Varep homebuyer guide by Son Nguyen

Dear Prospective Homebuyer: Our organization is a nonprofit financial literacy and housing counseling agency that is dedicated to helping you achieve sustainable homeownership. We offer the following services: Homebuyer Education and Counseling – The goal of these workshops is to provide homeowners with a strong foundation of knowledge before they begin the home purchase process. Prospective homeowners receive comprehensive information from experts about mortgage lending, credit and budgeting, real estate, home inspections, and available sources to help with down payment and closing costs. Each participant receives a packet of information, containing an application for one-on-one counseling offered by our housing Counselors. Pre-purchase Counseling – Assists with resolution of barriers to homeownership through oneon-one counseling. This includes a complete evaluation of their financial status and readiness for homeownership. Credit Counseling – Helps people gain control of their financial affairs and rebuild their credit. This service is for both potential homebuyers and for homeowners. Post-purchase Education & Counseling – Education give homeowners instruction to make better more informed decisions and to create sustainable homeownership opportunities. This workshop is offered in a classroom setting. Counseling involves one-on-one crisis intervention to assist homeowners who are in trouble to maintain homeownership. Home Improvement & Maintenance Counseling - Informs homeowners about sources for home improvement loans, minor home repairs, energy savings, recycling, fire prevention and other safety tips. Participants gather on Saturday mornings several times a year to share lunch and learn low-cost home repairs and energy tips presented by representatives from city agencies, utility companies, and energy experts. Participants usually receive energy saving light bulbs and/or recycling bins. We are looking forward to working with you and supporting you in realizing your homeownership reality. Regards, Veterans Association of Real Estate Professionals i

About VAREP Established in 2011, the USA Homeownership Foundation, Inc. DBA Veterans Association of Real Estate Professionals (VAREP), is a non-profit 501(c)(3) organization dedicated to increasing sustainable homeownership, financial-literacy education, and economic opportunity for the active-military and veteran communities. While our focus is on the active-military and veteran communities, our services are also offered to eligible low-to-moderate income (LMI) families. Our doors are open to all that want to realize the American Dream of homeownership. VAREP and its members represent and work within all sectors of the real estate, housing, and financial-services industries.

Legal Disclaimer This home buying guide is intended to provide general information regarding the process of buying a home. It is not intended to provide buyers with legal advice, and buyers should consider retaining an attorney and/or title insurance company of their choosing who can represent them in the matter from offer through closing. Additionally, this guide does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.

For more information about VAREP, please call 1-888-273-7267

Table of Contents Before You Begin ................................................................................................ 1 Step 1: Understanding Benefits and Barriers to Homeownership ....................... 2 Step 2: What Can I Afford? ................................................................................. 4 Step 3: Homebuyer Assistance Programs ......................................................... 10 Step 4: Finding an Affordable Property ............................................................ 12 Step 5: Homebuyer Counseling ......................................................................... 15 Step 6: Getting Pre-Approved for Home Purchase ............................................ 16 Step 7: Mortgage Financing .............................................................................. 18 Step 8: The Real Estate Agent ........................................................................... 21 Step 9: Making an Offer ................................................................................... 23 Step 10: The Home Inspection .......................................................................... 25 Step 11: Prior to Closing ................................................................................... 27 Step 12: The Closing Process ............................................................................ 29 Step 13: Post-Purchase Homeownership Responsibilities ................................. 31

BEFORE YOU BEGINâ&#x20AC;Ś Consider this question: Is owning a home right for you? - Buying a house is a big step with a rewarding outcome - a home to call your own. Deciding where to live is one of the biggest decisions you will ever make. It is important to make sure that you prepare yourself with the information you need to find the right home for you. The VAREP Homebuyer Education Guide: The Road to Homeownership a turn-by-turn roadmap to help you navigate your way to affordable homeownership. VAREP is here to help guide you to your destination and help you overcome detours that may stand in your path as you travel toward owning your first home. We understand that no two homebuyersâ&#x20AC;&#x2122; needs are the same, and we are here to provide you with the tools and resources necessary to make the homebuying process a successful one. We hope that this guide proves to be an invaluable resource on your journey toward homeownership.

Ready? Follow our step-by-step guide to begin your journey to owning your first home today!

ROAD TO HOMEOWNERSHIP – STEP 1 UNDERSTANDING BENEFITS AND BARRIERS TO HOMEOWNERSHIP Benefits of Homeownership Homeownership Builds Wealth over Time We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time. You Build Equity Every Month Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe. That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows! Mortgage Tax Deduction Benefits  Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.  Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.  Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

A Mortgage Is Like a Forced Savings Plan Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing. Long Term, Buying Is Cheaper than Renting In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more importantly, you are not throwing away all that money on rent. You’ve got to live someplace, so instead of paying off your landlord’s home or building, pay off your own!

Barriers to Purchasing a Home Poor Credit Rating A poor credit rating can be a huge barrier to buying a home. In order to qualify for a home loan, many lenders seek a Fair Issac Corporation (FICO) credit score between 600 and 700 or higher in potential home buyers. The higher your FICO score, which can go as high as 850, the better the interest rate you'll get from a mortgage lender. Build up your credit score by paying your bills on time and paying down your credit cards so your debt-to-income ratio improves. Insufficient Deposit Certain lenders require a down payment of 10 to 20 percent, depending on your credit rating and the size of the mortgage you seek. Saving up money for a down payment, as well as for moving costs and closing fees, can be a barrier to home ownership. Deal with this hurdle by deciding what your budget will be for a house and then setting a goal of saving 20 percent of the cost for a down payment. Set aside as much money as you can each month until you reach this goal. Financial Insecurity People who feel they can't afford to buy a house may be worrying about the state of their current finances or about the potential of losing their jobs and thus, their future income. According to a 2010 survey by mortgage lender Halifax, 52 percent of respondents said they weren't buying a house because they were worried about losing their jobs. If you're concerned about your current employment opportunities, continue to rent until you feel more secure in your job or shop for a cheaper home that won't overextend your budget.

ROAD TO HOMEOWNERSHIP – STEP 2 WHAT CAN I AFFORD? It’s an exciting time, but before you head out in search of your new home, take some time to review your finances. Be sure to consider the expenses involved in owning a home when you outline your budget. Can you afford to buy a home? Let’s find out.

The costs of Homeownership Owning a home is a big responsibility that comes with great rewards. Budgeting is important, so plan for sudden expenses that may arise in addition to your regular monthly expenses. Don’t forget to include all costs in your monthly budget including:  Property taxes and special assessments  Home/hazard insurance  Property maintenance  Association and membership fees (for condominiums, townhomes and some developments) Some of the fees mentioned above are part of your monthly mortgage payment while others are not – be sure to ask about how these fees are to be paid.

The Importance of Good Credit It’s no secret. Your credit history is an important factor that affects your ability to obtain a mortgage for the purchase of your home. Lenders want to see how you borrowed and repaid money in the past. This is reflected in your FICO score. FICO scores range from 300 to 850, and lenders believe that borrowers with higher scores are more likely to repay their loan. Credit Reports Your credit report is a listing of the information in your credit record. Your credit report includes:  Your name, date of birth, and Social Security number or tax identification number.  Your current and previous address.  Your current and previous employers.  Your debts.  Your payment history with companies that have loaned you money under an agreement to pay it back, such as banks, credit card companies, department stores, including whether you pay your bills on time, and you pay the proper amounts due. 4

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Public record information, such as tax liens, bankruptcies, or foreclosures, even if these happened several years ago. Inquiries made by potential creditors each time you apply for credit, whether you were granted or denied credit. A list of your accounts, if any, that have been referred to a collection agency for default.

Credit reporting agencies are companies that gather information on potential borrowers and sell that information in the form of a credit report to credit grantors. Credit reporting agencies keep records of consumer debt and how regularly these debts are paid. Data includes information on whether the payments are up-to-date or overdue and whether any action has been taken to collect overdue bills. Three major credit reporting agencies maintain a record of your credit history. They are Equifax, Experian, and Trans Union. It’s important to note that inquiries or applications will show up on your credit report, even if you are denied credit or decide to decline the credit. Too many inquiries by creditors showing on your credit report are a sign that you are overextending yourself. Inquiries stay on your credit report for 24 months. Therefore, it’s important to keep the number of inquiries to a minimum. When shopping for a car or a home mortgage, however, you do have the flexibility of checking out your financing options within a short period of time. Doing so will show that you were comparison-shopping versus desperately seeking credit. Requesting a copy of your own credit report for your personal review is strongly encouraged and does not negatively impact your credit history. You should know what’s in your credit report to be sure that all of your identifying information and accounts are correct. Review your credit reports from each of the three credit reporting agencies including Equifax, Experian, and TransUnion at least once a year to make sure they are accurate. Here’s how you can contact each company:  Equifax: 800-685-1111, www.equifax.com  Experian: 888-397-3742, www.experian.com  TransUnion: 800-888-4213, www.transunion.com

If you’ve been denied credit, you can get your report for free by following instructions in the written notice you received denying you credit. Moreover, due to changes in the federal Fair Credit Reporting Act (FCRA), consumers throughout the U.S. are able to ask for a free copy of their credit report once every 12 months from each of the credit reporting agencies. For more information, log onto www.annualcreditreport.com or call 877-322-8228. Mistakes on your Credit Report If you believe that any one of your credit reports contains mistakes and you wish to correct the mistake, contact the company that developed the report at the telephone number or website previously listed. Under the Fair Credit Reporting Act (FCRA), the company must complete an investigation of your disputed items (generally within 30–45 days) and provide you written notice of the results of the investigation within five days of its completion. The notice should include a copy of your credit report if it has changed based on the dispute. If you’re in the process of applying for a loan, tell the lender immediately about the incorrect information. Negative information stays on a credit report for seven years; public record information such as bankruptcy and foreclosure can stay on a credit report for up to 10 years. With time and a history of on-time payments, you can improve your credit record. If You Have Been Denied Credit If your application for credit is denied, it’s important to secure a copy of the credit report and find out why you were turned down. If the information in the report is accurate, you may need to work on the reason it was denied. For example, if you’ve been consistently late making your payments, begin paying on time. Federal law requires a creditor that denied you credit to give you the name, address, and telephone number of the credit reporting agency. If you contact the agency within 60 days of receiving the denial, you are entitled to a free copy of your credit report. Credit Scoring Credit scoring uses statistical models to evaluate your credit risk by com paring credit information about you to the credit performance of others with similar credit records. The models have been developed based on millions of credit report files and are considered to be excellent predictors of the likelihood that an individual will repay a loan. 6

Credit scores assess each factor in the same way for every consumer, every time. They do not include race, religion, national origin, gender, or marital status as factors. Credit scores are blind to demographic or cultural differences among people. Remember, no credit score lasts forever. A credit score is a snapshot based on current information in your credit report. Credit scores change over time just like your credit and credit behavior change over time. Many factors are used to determine your score including:     

Your payment history. The amount of debt you owe. How long you have been using credit. How often you’ve applied for new credit and taken on new debt. The types of credit you currently use, such as credit cards, retail accounts, installment loans, finance company accounts, and mortgages.

It’s important to note that your income level is not a factor considered in calculating your credit score. It all depends on the past use of credit and the factors described above. Knowing your Legal Credit Rights  Your rights under the Equal Credit Opportunity Act (ECOA): 1. You cannot be denied credit based on your race, sex, marital status, religion, age, national origin, or receipt of public assistance. 2. You have the right to have public assistance considered in the same manner as other income. 3. If you are denied credit, you have a legal right to know why.  The Fair Credit Reporting Act (FCRA) gives you the right to know what information is being distributed about you by the credit reporting agencies and requires that the information be accurate.  The Truth-in-Lending Act (TILA) requires lenders to give you written disclosures of the cost of credit and terms of repayment before you enter into a credit transaction.  The Fair Credit Billing Act (FCBA) establishes procedures for resolving billing errors on your credit card accounts

Budgeting There are three main reasons why a budget is critical in the home buying process: 1. A realistic budget will help you determine how much house you can afford. 2. A budget will help you determine if you can afford the extra expenses related to homeownership. 3. A budget will help you plan to save money for the down payment on your home, as well as develop good saving habits for other financial goals, such as retirement or education expenses. Preparing a budget Budgeting is simply a management tool that helps you plan and keep track of how and when you are spending your money. By following a budget, you will be able to set goals for how you want to spend your income. Here's how to get started: 1. List all current, regular, net monthly income for your household. 2. List all current monthly expenses, including any money you set aside each month toward savings. Keep a record of your receipts so you can total expenses by each category at the end of the month. If you develop a budget, and then decide not to keep a record of your actual expenses, you've wasted your time! 3. After recording your actual expenses at the end of the month, you will be able to analyze whether or not your budget was realistic. You may need to go back and adjust your budget accordingly.

How much can I afford? Now that you have analyzed your current monthly expenses by preparing a budget, letâ&#x20AC;&#x2122;s discuss other factors you should consider. Many experts use a basic, easy formula to roughly determine how much someone can afford to pay for a house. The formula says you should multiply your pre-tax, or gross, annual income by two and a half. For example, if you have a total household income of $60,000, you should be able to buy a house worth $150,000. This quick ballpark figure is great; however, your buying power will ultimately depend on two things: 1. How much you have available for the down payment and closing costs. 2. How much a lending institution will agree to lend you.

Down-payments You will need to make an up-front investment in your new home in order to get a mortgage. The amount of the down-payment, or the initial payment made when buying a home, will also impact your ability to get a mortgage as well as the interest rate and terms of the mortgage loan. Buyers who contribute their own funds to the purchase of a home are considered a better overall credit risk. If you’re making a down-payment that is less than 20% of the home price, mortgage insurance will be required. Securing a Down-payment - If you’re like most people, the down payment on your house will likely be one of the biggest cash investments that you’ll make. There are a number of ways that you can get that amount of cash together.  

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Savings - Buyers often save regularly for years by reducing expenses, taking a second job or getting a smaller apartment if they are renting. Gift - If you accept a cash gift, you’ll need to get it clearly in writing that the person making the gift has no financial interest in or obligation toward the property. A bank will not accept it if your “gift” is really a loan. Special programs - State and local governments offer down payment assistance to lowand moderate-income homebuyers. Many nonprofit organizations also offer down payment assistance. Contact your bank or your state housing authority for information on these programs.

ROAD TO HOMEOWNERSHIP – STEP 3 HOMEBUYER ASSISTANCE PROGRAMS There are various public and private agencies offer assistance to first-time home buyers including:      

Home Buyer Education & Pre-Purchase Counseling Down Payment Assistance Help With Closing Costs Affordable New Homes Low Down Payment Loans Purchase-Rehab Loans

Federal, state and local government programs offer help to first-time home buyers. The goal of government home buying programs is to maximize home buying power, with an affordable monthly payment combined with a low down payment. Tip: These programs can be combined and layered like a cake! Qualifying for First-Time Homebuyer Programs  

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Make sure that income that can be verified - Supported by paycheck stubs, bank statements, tax returns, W2s and two-year employment history Make sure sufficient savings are in place o Supported by bank statements o Cash-on-hand is not an asset o Properly documented gift funds can be used Positive Credit Reputation o Middle FICO credit score of 620 or higher o Minimum of two years of re-established credit after discharged bankruptcy, three-years after a foreclosure, and two years after a short sale. Positive Credit Reputation Must have first-time home buyer status o Not owned a home in the last three years o Exception for NSP-funded programs (can’t currently own a home). Total household income must be low or moderate based on household size. 10

Property Type  Move-in condition. Most “fixers” won’t qualify.  Must be owner-occupied or vacant, no tenant occupied properties.  Single-unit properties only.  Must include ownership of the land (most mobile home parks won’t qualify)  Single-family homes, condominiums and town homes are eligible.  Short-sale properties must already be approved by the short-sale bank.  Bank-owned and investor-owned properties are acceptable.

ROAD TO HOMEOWNERSHIP – STEP 4 FINDING AN AFFORDABLE PROPERTY Now that you know what you can afford, it’s time to start looking at houses. You’re probably asking yourself, where should I look, what can I expect to find? While no property will have everything you want, the home you purchase should meet as many of your needs and wants as possible. You might start out looking for a mini-mansion but end up finding that a mid-size ranch home is just right for you and your budget.

Where to begin You’ve probably been making a mental wish list of expectations for your new home. Maybe you can’t live without a walk-in closet, a living room with high ceilings or a functioning fireplace. Let’s get all those details listed on paper and make sure that the priorities reflect you and your family. Consider the neighborhood, the home’s exterior, interior layout, number of bedrooms and bathrooms as well as location and lifestyle, commuting distance and community, and reputation of the schools. Take your list with you when you look at prospective homes and size up each house according to the items on your list. Can you envision entertaining family and friends during holidays in the dining room? Is there enough closet space to store your ever-growing shoe collection? The more the home matches up to items on your list, the happier you’ll be when you’re living in it. What are my options? First, you need to decide what type of home you want. Be mindful of your plans for the next five years. Do you plan on starting a family or would you be interested in renting out a space in your home? There are a number of housing types to choose from to suit your individual needs, including: 

Single-Family - Single-family homes are the most common target property for prospective homeowners. There are two options: a newly-constructed house or an older home in an already established neighborhood. Both new construction and older homes offer advantages to first-time buyers. Older homes may be roomier, more affordable, and situated in a convenient or central location. A new home likely has a more efficient

heating system, better insulation, and lower maintenance costs, since everything is brand new. 

Condominium - A condominium is a single unit in a multi-unit property. Benefits of condo ownership include low maintenance and many of the freedoms of apartment living. Remember, though, that along with your private space, you will also share common areas with the owners of other condominiums in your property. As a condo owner, you may be asked or may wish to serve on the association board. This involves overseeing the collection of fees, upkeep of the grounds, maintaining cash reserves, and managing both emergency and scheduled repairs.

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Multifamily - Purchasing a 2- to 4-unit property provides you with both an investment property and a personal residence. Along with the possible tax and income advantages of multifamily homes come the added responsibilities of a landlord, such as tenant search and selection, leases, security deposit procedures, evictions and emergency repairs.

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Fixer-Upper - During your search for a home, you are sure to find many houses that can be described as fixer-uppers – generally older homes in need of updates and repair. These homes are often in older, more established neighborhoods, but have suffered from neglect over a long period of time. If you decide that a fixer-upper is for you, be prepared for the numerous costs involved in rehabilitation work. Once work begins, you may uncover additional issues. Rehabilitation costs can rise quickly and significantly, as can the time needed to get the house in good working order. If you decide on a fixerupper, have a contractor or home inspector detail the extent of rehabilitation work, and estimate the costs. Do this before you make your offer on the home. The amount it will cost to repair the property will impact the price you pay for the house.

Location, Location, Location You’ve heard it before. Your home’s location is arguably the most important feature to consider. Are you comfortable living on or near a main street? Would you like to have a dog park within walking distance? Here are some things to consider when choosing a location:  How far are you willing to commute to work?  How accessible is the home to highways or public transportation?  How close are shopping, churches, day care facilities and recreation areas?  What is the quality of the public schools?

Prioritize the attributes that are most important to you. Ask yourself, would you trade a larger yard for highway access, public transportation for shopping and restaurants, a shorter commute for better public schools? With your list in hand, youâ&#x20AC;&#x2122;ll be better equipped to find the town and the home that best suits your desired lifestyle.

Location and Its Impact on Your Finances It is important to understand that there is more to housing affordability than how much rent or mortgage you pay. Aside from a mortgage, transportation costs are the second largest budget item for most families. It is important to seriously consider the location of your new home and how transportation costs may affect your budget.

ROAD TO HOMEOWNERSHIP – STEP 5 HOMEBUYER COUNSELING If thinking about buying a home causes you to break into a cold sweat or twitch nervously – stop and take a deep breath. You might want to consider attending a homebuyer counseling course that will give you a step-by-step breakdown of what lies ahead, so that you know what to expect.

Do I Need Homebuyer Counseling? Most loans do not require counseling, but there are many benefits to going through a counseling course.

What are the benefits of homebuyer counseling? The counseling course is basically a 101 class on buying your first home. It will teach you about the different aspects of homebuying including finding the right home, choosing a neighborhood, different mortgage types and terms, and real estate lingo. Programs include discussions of:  Applying for a mortgage  Down-payment and closing cost requirements  Credit  Making an offer  The home inspection  Preparing for closing  Special considerations for buying condos and multifamily properties  Post-purchase issues  Budgeting VAREP provides homebuyer education on the above topic and can also provide one-on-one housing counseling. For more information about VAREP, please call 1-888-273-7267. A VAREP housing counselor is standing by to help you.

ROAD TO HOMEOWNERSHIP â&#x20AC;&#x201C; STEP 6 GETTING PRE-APPROVED FOR HOME PURCHASE What is Mortgage Pre-approval? Though there are several different definitions of "pre-approval" used in the mortgage industry, a pre-approval generally is a written statement from a lender stating the lenderâ&#x20AC;&#x2122;s preliminary determination that a borrower would qualify for a particular loan amount under that lender's guidelines. The determination and loan amount are based on income and credit information. Most pre-approval letters are good for 60 to 90 days.

Does Pre-approval Guarantee a Loan? No. Even if you receive a pre-approval letter from a lender you connected with on Zillow, you may not get a loan from a lender and you are not guaranteed a specific rate or loan term. Regardless of pre-approval, a lender may require additional income and asset verification, as well as the satisfaction of other conditions, before extending you a loan. Pre-approval letters are subject to modification or cancellation if your financial situation or other conditions change. A pre-approval letter is not an offer to lend, a commitment to make a loan, or a guarantee of specific rates or terms. Having a pre-approval letter does not guarantee that an offer you make on a home will be accepted by a seller.

Items Needed for a Home Loan Pre-Approval Proof of Income - "No verification" or "no documentation" loans are a thing of the past, so all borrowers need to be prepared with W-2 statements from the past two years, recent pay stubs that show income as well as year-to-date income, proof of any additional income such as alimony or bonuses and your two most recent years of tax returns. Proof of Assets - You will need to present bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves. An FHA loan requires a down payment of as low as 3.5% of the cost of the home, while conventional home loans require 10 to 20%, depending on the loan program. If you receive money from a friend or relative to assist with the down payment, you will need a gift letter to prove that this is not a loan. Good Credit - Most lenders today reserve the lowest interest rates for customers with a credit score of 740 or above. Below that, borrowers may have to pay a little more in interest or pay additional discount points to lower the rate. FHA loan guidelines have tightened in recent 16

months, too, so that borrowers with a credit score below 580 are required to make a larger down payment. Most lenders require a credit score of 620 or above in order to approve an FHA loan. Lenders will often work with borrowers with a low or moderately low credit score and suggest ways they can improve their score. Employment Verification - Your lender will not only want to see your pay stubs, but is also likely to call your employer to verify that you are still employed and to check on your salary. If you have recently changed jobs, a lender may want to contact your previous employer. Lenders today want to make sure they are loaning only to borrowers with a stable employment. Selfemployed borrowers will need to provide significant additional paperwork concerning their business and income. Documentation - Your lender will need to copy your driver's license and will need your Social Security number and your signature allowing the lender to pull a credit report. Be prepared at the pre-approval session and later to provide (as quickly as possible) any additional paperwork requested by the lender. The more cooperative you are, the smoother the mortgage process will be. The Bottom Line is consulting with a lender before you start the home buying process can save a lot of heartache later, so gather your paperwork or print some recent statements off your online bank accounts before your pre-approval appointment and before you begin house hunting.

ROAD TO HOMEOWNERSHIP – STEP 7 MORTGAGE FINANCING You’re looking at homes, considering a purchase, and talking to your loan officer about different mortgage programs. You may even be hearing a lot of unfamiliar terminology related to mortgage financing. Let’s review some of the more common terms you may encounter. Components of your monthly mortgage payment A typical monthly mortgage payment is made up of principal, interest, and an escrow. The principal portion of your mortgage payment is used to repay part of your outstanding principal balance (your loan amount). The interest is the fee you pay the lender for using the lender’s money. Principal and interest may sometimes be referred to as "P&I." The escrow portion of your monthly mortgage payment is deposited into an escrow account. Escrow is money that is collected by the lender to pay the annual real estate taxes, homeowner’s hazard insurance premiums, and, if applicable, any mortgage insurance premiums and/or flood insurance. When your real estate tax and insurance bills come due, the lender pays these bills on your behalf from the proceeds in the escrow account. The lender does this to ensure these expenses are paid in a timely manner. The inclusion of real estate taxes and insurance to the P&I is often referred to as “PITI.” Mortgage Options There are different kinds of mortgages designed for different kinds of borrowers. Your mortgage loan officer will help you determine which one is the best fit for your individual needs and goals. The following are some of the most common options available: 1. Fixed rate - Fixed rate mortgages are the most common type of mortgage financing. They have an interest rate that remains constant; therefore, monthly principal and interest payments do not change during the life of the loan. 2. Adjustable rate - Adjustable rate mortgages, or ARMs, have an interest rate that remains fixed for an initial period of time. At the end of the initial fixed period, the interest rate becomes variable and can adjust either up or down on a monthly, semiannual, or annual basis. Consequently, principal and interest payments may increase or decrease at various times over the life of the loan.

3. Fully amortizing - With a fully amortizing loan, both principal and interest payments are made monthly for the life of the loan. The principal portion of the monthly mortgage payment is calculated to repay the outstanding principal balance in full by the end of the loan term, without a final balloon payment that is much larger than any earlier payments. Both fixed rate and adjustable rate loans can be fully amortizing. 4. Interest only - Payments on interest only loans consist exclusively of interest for a designated period of time, usually the first ten years of the loan’s term. During this time, the principal balance owed is not reduced. No equity is created in the home while making interest only payments unless the value of the home appreciates. After the interest only period ends, the monthly mortgage payment is increased to include enough principal to repay the outstanding principal balance in full by the end of the remaining loan term. Mortgage insurance When a borrower makes a down payment of less than 20% of the purchase price of the home, the lender will require some type of mortgage insurance. This insurance protects the lender against loss if the borrower defaults on the loan. Loans are typically insured by private companies or the federal government. Listed below are different insurers of mortgages. Each mortgage insurer has its own down payment and qualification requirements. 1. Private mortgage insurance companies - Loans that are not insured by the federal government are called conventional loans (you may even hear these loans referred to as “Fannie Mae” or “Freddie Mac” loans). These loans are insured by private mortgage insurance (MI) companies. An MI company will require a minimum contribution from the borrower’s own funds to be used toward the down payment amount. Gift funds from a relative may be used for additional down payment or closing costs. The cost for monthly mortgage insurance will vary depending on the amount of the down payment and the borrower’s overall credit rating. The monthly mortgage insurance premium is collected with the monthly mortgage payment. 2. Federal Housing Administration - The Federal Housing Administration insures loans (referred to as “FHA loans”) which typically offer lower down payment requirements and more flexible qualifying guidelines than conventional loans. Gift funds may be used for 100% of the down payment and closing costs. FHA loans require both an upfront mortgage insurance premium, which can be financed into the loan amount, and a monthly mortgage insurance premium which is collected with the monthly mortgage payment. 19

3. USDA Rural Development - USDA Rural Development (RD) offers federally-insured, affordable home loans through its Guaranteed Rural Housing Loan Program. These loans are designed for low-to-moderate income families purchasing a home located in a rural area as designated by RD and require a guarantee fee, which must be paid upfront and can be financed into the loan amount. Effective October 1, 2011, a monthly mortgage insurance premium will also be required. 4. Department of Veterans Affairs - The Department of Veteran Affairs (VA) guarantees loans to veterans and active duty service members with VA eligibility, as well as loans to eligible reservists with six years of service. VA loans require a VA Funding Fee, which must be paid upfront and can be financed into the loan amount. There are no monthly mortgage insurance premiums. Homeowner's Hazard Insurance Homeowner's hazard insurance is a requirement whenever you borrow money to purchase a home. You pay the premium, protecting you and the lender from loss if a fire or storm destroys or damages your home. A homeowner's hazard insurance policy should include: 1. Personal liability insurance â&#x20AC;&#x201D; protects you if someone sues you after being injured on your property. 2. Property coverage â&#x20AC;&#x201D; protects against fire, theft and specific weather-related hazards. Itâ&#x20AC;&#x2122;s wise to shop around for your homeowner's hazard insurance, since rates can vary among different insurance companies. Flood insurance A homeowner's hazard insurance policy does not provide coverage for damage caused by flooding. If the home you buy is located in an area that is at risk for flooding, you may be required to purchase a separate flood insurance policy. Under federal law, lenders must obtain a flood certification on any loan secured by residential real estate. A flood certification indicates whether the property lies within a Special Flood Hazard Area (SFHA) as designated by FEMA (Federal Emergency Management Agency). If your property is in an SFHA, the lender will not be able to offer you financing unless you purchase a flood insurance policy.

ROAD TO HOMEOWNERSHIP – STEP 8 THE REAL ESTATE AGENT The Real Estate Agent What is a real estate broker? What is a real estate agent? What is a Realtor®, or a salesperson? These titles can get confusing, so let’s look at the differences between these terms and the role these professionals can play in a real estate transaction. 

Real estate agents are people who help you buy or sell your property. They hold licenses issued by a state. Agents can only sell real estate under the supervision of a broker and must collect the commission from the sponsoring broker. The broker is legally responsible for the actions of the agent.



Brokers are licensed by the state to collect fees and oversee negotiations for a purchase. The broker has earned a higher-level license and may or may not have more experience than an agent. Brokers can manage a real estate office, work on their own or work in an office under another broker.



Realtors are brokers and agents who belong to the National Association of Realtors (NAR), usually via a local board. NAR has trademarked the word, which is why it's capitalized. Members abide by a code of ethics over and above the requirements of state law.

None of these licenses and designations by themselves can guarantee that any particular real estate professional is the right person to do the job for you. Many other factors weigh in: personal chemistry, location and experience, for example. The buyer's agent Some agents specialize in representing buyers and are not primarily obligated to the seller. Note the word "specialize." These agents could end up as dual agents; however, if the company they work for listed a home you are interested in buying, a buyer's agent's fiduciary responsibility is to you, not the seller. Unlike traditional ways of doing business, you may or may not sign an exclusive contract, and the agreement may state you are liable to pay a commission to the agent even if you find a home through other channels. Read contracts carefully to see if you have to pay the agent a commission if you find a FSBO (for sale by owner home) or other house by yourself. A buyer's agent can be paid by either the buyer or the seller. 21

Exclusive buyer’s agents Exclusive buyer’s agents work for real estate companies that never represent sellers or list properties for sale. By utilizing the services of an exclusive buyer’s agent, you can avoid conflicts of interest that may arise if a buyer client becomes interested in a property that is also listed for sale by a traditional buyer’s agent. Interviewing Questions to Ask Real Estate Agents How Long Have You Been in the Business? The standard joke is there's nothing wrong with a new agent that a little experience won't fix. But that's not to say that freshly licensed agents aren't valuable. Much depends on whether they have access to competent mentors and the level of their training. Newer agents tend to have more time to concentrate on you. Some agents with 20 years of experience repeat their first year over and over. Other 20-year agents learn something new every year. What is Your Best Marketing Plan or Strategy for My Needs? As a buyer, you will need to know:  How will you search for my new home?  How many homes will I likely see before I find a home I want to buy?  Will I be competing against other buyers?  How do you handle multiple offers?  Do you present offers yourself? Will You Please Provide References? Everybody has references. Even new agents have references from previous employers.  Ask to see references.  Ask if any of the individuals providing references are related to the agent.  Ask if you can call the references with additional questions. What Haven't I Asked You That I Need to Know? Pay close attention to how the real estate agent answers this question because there is always something you need to know, always. You want an agent to take her time with you -- to make sure you feel comfortable and secure with her knowledge and experience. She should know how to listen and how to counsel you, how to ask the right questions to find out what she needs to know to better serve you.

ROAD TO HOMEOWNERSHIP – STEP 9 MAKING AN OFFER After carefully searching, you finally found the right home and you’re ready to make an offer. An offer is a legally binding commitment stating that you will buy the home for a specific price provided that certain terms and conditions are met. Once the seller accepts your offer, it must be signed both by you and the seller.

Considerations for the offer You may want to think about the following as you prepare your offer:  What is the age and condition of the home?  Are any repairs needed? What will they cost? Are the sellers willing to share any of the expense?  How long has the property been on the market?  How active is the market (i.e., buyer’s or seller’s market)?  Are the sellers anxious to sell?  Is the property in a particularly desirable location or school system?  Does the home meet many, most, or all of the items on your wish list?

Preparing the Offer Pay close attention to all the details. Be sure that the offer clearly outlines all the terms and conditions of the sale, including:  Your name and the seller’s name  The property’s address  Any special provisions regarding fixtures, appliances, etc.  The purchase price being offered (including the deposit put down to bind the offer and the deposit to be paid upon the execution of the Purchase and Sale Agreement)  Any additional riders and deadline dates  Any contingencies to which the offer is subject (e.g., pest inspection, securing financing)

Timing and Deadlines Now it’s time to get out your calendar. Take time to think about how long it will take you to negotiate the offer with the seller, get an inspection, and get approved for a mortgage. Consider meeting those deadlines when you set a closing date. Your deal could fall through if deadlines aren’t met. 23

Negotiating the offer Make an offer that you feel is appropriate and makes you comfortable. You may choose to offer an amount lower than the asking price or request the seller pay some of your closing costs; your real estate agent should advise you if the amount you wish to offer is out of line and help you negotiate the purchase price. You will be expected to provide an earnest money deposit when making the offer. This deposit will be held until loan closing and can be applied toward the cash you will need to bring to closing. Your real estate agent will present your offer to the seller or to the seller's real estate agent. If your offer is not accepted, you should take your time in considering a counteroffer. Do not be pressed into acting too quickly, even if other buyers are waiting. Remember, this is probably the largest purchase you will ever make, so you must make sure you are comfortable with the price and terms of the agreement. Once you and the seller have agreed to all terms in writing, the signed purchase and sale agreement becomes a legally binding contract. You will be expected to follow through on all terms of the transaction and not change your mind after your offer has been accepted by the seller.

Purchase and Sale Agreement It’s not over yet! After negotiations are settled and your offer is accepted, a Purchase and Sale Agreement is written up by the broker. This document spells out the agreement in specific detail. Because it’s a legally binding contract, you may have your attorney review it before you sign it.

Provisions and contingencies Your first line of defense before you go into contract on your first home is to include provisions and contingencies in your offer. This ensures that you and your money are protected in the event that the loan is not approved and the deal is called off. It is very important that the Purchase and Sale Agreement include a mortgage contingency clause, which states that your buying the home is dependent on your ability to get a mortgage. Such a clause allows you to keep your deposit if your mortgage isn’t approved. Other contingencies to be added to the Purchase and Sale Agreement should be based on the home’s condition, pest, radon, and lead paint inspections. The closing date and occupancy date should also be indicated. 24

ROAD TO HOMEOWNERSHIP – STEP 10 THE HOME INSPECTION Importance of a Professional Home Inspection A condition of purchase that many buyers choose to include in the agreement is a home inspection. The purpose of the pre-purchase home inspection is to provide you with useful information about the condition of the home and identify major deficiencies, if any, in the home's structure and components. A home inspector is a professional who has been trained to examine the visual condition of residential properties and determine if they are free from discoverable major mechanical (heating, plumbing, electrical, etc.) or structural (walls, roof, foundation, etc.) deficiencies. A professional home inspector will tell you whether the roof or heating system will soon need major repair or replacement and if the electrical and plumbing systems are functioning properly. The inspector will also let you know if the major mechanical and structural systems are in overall satisfactory condition. As the potential home buyer with an interest in the property, you would be expected to pay for the home inspection because the home will ultimately be your investment. Once you have chosen a home inspector, your real estate agent should be able to help you coordinate a time for the home inspection to take place.

What is involved in a home inspection? An inspector will do a visual check of the home’s:  Heating system  Central air conditioning system (temperature permitting)  Plumbing  Electrical systems  Roof, attic, and visible insulation  Walls  Ceilings  Floors  Windows and doors  Foundation, basement, and the visible structures of the home  Environmental concerns (removal of oil tank, etc.) 25

The inspector should give you a written report immediately after the inspection. If the inspector finds many problems and gives the home failing grades, you may withdraw from the agreement provided that was in the contingency clause in your offer. You can also have the home inspected for termites, radon, lead paint, and asbestos, which is not covered in a basic inspection.

ROAD TO HOMEOWNERSHIP – STEP 11 PRIOR TO CLOSING Prior to closing on your new home, you and your lender need to complete a few final tasks.

Title search Before the lender gives you a mortgage, a title search must be done to verify that the seller truly owns the property and that there are no liens (claims) on the property. If there are any claims, the seller is required to pay them prior to the closing.

Title Insurance The lender will require title insurance to protect its investment in case a question about the validity of the title arises after closing. Additional title insurance to protect your investment is also available. Generally, the buyer pays for title insurance.

Homeowner’s Insurance You will need to obtain homeowner’s insurance prior to closing. A paid receipt and declaration of issuance must be presented at closing.

Survey Most transactions will require providing the lender with a certified property survey. The survey is a technical drawing of the property and its structures. A survey can take a few weeks and should be ordered well in advance of the closing date. The buyer is usually responsible for ordering and paying for the survey.

Flood Search The lender will order a flood search on the property you are buying. The flood search determines whether the property is located in a designated flood zone. Federal flood insurance is available to those residing in flood zones and may be a condition of the mortgage commitment.

Septic Certification If the property you are purchasing contains a septic tank, a system certification by an engineer or septic expert may be required.

Well Testing The state requires that drinking water wells be tested for contaminants. If the propertyâ&#x20AC;&#x2122;s served by a well, you will be given test results. You should consider test findings carefully and contact the county health offices if you have any questions.

Termite Inspection In certain areas, a termite inspection must be completed prior to the closing. The seller generally pays for the property to be inspected for termite damage and infestation by a termite inspection firm. A certificate of inspection should be delivered to your lender before the closing.

ROAD TO HOMEOWNERSHIP – STEP 12 THE CLOSING PROCESS Excited about finally moving into your new home? There’s just one more step left – the closing. Ownership is transferred to you from the seller and money is exchanged. It’s stressful but your real estate agent and attorney will be there to guide you through the process.

How do I prepare? You should walk through the home within 24 hours of the closing to make sure it looks as you expected and is in move-in condition. This final inspection gives you the opportunity to see that the seller has moved out and completed all repairs agreed to in the sales contract. Make sure all appliances and systems are working and that any items the seller agreed to leave behind are in the house. If you discover something after the closing, you have no way out, so be sure to walk slowly and look carefully.

What do I bring to the closing? The mortgage lender’s attorney will let you know exactly what documents you should bring. Typically, you need a form of photo or state-issued ID, a cashier’s check to cover the closing costs (the attorney will let you know the correct amount), and a homeowner’s insurance policy.

What Happens During Closing? The closing usually takes place at the attorney or mortgage lender’s office. You will be asked to sign a lot of documents, so make sure you read each one closely.

Closing Costs There are some costs that will need to be paid at the closing. Your attorney will go over your HUD-1 Statement with you, which itemizes all the costs. Some standard costs include:  Down-payment  Attorney fees  Title search (a check of the title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding)  Title insurance (to protect the lender and/or the buyer against loss arising from disputes over ownership of a property)  Municipal lien search (to determine that there are no outstanding legal claims against the property that must be paid when the property is sold) 29

    

Appraisal Credit report and a certified plot plan A full-year insurance binder Recording fees and transfer charges Prepaid interest due on the mortgage for the month in which you are closing the loan

Payments The closing agent will provide the buyer (you) and the seller with a list of all the costs that must be paid at this time. You make these payments and sign for your mortgage. By signing the mortgage, you agree that if you do not make payments, the lender is entitled to sell your property and apply the proceeds to your unpaid debt. You will also sign a mortgage note agreeing to pay back the loan.

Title The owner will give you title to the house in the form of a deed. The title and mortgage will be recorded in the County Clerk’s Office.

Final walk-through inspection Your purchase agreement should include a clause allowing you to examine the property within 24 hours immediately prior to closing. This allows you to inspect the property for any damage and to make sure the seller has (where applicable) vacated the property and left any items negotiated in the contract.

Congratulations! The closing process is now complete and you have just purchased your first home. You are now officially New Jersey homeowners! We hope that our step-by-step guide proved to be a helpful resource along the way.

ROAD TO HOMEOWNERSHIP â&#x20AC;&#x201C; STEP 13 POST-PURCHASE HOMEOWNERSHIP RESPONSIBILITIES Homeownership Responsibilities Now that you have moved into your dream home, itâ&#x20AC;&#x2122;s time to think about the future. Your home is likely your most valuable asset by far, so it is critical to give it the attention it deserves.

Maintenance and Repairs It's your home now. When something breaks, you will have to fix it or pay someone else to fix it. Attention to regular maintenance can often help you avoid repairs, and prompt repairs can help you avoid more costly disasters.

Major Repairs and Home Improvements Sooner or later, you may need to hire an expert to help you with major repairs or home improvement. Perhaps you want to do the kitchen or bathroom remodel you promised yourself when you moved into your new home. The following guidelines can help you get such a project done right for a fair price. 1. Interview several contractors. Find one that listens to you and with whom you feel comfortable working. 2. Ask for references and check them. You might begin by asking friends and neighbors to recommend companies or individuals that have provided them with good service. Many counties and cities have a licensing process for home improvement contractors. If the repair job is relatively small or you're on a budget, you may get better service from an individual than from a large firm. 3. Get cost estimates, and find out whether these are estimates or firm bids. Often, especially on older houses, contractors will not give a firm bid because it's impossible to know until they start the work what they'll find and how hard it will be to fix. 4. To protect yourself, especially for a larger job, be sure you have a contract that specifies exactly what work is to be performed, when payments are due, and so on. Always hold back part of the payment until after the job is finished. If the job requires permits, find out who is responsible for obtaining them.

Understanding Your Obligations as a Borrower As a homeowner, you need to take the steps necessary to protect your investment, not only by caring for the property itself but also by making timely payments on your loan.

Predatory Lending and Refinancing Once you have been in your house for a while, you may consider refinancing your loan. Refinancing your loan can make sense and save you money if interest rates have dropped, but it must be done carefully. The amount of money you save by refinancing your existing loan should fully offset the cost of the refinance transaction. Beware of predatory lenders who lend money against your home in a way that can harm you more than help. They may try to convince you to refinance a home for no good reason (other than for the lender to earn fees). While not all of the practices of predatory lenders are illegal, consumers should protect themselves. Here are some warning signs of predatory lending: 1. The interest rate seems higher than reasonable. 2. The lender uses aggressive, high-pressure tactics. 3. You are rushed through the process and discouraged from taking time to read and understand what you are signing. 4. You are encouraged to refinance a loan you already have without being shown any real benefit. 5. The lender insists that you buy life insurance as part of the loan.

Using Home Equity Responsibly As you pay down your outstanding principal balance or if your home increases in value, you will build up equity in your home. At some point, you may even choose to borrow against this equity to make home improvements, pay down higher-rate debt, or cover a large, unexpected expense. There are a variety of ways to access your home’s equity, including equity loans, lines of credit, and “cash-out” mortgage refinances. When used responsibly, home equity can be a wise choice to help manage your finances. Just remember to consider all of your options first. If you are not confident you can make the monthly payments, do not borrow against your home’s equity. Even with an equity loan or line of credit, you could potentially lose your home if you find yourself unable to make the monthly payments.

Avoiding Foreclosure As stated in your loan documents, your monthly mortgage payment is due on the first day of each month. By making this obligation a priority, you can avoid costly late charge assessments and maintain a good credit history. Should your financial circumstances change over time, and you find yourself having difficulties keeping up with your payments, we strongly encourage you to act immediately by calling your lender.

NOTES

Legal Disclaimer This guide is intended to provide general information regarding the process of buying a home. It is not intended to provide buyers with legal advice, and buyers should consider retaining an attorney and/or title insurance company of their choosing who can represent them in the matter from offer through closing. Additionally, this brochure does not set forth all qualification criteria for any of the loans described herein; all interested persons must successfully meet qualification criteria and complete the application process to obtain such loans.

Veterans Association of Real Estate Professionals 462 Corona Mall, Ste. 102 Corona, CA 92879 1-888-273-7267 47