First-Time Buyer FAQ

Why should I buy instead of rent?

A home is an investment. When you are renting, you pay rent monthly and then that money is gone forever. However, when you own a home, you can deduct your mortgage loan interest from your federal income taxes and typically from your state income taxes as well. This saves you a significant amount of money each year because the interest you pay will make up most of your monthly payment for most of the years on your mortgage. You can also write-off your property taxes. The value of your home may also rise as the years go on which makes it a worthwhile investment. Finally, your home will be all yours and you are free to do whatever you want with it free off the demands from landlords.

What are HUD homes and are they a good deal?

HUD Homes can be a great deal. A HUD Home is when someone with a HUD-insured mortgage can no longer make their payments and the lender forecloses on the home. HUD pays the lender what is owed and then takes ownership of the property. Then it is sold at market value as quickly as possible.

Can I become a homebuyer even if I have bad credit and little money for a down-payment?

If you are in this situation, you may be a good candidate for a federal mortgage program. To find out if you qualify, contact a HUD-funded housing counseling agency to help you figure out your options. Also contact your local government to see if there are any local homebuying programs that are suitable for you. Contact your local office of housing and community development or the mayor or county executive’s office for more information.

Are there special homeownership grants or programs for single parents?

Yes, there is help available. Become familiar with the homebuying process and find a good real estate broker. Although you won’t have the benefit of two incomes on which to qualify for a loan, consider getting pre-qualified so when you do find the house you like in your price rang you won’t have to wait to be qualified. Contact one of the HUD-funded housing counseling agencies in your area to talk through other options available. Look into buying a HUD Home which can be a very good deal. Again, contact your local government to see if you are eligible for any local homebuying programs.

Should I use a real estate broker? How do I find one?

Yes, it is recommended you use a real estate broker. All the details involved in the homebuying process can be confusing, particularly the financial aspects. A good real estate broker can lead you through the entire process and make the experience easier and less stressful. They will also be knowledgeable about important qualities of certain neighborhoods such as the quality of the schools, the number of children who reside in the area, the safety of the neighborhood, traffic volume, etc. Your real estate broker can help you figure out what is in your price range and search to find homes that you can afford. The immediate access to homes as soon as they are put on the market that brokers have will save you time. When you decide you want to make an offer, your broker can guide you on the best strategy as to how to structure your deal to save you the most money. They can explain mortgages to you and point out the advantages and disadvantages of the different types. They will guide you through the paperwork and and answer your last-minute questions before singing the final papers at closing. And you don’t pay the broker anything, the home seller does.

Furthermore, if you wish to buy a HUD Home, you are required to submit your bid through a HUD-licensed broker.

How much money will I have to come up with to buy a home?

The amount you need for payment will dependent on a number of factors including the cost of the home and the type of mortgage. Generally, you need enough to come up with three costs:
earnest money- the deposit you make on the home when you submit your offer to show you are serious about purchasing the home.
the down payment- the percentage of the cost of the home you must pay when you go to settlement
closing costs- the costs associated with the processing of the paperwork when buying a home.

When you make an offer, your real estate broker will put your earnest money into an escrow account. If accepted, the money will be applied toward your down payment. If not accepted, your money will be returned to you. The amount of earnest money varies. When you buy a HUD Home, it is generally in the range of $500-$2000.

The more money you put into your down payment, the lower your mortgage payments will be. Some loans require 10-20% of the purchase price which leads to many first-time buyers turning to HUD’s FHA for help. A loan through FHA only requires 3% down and sometimes it’s even less.

Closing costs need to be paid at settlement and average around 3-4% of the cost of the home. The closing costs cover various fees charged by your lender and other various processing fees. When you apply for a loan, your lender will estimate your closing costs so you know approximately how much it will be. When you buy a HUD Home, HUD may pay the majority of your closing costs.

How do I know if I can get a loan?

To determine if you qualify for a loan, use a mortgage calculator to see how much mortgage you could pay. If that amount is significantly less than the cost of the home you want, you might consider waiting longer before purchasing a home. But first contact a real estate broker or HUD-funded housing counseling agency to help you evaluate your loan potential. The broker will know what kind of mortgages are being offered and can help you choose a lender offering a program that is suitable for you. Also consider getting pre-qualified for a loan. Pre-qualification involves going to a lender and applyin gfor a mortgage before you began to look for a new home. This way, you’ll know exactly what you can afford and what is and isn’t in your price range.

How do I find a lender?

You can finance your home through a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. If you take time to look around and search for the best rates, you will save money. Loan fees and interest rates vary from lender to lender and because the interest rate has such an influence on what home you can afford, you should talk to several lenders before you decide. Most lenders need 3-6 weeks to complete the whole loan process. Ask your real estate broker about lenders in your area and what programs they offer. You can also find FHA-approved lenders in the yellow pages or on the internet. HUD does not make loans directly; you must use a HUD-approved lender if you want an FHA loan.

In addition to mortgage payments, what other costs should I consider?

You need to consider monthly utilities and your real estate broker should be able to help you get the information from the seller on how much utilities will be approximately. Also consider, any homeowner association (HOA) fees or condo association dues. Remember to consider property taxes as well as city or county taxes. Taxes will normally be rolled into your mortgage. Your broker can assist you calculate approximately how much these costs will be.

What does the mortgage cover?

Most loans have four parts: principal, interest, homeowners insurance, and property taxes.

principal- the repayment of the amount you actually borrowed
interest- payment to the lender for the amount you borrowed
homeowners insurance- a monthly payment that insures your property against loss from fire, smoke, theft, and other hazards that is required by most lenders
property taxes- the annual city/county taxes assessed on your property divided by the number of mortgage payments you make per year.

Most loans are for 30 years but 15 year loans are also available. Throughout the duration of the loan, you’ll pay significantly more in interest than you will in principal- up to three times more. Because of the structure of loans, in the first years, you’ll mostly be paying interest in your monthly mortgage payments and in the final years it will be mainly principal.

What do I need to take with me when I apply for a mortgage?

1. social security numbers for you and anyone else who is applying for the loan with you
2. copies of your checking and savings account statements for the last 6 months
3. evidence of other assets such as bonds or stocks
4. a recent paycheck stub detailing your earnings
5. a list of all your credit card accounts and the approximate monthly amounts owed on each
6. a list of account numbers and balances due on outstanding loans such as car loans
7. copies of your last 2 years income tax statements
8. the name and address of someone who can verify your employment.

Depending on your lender, you may need to provide additional information.

I know there are many types of mortgages so how do I know which is best for me?

The more you know about different mortgages before you start the better. Most people use a fixed-rate mortgage in which your interest rate stays the same for the duration of the mortgage, normally 30 years. The advantage to a fixed-rate mortgage is you always know how much your payment will be and can budget accordingly.

Another type of mortgage is the Adjustable Rate Mortgage (ARM). In this type, your interest rate and monthly payments start lower than an a fixed-rate mortgage but the rate and payment fluctuates, and can go up or down as often as twice a year. The adjustment depends on a financial index, such as the U.S. Treasury Securities index. The advantage to a ARM is you may be able to afford a more expensive home because your initial rate will be lower.

There are also government mortgage programs, such as the Veteran’s Administration’s programs or the Department of Agriculture’s programs. FHA mortgages are well-known but the FHA doesn’t actually make loans. Instead, they insure loans so that if the buyers default the lenders still get their money. This encourages lenders to give mortgages to people who might not otherwise qualify.

Discuss with your broker the different types of loans and decide which option best suits your needs before you begin to shop for a mortgage.

When I find the home I want, how much should I offer?

Your real estate broker will help you with this but there are several things to consider:
1. Is the asking price in line with the prices of similar homes in the area?
2. Is the home in good condition or will you need to spend a substantial amount to improve it?
You’ll probably want to wait until after you get a professional home inspection before making an offer.
3. How long has the home been on the market?
If it’s been for sale for awhile, the seller may accept a lower offer more readily than if it’s newly listed.
4. How much mortgage will be required?
Be sure you can afford whatever offer you make.
5. How much do you really want the home?
The closer you are to the asking price, the more likely it is your offer will be accepted. If you know you are competing with others for the house, you may want to offer an amount above the asking price.

What if my offer is rejected?

Offers are commonly rejected so don’t let that deter you. If you offer is denied, then began negotiations with the seller with the assistance of your broker. You may have to offer more money but you can also ask the seller to assist with some closing costs or to make some repairs to the home. Often negotiations go back forth several times before a deal is made. Be sure not to get so caught up in the negotiations that you lose sight of what you want and what you can afford.

So what will happen at closing?

You, your broker, the sellers broker, the seller, and a closing agent ill sit down and the closing agent will have a stack of papers for you and the seller to sign. The closing agent will give you a brief explanation of each paper but be sure to read each one and/or consult with your agent to ensure you know exactly what you’re signing. Before closing, your lender is required to give you a booklet explaining closing costs, a “good faith estimate” of how much cash you’ll need for closing, and a list of documents you’ll need at closing. If you don’t receive these items be sure to call your lender before you go to closing and don’t hesitate to ask questions!

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