air spaces could affect your electric bill. ● As you enter, note any unusual scents. Use your nose throughout the tour. Unique scents could be signs of mold, pests or worse. ● Look at ceilings to see if repairs have been done or changes in color. This could mean damages from water. ● Look at the flooring for breakages, sinks, separating wood, and warps. Are some areas noisier than others? ● Start to mentally place your furniture. Measure to make sure they will fit. ● Check all appliances and utilities to make sure they work. ● Plug in your phone in every outlet and test that they work ● Check to see if you can get phone service in every room ● How does it feel to walk up and down the stairs? Will you be able to do that as you get older? ● Turn on all lights
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● Open and close all doors (including closets), and windows. Are any falling off? Do they have proper insulation? ● Open and close every window and door treatments ( blinds) ● Open and close the garage doors. Make sure your car can fit comfortably. ● Flush every toilet and look into the tanks for worn out parts and carbonate build-up. ● Check the kitchen cabinets for functionality. Make sure lazy suzan, spice trays, and garbage pull-outs all work. Look for broken hinges and out-of-balance doors. Look under sinks for water damage or water dropping. Check garbage disposal (sink erator). Ensure that the faucets have no leaks and are not too stiff or loose. ● In the bathroom, turn on the water in the shower and let it run for 15 to 20 minutes. See if you get a good mix of cold and hot water. Is the water pressure acceptable? Check to make sure the tub can hold water and that it also drains freely. Is the extraction fan functioning? Knock the tiles to make sure they are not falling apart. Use the Home-buyer's Walk-through Assessment Form to help you decide which house to make your home. See the resources section at the back of this book for download information.
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Step 6 - Choose your home As was stated before, this may be the biggest purchase of your entire life. Make sure that your choice is the right one. You should be excited about spending the rest of your life in this house, but don’t let that be the most important reason to pick your new home. Now is the time to separate your emotions from your logical thoughts. Use common sense to help you decide. Be practical and work within the boundaries of your finances. Your realtor and mortgage broker are good sources for help. To make your choice, gather your Home-buyer's Wish list and compare it with your Home-buyer's Walk-through Assessment Form. The house with the highest number of checkmarks ( ) indicates the one you are most satisfied with. If you have too many ( ) and or (�) then this may not be the house for you. Be very detail and deliberate in your choice. It will be worth it in the end.
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Step 7 - Make the offer Now that you have made a choice, it is now time to make an offer to the seller. This is the point where great negotiating skills are required to get the best deal. Now is the time to really use the “intelligence” you gathered from your Buyers walk-through assessment form. The process ● You make an offer in writing ● The seller accepts, rejects or counter with a different offer ● You can accept or make another counter offer. ● This negotiation continues until there is acceptance or someone decides to end the negotiation and walk away. ● If there is acceptance, an agreement is signed outlining the terms and conditions, including the closing date. Remember to rely on your team members’ expertise to help you in this section. Your realtor has been through this process countless times. They should know what to say and what to do. Let them earn every penny of their commission. The most important factors to consider when making an offer are: 1. Price - Buy a house that you can afford. Paying more than your income can support is a recipe for disaster down the road. Stick to your wish list price, if that is what you can afford. The last thing you want is a foreclosed notice in your mail. Make sure you consider everything. Look at the Buyers walkthrough assessment form for areas that can buy you leverage. Find the things that need fixing and estimate (from your contractor/handyman) how much you will need to layout to make them good again. Consider the seller’s situation. Is he desperate to sell, forced to sell or not in a hurry? 76
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2. Comparable market value - This is an average of what others pay for houses similar to yours in the area. You certainly don’t want to pay more than others for a similar home. 3. Deposit - Make sure you have your earnest money ready and waiting to seal the offer. This is usually 1-3 percent of the agreed price. Earnest money shows the seller that you are very serious about getting the house. If the market is competitive, you may want to offer a “more than reasonable” deposit. This may make you more competitive. Ensure that the money is placed in an escrow account, and that you are very aware of the contingencies that must be satisfied to get a refund. 4. Items included in the sale - Knowing what is included could also affect your offer. Not having to buy new appliances could save you a few thousand dollars, if the ones you have are old or you don’t have any. 5. Contingencies - In your excitement, you may not even be thinking that you could lose the home you selected. Between the acceptance of your offer and your due diligence, so many things can go wrong, some of which could cause you to run. If you do, your earnest money could run away too, unless you have contingencies in the agreement to protect it. Your realtor and or attorney will guide you on what to include. The main contingencies include Financing, inspection, and appraisal. 6. Sweeteners - These are things that may benefit the seller. This could be, allowing them to rent the house and stay longer if they have not closed on a house or conducting repairs. 7. Personal letter - In recent years it has become common for buyers to appeal to the emotions of sellers as a way to becoming the “chosen one.” These letters will let the seller know why you should be the owner, why you love the house, how you 77
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will treasure it, and how you appreciate the way they have cared for it. Even if you consider yourself an expert on this, consult with your team of mortgage broker, realtor, and attorney (if hired) to guide your decisions and actions at this stage. Once an agreement is signed, your lender will most likely order an appraisal. The lender wants to ensure that you are not paying more than you should for the house, and you don’t want that either. The cost of the appraisal will be passed on to you at closing.
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Step 8 – Bring in the inspectors If your offer is accepted, your next step is to get the home inspected. A good home inspection report from a qualified professional, will tell you all that needs to be fixed structurally, and what should be done to keep you healthy. It will also highlight issues with the home’s heating, air-condition and electrical systems. The last thing you want is to be saddled with a huge repair bill after moving in, because you were unaware of the issues. Pest inspection Apart from termites and other pests, inspect the house for radon, lead, asbestos, polybutylene (blue pipe), and mold. According to www.townhustle.com, termites cause damage to 600,000 homes per year, costing 5 to 6 billion dollars in treatment and repairs. The average treatment cost per home runs between $3,000 and $6,000. Radon is the second leading cause of lung cancer in the USA, according to the Center For Disease Control (CDC). If you live in a house where this radioactive gas is located, you will have an increased risk of getting the disease. While you can buy a kit to test your home, it may be better to have it tested by a professional before you move in. As stated by the EPA, “Lead can affect almost every organ and system in your body. Children six years old and younger are most susceptible to the effects of lead.” Even low levels of lead can be dangerous. Be particularly careful if you are pregnant, as lead can be passed on to the fetus. If the home was built before 1978, there is a good chance that lead was in the paint. There is even a federally mandated disclosure 79
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when selling a home, which is included in a law known as the Residential Lead-Based Paint Hazard Reduction Act of 1992 or Title X. Some of the essential parts of the disclosure are: ● Disclosure of all known lead-based paint and hazards in the home ● Seller must give you a ten-day opportunity to test the house for lead. ● Real Estate agents must give you a pamphlet from the U.S. Environmental Protection Agency (EPA) called Protect Your Family from Lead in Your Home. Older homes may also have asbestos which was used in building materials before 1980. This is a dangerous and toxic material that can cause mesothelioma and lung cancer. According to www.redfin.com asbestos is often found in: ● Vermiculite insulation ● 9”x9” floor tiles ● Acoustic ceiling tiles ● White tape on heating ducts ● Insulation on boiler pipes and boilers ● Old asbestos cement siding ● Popcorn ceiling texture ● Glues used under flooring Polybutylene is a type of plastic that was used in homes built between 1978 and 1995. The material was considered a “God sent” because of its cheapness and “quality.” Unfortunately, the pipes used by plumbing professionals with this material did not live up to expectations, as a 1 billion dollar lawsuit (cox vs Shell Oil) proved in 1995. A large number of homes started having leaking problems because of ruptures in the pipes, which led to millions of dollars in repairs. In 1995 US building codes stop accepting pipes made with polybutylene. Some lenders have even stopped lending for homes with this type of piping. Save yourself 80
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any future expense, and make sure your home plumbing does not have polybutylene-made pipes.
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Step 9 – Get the appraisal Whether you are using your own cash or getting a mortgage, it is strongly recommended that you get an appraisal of the home you are purchasing. The lender wants to ensure that you are not paying more than you should for the house, and you don’t want that either. In fact, lenders will only lend money to you based on the appraised value. They will order the appraisal on your behalf, and then add it to your cost. A licensed, professional appraiser will use his skills and resources to determine a fair price for the home you have falling in love with. They will consider the home’s : ● Location ● Structural construction ● Comparable Market Value ● Size ● Rooms ● Age ● Condition
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Step 10 – Pre-close Walk-through and Assessment Before you hand over your check to the seller, you want to make sure that all the promised repairs are done, based on the agreement that both of you signed. This is where the pre-close walk-through comes in. If you are tempted to bypass it PLEASE DON’T DO IT. The pre-close walk-through is even more important if the initial walk-through was done while the seller still occupied the property. Once you close on the property, all its happy and horrible features are yours. Now is the time to see the exposed walls, floors and areas that were hidden with fixtures and furniture. This is why your pre-close walk-through should be done about a week before closing, or as soon as the seller leaves. This will allow time for any new or missed repairs. Grab a note pad, your agreement, and the inspection summary. Make sure your phone is fully charged and is functional. Ask your seller for copies of receipts to show repairs. Your pre-close walk-through should ensure that: ● The home is in the condition that you agreed to ● There is no damage to the home from the move out by the seller ● The utilities are not shut off before being transferred into your name ● There are no pest issues ● Lawn-care was done up until closing (if it was needed) ● Items that were included in the deal are left behind ● No unwanted items are left behind ● The home is clean ● Warranty and instruction booklets for appliances are left behind 83
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● All remotes, gadgets, and keys are available ● Heating, ventilation and Air-Conditioning systems are working ● Appliances are working ● All negotiated repairs are done Twenty-four hours before you sign on the dotted line, you need to do this final walk-through. This is your last opportunity to see the home before you move in. This walk-through should not be as long as the previous two, since most of the fixing should have been done from the pre-close walk-through assessment. It is used to identify any unexpected issues that could affect the closing. If all the issues cannot be fixed by the closing date then your team may have to negotiate an extension to the closing deadline. This will give more time to get everything right. Of course, you could also take the home as it is and do the fixing yourself. Doing the walk-through Use the home inspection report and Home-buyer's Walk-through Assessment Form
1. Look at both documents for any items or areas that required attention. 2. Check the agreement to see what the seller agreed to fix. Use repair receipts for items that are not visible 3. Go through and make sure everything is fixed.
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Step 11 - Close the deal Up to this point, you have spent time, which could be from a few months to a few years, doing everything to get your dream home, first home or another home. You got your financial house in order, built your success team, and got approval for a loan. You searched and found a home that fits your budget, and that you have fallen in love with. Your offer was accepted, the house passed the inspection and the final walk-through met your expectations. Congratulations, you have arrived at one of the most critical points on your journey. You are about to hand a hefty check to the seller and take the keys to your new home. This is when you become the legal owner, based on the mortgage terms! This is the final step! Three Days before At least three days before you go to closing, your lender must send you your Closing Disclosure (see resources section). This is the document with your final loan terms and closing costs. Pay careful attention here because this is where the money matters . You need to grab your Loan Estimate and go through each line to make sure the terms are what you agreed to, and that the figures are correct. Any deviation from what you should have, needs to be discussed immediately with your mortgage broker or lender. Use your Loan Estimate & Closing Disclosure Comparison Report to record differences.
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Here are the items that are comparable on both forms: Page 1 1. Contact information 2. Loan information 3. Loan terms 4. Projected payments 5. Costs at closing Page 2 1. Loan costs 2. Other costs Pay particular attention to the “Calculating cash to close” section on page 3. Here the lender will show some of the important changes from the Loan Estimate.
As stated previously, use the expertise, knowledge, and experience of your team to ensure that everything is done right. The closing is not only important for you, it is also very important for them. They have a huge motivation to make sure everything ends well. Many things can go wrong before and during the closing moments. The last thing you want is to fall in love with a house and lose it 86
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because of foolish behaviors. So be prepared! Make sure all contingencies are taken care of. These include inspections, financing, appraisals, and repairs. {Preserve your credit and financial status, especially before closing. Do not take out any new loans or extended credit facilities.} What happens at the closing? 1. You sign a bunch of documents 2. You hand over a check for the home and closing costs 3. You get the title and keys to the home How much does closing usually cost? Usually about 3 to 5 percent of your loan Important documents at the closing: Your lender would have sent your closing disclosure at least three business days before the closing date. Compare this document with the loan estimate you received when you first contacted your loan officer before going to the closing meeting. You will also get your initial escrow statement which tells you the money the lender will pay out on your behalf during the first year. Expect to see insurance and tax charges here. Your mortgage note is the promise you are making to repay your loan. The mortgage deed or deed of trust is what the lender uses to secure a claim to your home if you fail to live up to the terms. And if you are buying a new home then the certificate of occupancy is your legal authority to move in.
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What should you take to the closing? ►Certified or cashier’s check to cover closing costs ►Government photo ID that will match the name on the title ►All outstanding documents for your lender or title company including homeowner’s insurance ►All documents that you received during the process including agreement with the seller, home inspection reports ►Your walk-through assessment forms ►Your personal checkbook just in case there is a last-minute cost to cover ►Your reading glasses to see through the pages and pages of documents ►A fully charged cell phones with a working camera ►Working black-ink pens
Extra tips ♦ If you just got married, make sure your ID was changed ♦ For heaven’s sake have this important and momentous occasion recorded. Take still photos and get a video if possible. Years to come you will treasure this moment even more.
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Who will be there? You, real estate agents, seller’s representative, closing agent/title company representative, attorney (depending on which state you live) After the closing You have earned it, go find a way to celebrate! Just make sure you collect all your paperwork. Hug and thank your team. Let them know how valuable they were in winning the prize. Here are some other important things to do: ● Get the moving truck moving. Call you movers, if you hired a moving company and let them know that it is time to start the engine. ● Make copies of and securely put away your documents. If you have a fireproof safe, use it. If not then safety deposit boxes at banks are cheap enough now. Make sure you let someone knows where they are, just in case. ● Change your driver’s license to reflect your new address ● Change your address with companies you do business with ● Change every lock to doors that lead to the outside. If your locks use keypads, change the codes. ● File for homestead exception where applicable to save money on property taxes ● Start your home maintenance plan, especially if you live in an area where the seasons are visibly different. ● Check to make sure your insurance is still valid, and how your new address will affect the rates. You don’t want to need your insurance and find out you don’t have coverage. ● Meet your neighbors. They may have some important tips for you. You never know when their help will be necessary. 89
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● Locate the main shutoff for your water, just in case you need it in an emergency Things that may happen after you close ● Your loan servicing may be sold. This is just part of what happens in the real estate industry. Don’t panic. This will not affect your terms, and you will be sent notices by both the old and new holder of your mortgage. ● Look out for scammers wanting to take advantage of you. Make sure you get letters from both the buyer and seller of your loan, if your loan is sold. Verify before sending payments to new addresses. ● If you negotiated a loan with future adjusted payments, be ready for it. ● Expect to receive lots of offers from companies. This happens because your home purchase is a matter of public record.
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Step 12- Moving in You now have the keys to your own home and the emotions are still flying high. You look back at the journey and cannot contain the smiles. You can’t believe the journey is almost complete. Just one more thing to do and it’s done, at least for now. Let’s move into your new home! Moving is no fun, and it does not matter if you hire professional movers or do it yourself. Professionals only make it easier with the lifting and transporting. Below are some fabulous resources that will help you with moving. You will find information about planning, organizing, hiring professionals, do-it-yourself moving, and lots of tricks and tips. Visit each website after selecting your home and start the planning process. CLICK THE FOLLOWING LINKS TO EXPLORE THE SITES 33 tips that will make your life easier 50 moving hacks of all time 21 moving tips and tricks 41 Easy moving and packing tips that will make your move dead simple
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Section 3 Important Key words To know 92
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Keywords To Know Adjustment Date This is the date your mortgage begins to grow interest, usually the first day of the month after your funds were disbursed from the lender. Adjustable Rate Mortgage Mortgage where the interest rate changes over the life of the loan. Your monthly payment will start low and then increases later. Amortization The process of combining principal and interest in one payment over the life of a loan. Appraisal Done by the lender to make sure the house is worth the amount you want to borrow. This cost will be included in your closing disclosure. Also done by the seller to see what the property is worth. Appraisal Contingency A clause in a contract that must allow an appraisal to be done before closing on a house. Assessed Value How much your home is worth, according to your city, county or state government. This is used to determine property taxes. Balloon Payment A large payment that is required usually at the end of the loan.
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Buyer’s Agent A realtor who represents the buyer in finding a house. Paid by the seller. Comparative Market Analysis (CMA) A comparison of home values in the area you are looking to buy. Used to ascertain the value of the house you are interested in. Contract Document with the terms of the sale that is signed by the buyer and the seller. Closing The process of completing the sale. All paperwork is signed and witnessed. Money is paid and keys handed over. Closing costs All the fees and expenses associated with buying and selling a home that are paid at closing. Closing Disclosure Form provided by the lender three business days before closing, that shows final details about your mortgage. Included are your loan amount, fees, closing costs, special features, and other important information. Contingencies Special clauses in a purchase contract that must be satisfied before closing takes place. If not done, the buyer can walk away without losing his or her deposit. The most common contingencies include: financing, appraisal & inspection.
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Debt-to-income ratio Used in conjunction with the housing expense ratio to determine how much house you can afford. It is your total housing expenses plus your total debts divided by your gross income, multiplied by 100. Lenders usually use 36% or less. Down Payment Amount of cash you put down on a property at closing. The more you put down, the less you will pay in monthly payments, loan costs, and the less debt you will acquire. Due diligence All the research and inspections that go into buying a house. Earnest money Deposit by the buyer on a house after the offer is accepted. It binds the contract and represents about 1-3 percent of the offer price. This money is held in an escrow account and is applied to down payment if the sale goes through. Money is returned to the buyer if contingencies are not met. Escrow Third-party designated to be the referee for the buyer and seller. They hold all documents and funds, ensure signatures are placed where necessary, and distribute proceeds of the sale at closing. Escrow Account An account that keeps funds on behalf of the buyer, to be distributed at closing. It also holds funds to be used monthly, to cover taxes and insurance. Equity Difference between what your property is worth and what you owe. 95
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FHA Mortgage A mortgage that is backed (insured) by the Federal Housing Administration. It allows lower down payment (at least 3.5%) and easier credit qualifying Fixed-Rate Mortgage Mortgage where the interest rate remains the same over the life of the loan. Your monthly payment remains the same until the end of the loan. Good Faith Estimate Form provided by the lender within three business days with basic information about a reverse mortgage loan, including costs, features and, terms. Housing Expense ratio Used in conjunction with the debt-to-income ratio by lenders, to determine how much house you can afford. It is your mortgage payment (Principal, interest, taxes, insurance & HOA fees) divide by your monthly gross income, multiplied by 100. Lenders usually use 28% Inspection (home) The process of assessing the structure, appliances, utilities and other important features of a house before closing. Inspection (pest) The process of inspecting a house for pests, such as termites. Interest Cost of money borrowed. Interest is added back to the principal to give total debt. 96
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Loan Estimate Form provided by the lender within three business days of applying for a loan. It shows information such as loan amount, interest rate, closing costs, loan application fees, taxes, insurance, and any special features. Mortgage Broker A licensed individual or entity authorized to accept loan and process applications on behalf of clients. Mortgage brokers usually have access to multiple lenders with different rates, terms, and qualification standards. Offer & Counter-offer A signed document outlining terms and price a buyer is prepared to pay for a house. A counter-offer happens when the seller rejects the offer and submit another. Origination Fee Fees charged by a lender to cover processing costs Points Points represents a percentage of your loan where 1 point means 1 percent. Discount points are fees that you pay at closing to get a lower interest rate. Lender credits are amounts given to you by the lender to take care of closing costs, in exchange for a higher interest rate. Pre-approval A status where the lender has decided to approve you for a certain amount for up to 90 days. It’s always better to have this status before you start looking at homes.
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Pre-payment Penalty An agreed amount you pay if your loan is paid of early. Pre-qualification A status where the lender provides an estimated amount you may be qualified for, based on initial access to your information, such as income and expenses. Private Mortgage Insurance (PMI) Insurance you pay to protect the lender from your mortgage default. Once you have 20% equity or 80% debt-to-value, the insurance usually ends. Principal Amount owed to lender excluding interest. Rate Lock Allows you to lock in an agreed interest rate for a specified period. Real Estate Agent A trained professional who is licensed to help the public buy and sell houses and properties. Seller’s Agent Realtor who represents the seller in a transaction. Title A document that shows the legal ownership of a house. Title Insurance Insurance that protects the owner and lender from title defects. These may include liens, back taxes, lawsuits, and third-party ownerships. 98
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Title search A process used to discover a property’s owner, history and attached obligations such as liens. Truth-in-lending Disclosure Provides information about your loan from your lender, if you are applying for a reverse mortgage, a HELOC, or a manufactured housing loan that is not secured by real estate. Information includes the loan amount, interest rates, fees, and any special features. Loan estimate and closing disclosure forms replace this form for most loans after October 3, 2015.
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Section 4 Resources
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Click the above to see your Home-buyers Wish list form. Use it to plan the type of home you wish to purchase.
Click the above to see your Success Team form. Use it to plan the type of home you wish to purchase.
Click the above to see your Home-buyers Walk-through form. Use it to check each home you select for areas that may need repair or replacement.
Page 2 of the Home-buyers Walk-through form. Use this section to record additional notes
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Click the above form to see your monthly budget worksheet. Use it to see where your money is going and areas that you can cut back to save for your home purchase.
Click the above form to see your Home-buying Action Plan (page 2). Use it to set your homebuying goals.
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Click the above form to see your Home-buying Action Plan (page 1). Use it to set your homebuying goals.
Click the above form to see what a Verification of Deposit looks like . Form created by Fanniemae and can be downloaded at https://www.fanniemae.com/content/guide_f orm/1006.pdf
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Click the above form to see what a closing Click the above form to see what a Loan disclosure looks like . Form created by CFPB Estimate looks like . Form created by CFPB and and can be downloaded at can be downloaded at https://www.consumerfinance.gov/ https://www.consumerfinance.gov/
Click the above form to see your Loan Estimate/Closing disclosure Comparison Report
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