What homebuyer programs are available in my region?

There are a number of homebuyer programs available at the state, regional, and community level. In southwest Florida, for example, the Pinellas County Community Development Department (PCCDD) is just one group that helps match up buyers with homes and financing. To promote home ownership in the region, the PCCDD offers the following services (see www.pinellascounty.org):
❑ Low-Interest Mortgages: The purpose of the low-interest loan program is to preserve the existing housing stock and encourage neighborhood improvement efforts. The program provides home repair loans to low-income and moderate-income home owners at interest rates ranging from 0 to 5 percent, depending on household income and family size.
❑ First-Time Homebuyer Program: The Housing Finance Authority provides financing for the rehabilitation, construction, and/or purchase of new and existing housing for moderate-, middle-, and lower-income families.
❑ Down-Payment Assistance: This program assists low- and moderateincome households to purchase homes that will serve as their principal residence. It provides financial assistance in the form of interestfree second mortgages with repayments deferred for up to five years.
❑ Special Lender Programs: Low-, moderate-, and middle-income buyers who have the desire and capacity for home ownership often lack the financial resources to purchase housing that meets their needs. According to the PCCDD, such individuals and families may be qualified for one of the programs offered by local governments or nonprofit corporations.
In Los Angeles, the Community Development Commission offers similar services, targeted at helping first-time home buyers through its Home Ownership Program (HOP), which provides loans of up to $60,000 (or 25 percent of the home purchase price) in designated target areas of the city, or $50,000 (or 20 percent of the purchase price) in nontarget areas. The loans are ‘‘shared equity loans’’ with no monthly payments and no interest. There are income guidelines to meet, and all information is on the city’s Web site at www.lacdc.org/programs/homebuyer/ownership/index.shtm.
Whether you’re looking for first-time homebuyer counseling programs, down-payment assistance, or low- to zero-interest loans, a phone call to your city or county offices should be able to get you pointed in the right direction. You can also use a search engine like Google.com to find such programs. Try combining your city or county name with words like ‘‘firsttime homebuyer program’’ or ‘‘homebuyer assistance’’ for the best results

What is a Federal Housing Administration (FHA) loan?

FHA loans are a popular choice for home buyers, although the program isn’t reserved only for first-time buyers. A wholly owned government corporation, the FHA has been around since 1934, with the goal of improving housing standards and conditions and providing adequate home financing through insurance of mortgages. Its loans feature reduced down-payment standards, lower mortgage insurance charges, and an approval process that’s more relaxed than conventional mortgage loans.
The FHA loan program requires only 3 percent down and is typically more forgiving of past credit issues, but it requires that borrowers not have a bankruptcy discharged within the last two years; that they not have a foreclosure within the last three years; and that any outstanding collection amounts, judgments, or charge-offs be paid in full before closing. The advantages of using an FHA loan include the following:
❑ A lower down payment is required.
❑ FHA loans are assumable (transferable to a new buyer) with a qualified borrower.
❑ Higher qualifying ratios of 29 percent for housing and 41 percent for total indebtedness are allowed on existing construction; 31 percent for housing and 43 percent for total indebtedness are allowed on new construction.
❑ The underwriting (approval) standards are more flexible.
❑ Gift funds for down payment and closing costs are allowed.
❑ The up-front mortgage insurance premium can be financed.
❑ Less cash is required out of pocket.
❑ The down-payment requirement (as low as 3 percent and never more than 5 percent) is the lowest of any nonsubsidized financing program.
❑ Nonoccupant coborrowers are allowed for qualifying purposes.
❑ The seller is allowed to pay prepaid expenses (closing costs) and can pay up to 6 percent of the purchase price toward closing costs and discount points.
❑ Charges on conventional loans such as tax service fees, underwriting fees, copy fees, and courier fees are not allowed to be charged to the buyer.
Find out more about how FHA loans work from your lender or mortgage broker, or visit HUD’s Office of Housing Web site at www.hud.gov/ offices/hsg/index.cfm.

What is Fannie Mae’s Community Home Buyer’s Program?

This is an income-based community lending model, under which mortgage insurers and Fannie Mae, the nation’s largest supplier of home mortgage funds, offer flexible underwriting guidelines to increase a low- or moderate-income family’s buying power, and to decrease the total amount of cash needed to purchase a home. Borrowers who participate in this model are required to attend prepurchase homebuyer education sessions. With this program, you can use a greater portion of your monthly income toward housing costs compared to other standard mortgage products.
The program also

• Requires a 5 percent down payment
• Does not require one month’s mortgage payment (or cash reserves) in your savings account at closing time
• Provides expanded debt-to-income ratios (you can use up to 33 percent of your gross monthly income for housing expenses each month, rather than the standard 28 percent, and 38 percent for your total monthly debt expenses, instead of the standard 36 percent To be eligible for Fannie Mae’s Community Home Buyer’s Program, you must attend a homebuyer education session offered or approved by your lender.

You can’t earn more than your area’s median income (this varies by your location), and the loan can be used to buy single-family, principal residences, including condos, planned unit developments, and manufactured housing. Learn more about Fannie Mae’s program at the group’s Web site: www.fanniemae.com.

What is a Veterans Administration loan?

Veterans Administration (VA) loans are available to qualified veterans, reservists, and active servicemen and women; these loans allow you to secure a mortgage up to a specified amount with no down payment and with flexible qualifying guidelines. The loans typically offer lower interest rates than you would find on any other mortgage. An application, a veteran’s certificate of eligibility, and a VA-assigned appraisal are required.
To obtain a VA loan, the law requires that:
❑ The applicant be an eligible veteran who has available entitlement
❑ The loan be for an eligible purpose (such as the purchase of a primary home)
❑ The veteran occupy or intend to occupy the property as a home within a reasonable period of time after closing the loan
❑ The veteran be a satisfactory credit risk
❑ The income of the veteran and/or spouse be stable and sufficient to
meet the mortgage payments, cover the costs of owning a home, take care of other obligations and expenses, and have enough left over for family support Find out more about VA loans at the VA’s Home Loan Guaranty Web site: www.homeloans.va.gov.

What government resources are available for home buyers?

A number of government-sponsored and -supported organizations offer a plethora of resources, opportunities, and programs for home buyers, particularly first-time buyers and those that fall into very specific categories, like veterans, who have access to Veteran’s Administration mortgage programs. Programs developed by community development departments (at the local level) and the Department of Housing and Community Affairs (at the state level) assist home buyers with flexible lending programs; housing options; and other resources, such as counseling. At the national level, in December 2003 President George W. Bush signed into law the American Dream Downpayment Initiative, which is expected to help more Americans enjoy greater access to more housing opportunities. The legislation will provide an average of $5,000 in grants to approximately 40,000 lower-income families in 2004 and 2005 to help them pay down-payment and closing costs on their first homes. Grants are made to state and local governments through the U.S. Department of Housing and Urban Development’s HOME Investment Partnership program. The program launched in spring 2004 and information about it is available at HUD’s Web site: www.hud.gov.
Through the Fair and Accurate Credit Transactions Act of 2003, the government is also helping individuals with credit-reporting issues. Under this legislation, consumers will receive one free annual credit report; full disclosure of their numerical credit score and the factors influencing that score; notice of any negative impact on their credit score caused by multiple shopping inquiries; notification when negative information is added to their credit files; prompt investigation and correction of inaccurate credit information; and new tools to combat identity theft such as placing a fraud alert in their credit file. The legislation also calls for federal regulators to conduct a study of the effects of consumers’ credit scores and credit-based insurance scores on the availability and affordability of homeowners insurance. The three most popular homebuyer programs offered by or supported by the government are Veterans Administration Loan Program, Fannie Mae’s Community Home Buyer’s Program, and FHA loans.

What information must I give to obtain a mortgage online?

Each online lender has different application requirements. A visit to Lend ingTree.com, one of the Internet’s better known lenders, for example, revealed a checklist of items to bring with you when you’re ready to sign up:
❑ Social Security Number of All Borrowers: Lenders use your social security number to access your credit record, which contains information about your income, debts, and credit payment history.
❑ Current Mailing Address and Number of Years You’ve Lived at This Address: This information will be compared against your credit record to determine if your rent or mortgage payments have been made on time each month.
❑ Property Type of the Home You Are Purchasing: Lenders need to know what type of home you are purchasing because your home becomes the collateral for your mortgage in the event that you default on the loan.
❑ Purchase Price, Down Payment Amount, and Amount You Wish to Finance: This combined information helps lenders determine the type of mortgage that may be best for your needs.
❑ Employment Information: Lenders normally like to see that you have been with the same employer for a few years, or at least in the same line of work, to demonstrate career stability.
❑ Total Monthly Income and Debt Payments: Your income and debt payments illustrate your debt-to-income ratio, which is the amount of money you owe each month compared to the amount of money you make. This ratio helps lenders understand your total financial situation.
❑ Total Liquid Assets: Lenders are interested in the amount and value of any assets you may have to help them judge your ability to make loan payments from available cash.

Can I get a mortgage online?

The online lending environment has become increasingly sophisticated, thanks to Web sites like LendingTree.com, Interest.com, Eloan.com, and 4LowRates.com, all of which serve as sales channels for the originating lenders, who subsequently lend you the money and to whom you will make your mortgage payments. Most of the major lenders (Wells Fargo, Countrywide, etc.) also offer an online application process, homebuyer educational information, and other resources online.
Whether you’re using a traditional lender or an online marketplace, the loan process is fairly simple. I recently applied for and obtained a home equity line of credit from GMAC Financing. The process took about forty minutes: five minutes to fill out the online application; five minutes on the phone with a loan officer to guarantee that I was who I said I was; and about thirty minutes of gathering necessary paperwork, such as proof of homeowners insurance, and faxing it to GMAC. For a first mortgage, that means entering the required information and/or providing necessary documentation from the comfort of your own keyboard, then letting the online lender use that information to track down the right mortgage for you. After completing the application form, LendingTree.com guarantees that you will receive up to four ‘‘real’’ loan offers within hours. The company says it’s unique in that it spurs lenders to ‘‘compete’’ for your business, rather than your having to track down the lenders individually. Whether you choose to work with one of those lenders is up to you, but the process will give you a good idea of what type of mortgage product will be best for you.
With online security issues like credit card fraud and identity theft at the forefront of consumers’ minds right now, it would be wise to inquire about the online lending firm’s information protection and security processes before sending sensitive financial data (particularly social security numbers, driver’s license numbers, and other personal information) through cyberspace. Lending Tree, for example, has reserved a Web page for explaining its security process, information protection, and other privacy issues at www.lendingtree.com/stm/aboutlt/privacy/security.asp. Interest .com has a similar site at www.interest.com/privacystatement.html. Make sure your online lender has taken similar measures, and ask questions if you have any specific concerns about these issues.

How can I reduce my closing costs?

Closing costs are pretty straightforward, but there are certain ways that you can reduce your out-of-pocket expenses. You can ask the home seller to cover some of the costs, for example, since lenders allow the seller to credit the buyer up to 5 percent of the purchase price for nonrecurring closing costs. These are costs that are paid on a onetime basis such as escrow, title, and transfer fees. Bear in mind that you may have to pay a bit more for the home to compensate the seller for paying your closing costs, particularly in a ‘‘hot’’ market, where the seller could easily find buyers who can cover their own closing costs.
Here are a few other strategies for reducing and/or eliminating your upfront closing costs:
❑ Ask your lender to pay your closing costs: Because lenders make a fee on each loan they make, your willingness to take out a loan at higher-than-market interest rates could convince the lender to make extra up-front fees. Those fees can be used to pay your closing costs.
❑ Finance your closing costs: Some lenders will allow you to finance (via a credit card, or by rolling them into the loan). Ask your lender up front if either or both strategies are acceptable.
❑ Secure a no-point, no-fee loan: The lower the points (see glossary), the higher the interest rate—and subsequently, the higher the payments—on a mortgage. Securing a no-point, no-fee loan will lower your closing costs, but realize that there is always a trade-off between points paid and the mortgage’s interest rate.
❑ Negotiate with the service providers: Most buyers won’t argue with a $300 title search, but what they don’t realize is that they have choices of appraiser, escrow company, and title company. Check that each of these providers’ fees are competitive before doing business with them.
❑ Defer closing costs by closing late in the month: Opt for a closing date around the end of the month and you’ll save money on upfront interest. When you close, lenders collect interest for the remainder of the month. With only a few days left in the month, you’ll end up paying just a few days of interest up front. To best educate yourself on closing costs and what’s required of you financially at settlement, check out the HUD settlement statement online at www.hud.gov/offices/hsg/sfh/res/sfhrestc.cfm (click on ‘‘Specific Settlement Costs’’). Here, HUD gives home buyers a comprehensive look at settlement costs and goes through an actual closing statement line by line. Familiarize yourself with the form, which is used on all mortgage transactions, and you’ll be well prepared when you get to the closing table.

What are closing costs?

Closing costs (also known as settlement costs) are expenses above and beyond the price of the property that the buyers and sellers have to pay when transferring ownership of a property. That includes a loan origination fee, the cost of the title search (‘‘title’’ is the legal term for one’s ownership interest in land), notary fees, attorney’s fee (if applicable), taxes, and the cost of the property survey. Your total closing costs will vary depending on your location, and either the lender or the real estate agent can provide estimates of closing costs on your mortgage.
When your mortgage is finalized, you as the buyer will have to pay closing costs. Most lenders will not roll the costs into the mortgage, so they’re essentially ‘‘out-of-pocket’’ or ‘‘up-front’’ fees that will need to be covered. Along with the basic title, service, and lender fees, closing costs include payments in advance for such items as taxes, property insurance, and interest to the end of the month.
Certain closing costs, such as recording fees and taxes, title examination, and credit reports, may be paid by the seller, or they may be shared between the borrower and the seller, depending on the terms of the sales contract. The Real Estate Settlement Procedures Act (RESPA) requires that your lender give you an information booklet and a good-faith estimate on your closing costs within three days of receiving your written loan application. RESPA also requires that at closing or shortly afterward, you must receive a uniform settlement statement (USS), which is a permanent record of all the final settlement charges. You are entitled to review the settlement statement one business day before you close on your loan. Read more about RESPA in Chapter 8: The Home Buyer’s Legal Rights.

What should I keep inmind when looking for a subprime loan?

If your own situation requires a subprime loan, the Virginia Housing Development Agency suggests following these ten tips.

1. Ask questions.
2. Shop around.
3. Be an educated consumer.
4. Read before you sign.
5. Avoid balloon payments (a loan that starts with small payments at first, then culminates into one or more significantly large payments).
6. Avoid prepayment penalties.
7. Know your rights.
8. Don’t be afraid to say no.
9. Be prepared—build your credit.
10. Be wary of targeted advertising.

Lastly, if you believe you’ve been victimized by predatory-lending practices, contact the Office of Consumer Affairs in your state to report the problem. You can find a state-by-state list of predatory-lending reporting bureaus at the HUD Web site: www.hud.gov/buying/localpredlend.cfm.

One issue to be aware of when you’re obtaining a mortgage

One issue to be aware of when you’re obtaining a mortgage are either short on cash or dealing with a poor credit rating are subprime loans. Some of these loans have fallen under considerable scrutiny lately because of a practice known as ‘‘predatory lending.’’ Subprime involves lending to borrowers with blemished, less-than-perfect credit or insufficient credit history who typically would not qualify for loans in the conventional prime market. To offset the increased risk, the lender charges higher interest rates on these loans; legitimate subprime lenders have played an important role in allowing access to home ownership (or home improvements) for many consumers who would not have qualified otherwise.

What mortgage programs are available if I don’t have the down payment?

Lenders today offer a variety of flexible mortgage programs. The most basic is the conventional mortgage, which has no security guarantees other than the value of the property. Such loans typically demand either a 20 percent down payment, or a lower amount combined with private mortgage insurance (PMI). Federal Housing Administration (FHA) loans and other programs guaranteed by the government do not require such insurance, which is offered by independent insurance companies to qualified borrowers with down payments of less than 20 percent of a purchase price. The cost of such insurance varies by lender and loan type but generally costs about seven-tenths of 1 percent of the total loan amount annually. There are many other nonconventional options available to home buyers right now. One of the country’s largest lenders, for example, offers the following programs with down payments as low as 3 percent:

• No Money Down Plus Program: Lets all qualified buyers finance the entire purchase price plus up to 3 percent of the closing costs. (No income limits.)
• 3 Percent Solution Program: Gives all qualified buyers the opportunity of putting only 3 percent down on a primary residence and taking advantage of flexible qualifying guidelines. (No income limits.)
• Easy-to-Own 3 Percent Down loan: Lets qualified low- to moderateincome borrowers put only 3 percent down and take advantage of flexible qualifying guidelines. (Limited to borrowers who fall within HUD median-income levels.)
• Easy-to-Own 5 Percent Down loan with 3/2 Option: Allows lowto moderate-income buyers to use their own funds for 3 percent of the down payment and get the remaining 2 percent as a gift, grant, or from an approved Down Payment Assistance Program. (Limited to borrowers who fall within Department of Housing and Urban Development [HUD] median-income levels.)
• FHA Mortgage: Allows all qualified buyers to take advantage of a low down payment with flexible qualifying guidelines, with loan limits set by area.
  

Alternatives to Down Payment

If you don’t have a down payment to buy a home, there may be other options available to you. Lenders offer an unprecedented range of loans with 100 percent (or sometimes more) financing options with very attractive rates and flexible credit and income guidelines. Thanks to these programs, the need to come up with a hefty down payment is no longer such an issue. Still, even 100 percent financing requires some financial commitment on the part of the borrower, like covering closing costs, the cost of an appraisal, and a home inspection.
Home buyers can also use ‘‘gift’’ money for down payments—something that was not allowed just a few years ago. While some lenders may view this attempt to help (by, say, a parent) as a signal of the borrower’s indebtedness, it is becoming a more acceptable way of obtaining the funds necessary to obtain a loan. Lenders have different guidelines for accepting gift funds of less than 20 percent of the home’s purchase price, so inquire before taking this route.
If coming up with a down payment is a sticky point for you, a mortgage broker or lender can point you in the right direction, particularly if you fall into one of these categories:
❑ You have a strong source of income, but not much savings.
❑ You prefer to keep your assets in higher-yielding investments.
❑ You have low-to-moderate income and minimal cash reserves.
❑ You are a first-time home buyer with high rent costs that eat up
much of your cash.
❑ You are a move-up home buyer with minimal cash reserves.

What are my down-payment options?

Generally, the down-payment requirements start at 3 percent of the purchase price and increase from there, depending on the price of the home and your own ability to come up with the cash. There are also a number of first-time homebuyer programs (designed to help buyers who haven’t purchased or owned a home within the last three years) that require no down payment, as well as ‘‘gift’’ down-payment programs available from organizations like Nehemiah and Ameridream. When calculating your down-payment needs, don’t neglect to factor any out-of-pocket closing costs (which can’t be folded into your mortgage) into your up-front expenses.
If you’re a first-time home buyer, saving up for a down payment can be a daunting task. In fact, it’s one of the biggest obstacles to home ownership in this country, since the average mortgage payment on a first-time or starter home isn’t much higher than a rental payment anyway. The good news is that lenders realize this and have made your options both flexible and extensive when it comes to offering mortgage programs that weren’t available a few years ago.

How do I improve my credit score?

Because most creditors only report to the bureaus once a month, improving a credit score doesn’t happen overnight. However, there are a few steps you can take right now to start cleaning up your credit blemishes. Here they are:

• Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of ‘‘inquiries’’ on your credit report can worsen your score because it looks like you’re being turned down for credit and ‘‘shopping around.’’
• Reduce your credit card balances. If you are ‘‘maxed out’’ on your credit cards, this will affect your credit score negatively.
• If you do have any ‘‘unpaid’’ debt that you now have the ability to pay off, either do so, or try to set up a ‘‘payment plan’’ or settlement option with the debtor.If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score. (Even if you don’t like charging purchases, obtain a low-limit credit card, use it every month, and pay off the balance within thirty days.)
• When you do get your mortgage, be sure to always pay it on time. Late mortgage payments are one of the most significant blemishes that you can have on your report.

What does a low credit score mean?

The importance of a good credit rating really can’t be overstated during the mortgage lending process. While lenders have become more flexible with their loan programs, most still hold the credit rating as one of the key deciding factors in both lending money and determining interest rates. Credit ratings show your overall financial health. When you or a lender receives your FICO score, up to four ‘‘score reasons’’ accompany that score and help explain the top reasons why your score was not higher. According to Fair Isaac & Co., these reasons are more useful than the score itself in helping you determine how you might improve your score over time, and whether your credit report might contain errors. However, if you already have a high score (for example, in the mid-700s or higher) some of the reasons may not be very helpful, as they may reference the factors that have the least impact on your score, such as length of credit history, new credit, and types of credit in use. Here are the top ten most frequently given score reasons. (Note that the specific wording given by your lender may be different from the reasons shown in this list):

1. Serious delinquency
2. Serious delinquency, and public record or collection filed
3. Derogatory public record or collection filed
4. Time since delinquency too recent or unknown
5. Level of delinquency on accounts
6. Number of accounts with delinquency
7. Amount owed on accounts
8. Proportion of balances to credit limits on revolving accounts too high
9. Length of time accounts have been established
10. Too many accounts with balances

Five Factors that Determine Credit Record

A credit score basically condenses your credit history into a single number, and while the credit bureaus don’t reveal how these scores are computed, the scores themselves are calculated by using scoring models and mathematical tables that assign points for different pieces of information that best predict future credit performance.
Credit scores analyze various aspects of borrowers’ credit history, including:
❑ Late payments
❑ The amount of time credit has been established
❑ The amount of credit used versus the amount of credit available
❑ Length of time at present residence
❑ Employment history
❑ Negative credit information (bankruptcies, credit card charge-offs,
accounts that are in collections)
According to Fair Isaac & Co., the five factors that determine your credit score are:

1. Payment History (approximately 35 percent of your score): The factor that has the biggest impact on your score is whether you have paid past credit accounts on time. However, an overall good credit picture can outweigh a few late payments, and late payments will continue to have less impact over time.
2. Amounts Owed (approximately 30 percent): Having credit accounts and owing money doesn’t mean you are a high-risk borrower. But owing a lot of money on numerous accounts can suggest that you are overextended and more likely to make some payments late or not at all. Part of the science of scoring is determining how much debt is too much for a given credit profile.
3. Length of Credit History (approximately 15 percent): In general, a longer credit history will improve your FICO score. Lenders want to see that you can responsibly manage your available credit over time. However, even people who have not been using credit very long may get high scores, depending on how the rest of their credit report looks.
4. New Credit (approximately 10 percent): People today tend to have more credit and shop for credit more frequently. But opening several credit accounts in a short period of time can represent greater risk—especially for people with short credit histories. Requests for new credit can also represent greater risk. However, FICO scores are able to distinguish between a search for many new credit accounts and rate shopping. FICO scores generally do not associate shopping for the best rate on a loan with higher risk.
5. Types of Credit in Use (approximately 10 percent): Your FICO score will reflect your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. While a healthy mix will improve your score, it is not necessary to have one of each, and it is not a good idea to open credit accounts you don’t intend to use. The credit mix usually won’t be a key factor in determining your score—but it will be more important if your credit report doesn’t have much other information on which to base a score.

What is a credit report?

Credit ratings are very important to lenders because they show your overall financial health and package it neatly into a multipage report that reads something like a report card from grade school. Credit reports are pretty telling, but they’re also not always 100 percent accurate, so be prepared to deal with any inaccuracies that may come up during the review process. Credit-reporting agencies prepare the reports. There are three reporting agencies and they all have slightly different ways of determining your financial health although they are focused on the same task at hand. The three main reporting agencies are Equifax, Experian, and Trans Union. If you have concerns about your report and what lenders will see on it, it would be wise to order a copy of your credit report (typically for a nominal fee) via phone or on the Web from:
Once you’ve filled out your loan application, the lender will order your ‘‘score,’’ commonly known as a FICO score (for Fair Isaac & Co.), from one or more of the reporting agencies just listed. Lenders also use salary, length of employment, and other factors when making their decision, but the FICO score is one of the first places they look. Some lenders use one of the three scores while others select the ‘‘middle’’ score as a measure.