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Common Questions from First-time Homebuyers
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- Why should I buy, instead of rent?
- Answer: You'll love the feeling of having something
that's all yours - a home where your own personal style will
tell the world who you are. A thriving vegetable garden in
the backyard, a tiled entryway, a yellow kitchen...when you
own, you can do it all your way! But there's more to owning
a home than personal satisfaction. You can deduct the cost
of your mortgage loan interest from your federal income taxes,
and usually from your state taxes, too. And interest will
compose nearly all of your monthly payment , for over half
the number of years you'll be paying your mortgage. This adds
up to hefty savings at the end of each year. And you're also
allowed to deduct the property taxes you pay as a homeowner.
If you rent, you write your monthly check and it's gone forever.
Another financial plus in owning a home is the possibility
its value will go up through the years.
- I've heard of HUD homes. What are HUD homes, and are they
a good deal?
- Answer: HUD homes can be a very good deal. When
someone with a HUD insured mortgage can't meet the payments,
the lender forecloses on the home; HUD pays the lender what
is owed; and HUD takes ownership of the home. Then we sell
it at market value as quickly as possible. Read all about
buying a HUD
home - one might be right for you! And check our listings
of HUD homes
- as well as homes being sold by other federal agencies.
- I've had bad credit, and I don't have much for a down-payment. Can I become a homebuyer?
- Answer: You may be a good candidate for one of
the federal mortgage programs
that are available. A good place for you to start is by contacting
one of the HUD-funded housing
counseling agencies. They can help you sort through your
options. In addition, contact your local government to see
if there are any local homebuying
programs that might work for you. Look in the blue pages
of your phone directory for your local office of housing and
community development or, if you can't find it, contact your
mayor's office or your county executive's office.
- I'm a single mother. How would I go about buying a home?
- Answer: Although you won't have the benefit of two
incomes on which to qualify for a loan, there's no reason
that you can't become a homeowner. Become familiar with the
process, pick a good real estate broker, and think about getting
pre-qualified for a loan. You might want to contact one of
the HUD-funded housing
counseling agencies in your area to talk through your
options. And you also might want to think about buying
a HUD home - they can be very good deals. Also, contact
your local government to see if there are any local
homebuying programs that could help you. Look in the blue
pages of your phone directory for your local office of housing
and community development or, if you can't find it, contact
your mayor's office or your county executive's office.
- Should I use a real estate broker? How do I find one?
- Answer: Using a real estate broker is a very good
idea. All the details involved in home buying, particularly
the financial ones, can be mind-boggling. A good real estate
professional can guide you through the entire process and
make the experience much easier. A real estate broker will
be well-acquainted with all the important things you'll want
to know
about a neighborhood you may be considering...the quality
of schools, the number of children in the area, the safety
of the neighborhood, traffic volume, and more. He or she will
help you figure
the price range you can afford and search the classified
ads and multiple listing services for homes you'll want to
see. With immediate access to homes as soon as they're put
on the market, the broker can save you hours of wasted driving-around
time. When it's time to make an offer on a home, the broker
can point out ways to structure your deal to save you money.
He or she will explain the advantages and disadvantages of
different types of mortgages, guide you through the paperwork,
and be there to hold your hand and answer last-minute questions
when you sign the final papers at closing. And you don't have
to pay the broker anything! The payment comes from the home
seller - not from the buyer.
By the way, if you want to buy
a HUD home, you will be required to use a real estate
broker to submit your bid. To find a broker who sells HUD
homes, check your local yellow pages or the classified section
of your local newspaper.
- How much money will I have to come up with to buy a home?
- Answer: Well, that depends on a number of factors,
including the cost of the house and the type of mortgage you
get. In general, you need to come up with enough money to
cover three costs: earnest money - the deposit
you make on the home when you submit your offer, to prove
to the seller that you are serious about wanting to buy the
house; the down payment, a percentage of the
cost of the home that you must pay when you go to settlement;
and closing costs, the costs associated with
processing the paperwork to buy a house.
When you make an offer on a home, your real estate broker
will put your earnest money into an escrow account. If the
offer is accepted, your earnest money will be applied to
the down payment or closing costs. If your offer is not
accepted, your money will be returned to you. The amount
of your earnest money varies. If you buy a HUD home, for
example, your deposit generally will range from $500 - $2,000.
The more money you can put into your down payment, the
lower your mortgage payments will be. Some types of loans
require 10-20% of the purchase price. That's why many first-time
homebuyers turn to HUD's FHA for help. FHA
loans require only 3% down - and sometimes less.
Closing costs - which you will pay at settlement
- average 3-4% of the price of your home. These costs cover
various fees your lender charges and other processing expenses.
When you apply for your loan, your lender will give you
an estimate of the closing costs, so you won't be caught
by surprise. If you buy
a HUD home, HUD may pay many of your closing costs.
- How do I know if I can get a loan?
- Answer: Use our simple mortgage
calculators to see how much mortgage you could pay - that's
a good start. If the amount you can afford is significantly
less than the cost of homes that interest you, then you might
want to wait awhile longer. But before you give up, why don't
you contact a real estate broker or a HUD-funded housing
counseling agency? They will help you evaluate your loan
potential. A broker will know what kinds of mortgages the
lenders are offering and can help you choose a lender with
a program that might be right for you. Another good idea is
to get pre-qualified for a loan. That means you go to a lender
and apply for a mortgage before you actually start looking
for a home. Then you'll know exactly how much you can afford
to spend, and it will speed the process once you do find the
home of your dreams.
- How do I find a lender?
- Answer: You can finance a home with a loan from
a bank, a savings and loan, a credit union, a private mortgage
company, or various state government lenders. Shopping
for a loan is like shopping for any other large purchase:
you can save money if you take some time to look around for
the best prices. Different lenders can offer quite different
interest rates and loan fees; and as you know, a lower interest
rate can make a big difference in how much home you can afford.
Talk with several lenders before you decide. Most lenders
need 3-6 weeks for the whole loan approval process. Your real
estate broker will be familiar with lenders in the area and
what they're offering. Or you can look in your local newspaper's
real estate section - most papers list interest rates being
offered by local lenders. You can find FHA-approved
lenders in the Yellow Pages of your phone book. HUD does
not make loans directly - you must use a HUD-approved lender
if you're interested in an FHA loan.
- In addition to the mortgage payment, what other costs do
I need to consider?
- Answer: Well, of course you'll have your monthly
utilities. If your utilities have been covered in your rent,
this may be new for you. Your real estate broker will be able
to help you get information from the seller on how much utilities
normally cost. In addition, you might have homeowner association
or condo association dues. You'll definitely have property
taxes, and you also may have city or county taxes. Taxes normally
are rolled into your mortgage payment. Again, your broker
will be able to help you anticipate these costs.
- So what will my mortgage cover?
- Answer: Most loans have 4 parts: principal: the
repayment of the amount you actually borrowed; interest: payment
to the lender for the money you've borrowed; homeowners insurance:
a monthly amount to insure the property against loss from
fire, smoke, theft, and other hazards required by most lenders;
and property taxes: the annual city/county taxes assessed
on your property, divided by the number of mortgage payments
you make in a year. Most loans are for 30 years, although
15 year loans are available, too. During the life of the loan,
you'll pay far more in interest than you will in principal
- sometimes two or three times more! Because of the way loans
are structured, in the first years you'll be paying mostly
interest in your monthly payments. In the final years, you'll
be paying mostly principal.
- What do I need to take with me when I apply for a mortgage?
- Answer: Good question! If you have everything with
you when you visit your lender, you'll save a good deal of
time. You should have: 1) social security numbers for both
your and your spouse, if both of you are applying for the
loan; 2) copies of your checking and savings account statements
for the past 6 months; 3) evidence of any other assets like
bonds or stocks; 4) a recent paycheck stub detailing your
earnings; 5) a list of all 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; and
8) the name and address of someone who can verify your employment.
Depending on your lender, you may be asked for other information.
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- I know there are lots of types of mortgages - how do I
know which one is best for me?
- Answer: You're right - there are many types of mortgages,
and the more you know about them before you start, the better.
Most people use a fixed-rate mortgage. In a fixed rate mortgage,
your interest rate stays the same for the term of the mortgage,
which normally is 30 years. The advantage of a fixed-rate
mortgage is that you always know exactly how much your mortgage
payment will be, and you can plan for it. Another kind of
mortgage is an Adjustable Rate Mortgage (ARM). With this kind
of mortgage, your interest rate and monthly payments usually
start lower than a fixed rate mortgage. But your rate and
payment can change either up or down, as often as once or
twice a year. The adjustment is tied to a financial index,
such as the U.S. Treasury Securities index. The advantage
of an ARM is that you may be able to afford a more expensive
home because your initial interest rate will be lower. There
are several government mortgage programs,including the Veteran's
Administration's programs and the Department
of Agriculture's programs. Most people have heard of FHA
mortgages. FHA doesn't actually make loans. Instead, it insures
loans so that if buyers default for some reason, the lenders
will get their money. This encourages lenders to give mortgages
to people who might not otherwise qualify for a loan. Talk
to your real estate broker about the various kinds of loans,
before you begin shopping for a mortgage.
- When I find the home I want, how much should I offer?
- Answer: Again, your real estate broker can help you
here. But there are several things you should consider: 1)
is the asking price in line with prices of similar homes in
the area? 2) Is the home in good condition or will you have
to spend a substantial amount of money making it the way you
want it? You probably want to get a professional home
inspection before you make your offer. Your real estate
broker can help you arrange one. 3) How long has the home
been on the market? If it's been for sale for awhile, the
seller may be more eager to accept a lower offer. 4) How much
mortgage will be required? Make sure you really 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
your offer will be accepted. In some cases, you may even want
to offer more than the asking price, if you know you are competing
with others for the house.
- What if my offer is rejected?
- Answer: They often are! But don't let that stop
you. Now you begin negotiating. Your broker will help you.
You may have to offer more money, but you may ask the seller
to cover some or all of your closing costs or to make repairs
that wouldn't normally be expected. Often, negotiations on
a price go back and forth several times before a deal is made.
Just remember - don't get so caught up in negotiations that
you lose sight of what you really want and can afford!
- So what will happen at closing?
- Answer: Basically, you'll sit at a table with your
broker, the broker for the seller, probably the seller, and
a closing agent. The closing agent will have a stack of papers
for you and the seller to sign. While he or she will give
you a basic explanation of each paper, you may want to take
the time to read each one and/or consult with your agent to
make sure you know exactly what you're signing. After all,
this is a large amount of money you're committing to pay for
a lot of years! Before you go to closing, your lender is required
to give you a booklet explaining the closing costs, a "good
faith estimate" of how much cash you'll have to supply at
closing, and a list of documents you'll need at closing. If
you don't get those items, be sure to call your lender BEFORE
you go to closing. Be sure to read our booklet on settlement
costs. It will help you understand your rights in the
process. Don't hesitate to ask questions.
- More information?
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