Homebuyers Education Book

First-Time Homebuyer Educa�on A HUD cer�fied NeighborWorks® Homeownership Center

________________________________ Class Attendee Name

February 2020

First-Time Homebuyer Educa�on

By Valerie Plichta

With Special Thanks to NeighborWorks® America

Homebuyer Education and Counseling Program HUD Certified a NeighborWorks® Housing Counseling Agency Welcome and congratulations on taking this first and essential step towards homeownership! Below is an overview of the flow of our program.

Education • •

Attend the Homebuyer Education class for first-time homebuyers Schedule your one-on-one counseling with a Housing Counselor • through the link in post-class email or • by phone at 713-864-9099

Prepare for Counseling •

If you have not already done so, gather essential documents to bring to your counseling session • Photo ID • 2 month's pay stubs or last 2 years Income Tax • Draft of the Household Budget WorkSheet • Loan Estimate (if available)

Prepare for Closing • •

Send the official Loan Estimate to your counselor Update your Budget as needed with the new PITI

Introduction: About Us & Our Services

Our Mission AVENUE is a non-profit organization dedicated to revitalizing Houston's Washington Avenue and Near Northside Community by developing affordable housing and economic opportunities, while preserving our area's economic, cultural, and historical diversity. These vibrant and historic neighborhoods are challenged by an aging and often neglected housing stock, vacant lots, and incompatible land uses. Recently, the close proximity to downtown has encouraged a patchwork of new, upscale development. This new popularity has led to escalating housing prices that have placed home ownership, and even rental housing, in certain neighborhoods beyond the reach of many hardworking residents.

Our History AVENUE was founded in 1991 by a group of neighbors who wanted to develop affordable housing, preserve historic buildings, and revitalize the Old Sixth Ward, a National Register Historic District in the shadow of Houston’s Downtown. Old Sixth Ward CDC, as it was then known, was operated entirely by volunteers for the first four years. Since then, our staff has grown to forty-three full-time employees, and our Board of Trustees now includes 16 community leaders. At the request of civic organizations from surrounding neighborhoods, by 1999 we had expanded our target area to include the entire Near Northside, Northline and Washington Avenue communities, just north of Downtown Houston. We changed our name to AVENUE to reflect this expanded focus.

Our Services To meet the tremendous need for quality affordable housing, AVENUE develops homes for purchase and rental. We provide homebuyer education and counseling to help working families buy and maintain their own homes. We provide realty services that you can utilize as you prepare to begin your homebuying process.

We promote economic development and offer supportive services such as computer labs and after-school programs that enrich the lives of individuals and families we serve. We engage neighbors and community leaders in a process of developing and realizing a future vision for their neighborhood.

www.avenuecdc.org

Chapter 1: Are You Ready to Buy a Home?

Chapter 1: Are You Ready to Buy a Home?

Is Homeownership Right for You?

While some people prefer to rent homes and apartments due to the freedom that it can afford, others are more interested in building roots in a community through the avenue of homeownership. While deciding whether or not becoming a homeowner is the right choice for you, consider the advantages and disadvantages of homeownership.

Advantages of Homeownership •

Stable housing costs. By obtaining a fixed rate mortgage loan, the principal and interest por�ons of your monthly payment will stay the same throughout your tenure as a homeowner. Your taxes and insurance costs will vary year to year, but you can maintain some control over the rates of increase by shopping around for the best insurance policy and protes�ng your taxes.

•

Tax benefits. Because home loan interest and property taxes are deduc�ble from your income taxes, it is possible that you’ll end up paying less federal income taxes annually. More informa�on on this is provided in Chapter 6: Protec�ng Your Investment.

•

Equity. Mortgage payments are investments in your future.

They go towards your purchasing of an asset that will build equity and value for you and your family. Over �me, as you build equity, you could borrow against it to buy a future income property, pay for your child’s tui�on or start a business. It can also be used as re�rement funds when you sell or reverse finance the home.

•

Control over your environment. As a homeowner, you have more freedom to make changes to the home that will make it what you want it to be. Although there may be some limita�ons if you decide to move to a neighborhood with deed restric�ons or a Homeowners’ Associa�on, you will s�ll have plenty of room to make adjustments and improvements to your home to make it just right for you.

•

Stability. With homeownership comes the feeling of having roots established in a community, as well as a sense of pride and involvement. Knowing that your neighbors will be living alongside you for a long �me can provide a sense of security and comfort to you and your household, and will allow you to develop deeper connec�ons in your community.

What are you looking forward to as a benefit of homeownership?

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Disadvantages of Homeownership •

Monthly costs. Depending on where you choose to buy, buying a home can some�mes be more expensive than ren�ng when you add in the cost of insurance, repairs, maintenance, HOAs, and u�li�es. It is worth considering the op�ons in your desired neighborhood to help you decide if you’re ready to buy or prefer to rent.

•

No guarantees. Due to the unpredictable nature of the housing market, possible damage to the home, and other factors, there is no guarantee that your home will increase in value. If you have to sell before you can build equity or before your home appreciates in value, you may end up “upside down” on your loan, meaning you’ll owe money at the closing table instead of receiving money. However, you can do your part to improve the home’s resale value by maintaining the physical condi�on of the home and adding minor upgrades over the years.

•

Maintenance and repairs. As a homeowner, lawn care, repair and maintenance are your responsibility. You either have to do them yourself if you have the �me, tools and know-how, or you have to hire someone to do it for you. Make sure to keep a close watch on the condi�on of major systems and cri�cal aspects of your home like the roof. By fixing minor issues quickly, you will be able to avoid larger, most costly problems in the future.

•

Decreased mobility. As a homeowner, you have to either rent out or sell your home before you can move on to the next place in your life journey. If you’re not comfortable with the idea of ren�ng out your house or if you don’t think you could carry two mortgages, you’ll likely have to sell the house before moving on. This could mean extra stress, work and money for you and your household.

•

Fewer Features. Apartment buildings o�en come with features such as swimming pools, communal laundry rooms, business centers, and exercise rooms. When you buy a home it is unlikely that you’ll maintain access to those features, and will instead have to pay for them or do without them.

What fears or worries do you have about the prospect of being a homeowner?

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WORKSHEET: Rent vs. Own Analysis Read the following aspects of ren�ng versus owning, and decide if they would be posi�ve or nega�ve for you – right now. Everyone’s answers will vary because we all have different priori�es at different �mes in our lives.

Put a “+” in the box for what you think would be good for you and a “-“ in the box for what you think would have a nega�ve impact on you and your household.

Rent

Own Monthly Costs

□

□

Monthly costs may be lower, especially if u�li�es are included but there are no tax advantages

Monthly payments are generally higher, but the interest and property taxes can be deducted from your federal income taxes.

Home Maintenance

□

Repairs are the responsibility of the landlord

□

Repairs are your responsibility

□

Mortgage payments are like forced savings accounts. Not only do you get to live there but every payment you make you are buying an asset and hopefully that asset will appreciate over �me to give you even more than you put into it.

Equity

□

Paying rent is basically just paying for the right to borrow a property – you are not building equity and in most cases, you are not building credit.

Freedom vs. Responsibility

□

□

You can move when your lease ends

You have to find someone to rent your home to and manage the rental or you have to sell your home before you can move on.

Privacy/Security

□

Your privacy may be limited living in mul�-family communi�es

□

Your home is yours so you’ll have greater privacy and say over who enters your home

□

The landlord may sell the property or you may be evicted or your rent may be raised

□

With a fixed-rate mortgage, your principal and interest payments remain the same.

Total + for Ren�ng = __________

Total + for Owning = __________

Total – for Ren�ng = __________

Total – for Owning = __________

Source: NeighborWorks® America, Realizing the American Dream

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PATH TO HOMEOWNERSHIP WORKSHEET

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Your Homeownership Team Avenue Homeownership Counselors Avenue employs HUD Certified Housing Counselors to provide guidance and information on the home buying process. They are available to you from the time you take your Homebuyer Education class, throughout the process and after you closing on the home to answer any questions or doubts you have. Counselors are a neutral party with the main purpose of providing you with knowledge and tools to navigate the homeownership journey. If you would like to schedule an appointment, call (713) 864-9099.

Real Estate Agent The real estate agent is licensed by the state and has received special training to sell homes, land, and other buildings. Although there are buyer’s and seller’s agents, only the seller pays a commission for using an agent. For buyers, it is strongly recommended that you find your own realtor to represent your interests, as the seller’s realtor is obligated by law to represent the best interests of their client, the seller. If you are interested in finding the right real estate agent for you, visit www.har.com.

Lender While looking to purchase your new home, you will in all likelihood obtain a home loan—often referred to as a mortgage loan—from a lender. Various institutions or even private individuals can provide mortgage loans, including banks, credit unions, savings and loans, government agencies, mortgage companies, and mortgage brokers. Due to the high cost of housing, the process of obtaining this mortgage loan is far more complex than applying for other kinds of credit. If you are planning to apply for down payment assistance, you may need to choose a lender from the program’s approved lender list.

Attorney Attorneys typically prepare or review the documents involved at closing and are able to handle any potential disputes that may occur during the homebuying process. They also generally conduct title searches and prepare title commitments.

Title Agent / Escrow Officer From the moment that the purchase contract is signed to the day that the sale of the house is closed, your sale is referred to as being “in escrow.” This means that the escrow officer—a trusted, neutral third party working for both the buyer and seller—will be put in charge of making sure that each party fulfills the terms of the purchase contract and that the sale closes on time. In order to do so, the escrow officer keeps the original purchase contract and other necessary documents, holds the earnest money deposit, and ensures that each party involved in the sale is completing the required tasks.

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Inspector Before you purchase a house, a housing inspector will come to the property to assess its mechanical components and structure. It is highly recommended that you attend this inspection, as the inspector will be able to show you essential aspects of your new home, such as the whereabouts of the electrical boxes and main water shut-off valves. The inspector will also be able to inform you about the home maintenance you will be expected to perform over the years. If you would like to learn more about the Houston Association of Real Estate Inspectors, visit www.harei.com.

Appraiser When deciding how much money to lend you, a mortgage lender will hire an appraiser. This appraiser will assess the home in question in comparison with similar homes in the same area that have recently been sold, and will use this information to estimate the fair market value of the house.

Surveyor A surveyor is a licensed professional who measures both the property you wish to buy and its surrounding land, and establishes the legal boundary lines of your property. The resulting survey will detail the exact size of the property, whether or not any easements or encroachments exist, the location and dimensions of any additions or improvements, and whether or not any of these improvements extend outside of the property lines. NOTE: Sometimes the seller will provide the buyer a copy of their survey so the buyer will not have to pay for a new one.

Insurance Agent When you become a homeowner, you will be required to purchase homeowners insurance, which will protect your home from casualty and liability. Your insurance agent will be able to inform you as to the appropriate policies as well as how much insurance you should have based on the physical condition as well as the geographical region in which you will live. Certain areas are more prone to certain kinds of natural disasters than others, which may make obtaining certain kinds of insurance—such as flood, fire, earthquake, or hurricane—more difficult. When researching insurance policies, make sure to receive at least three quotes.

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13

EXERCISE: Steps in the Homebuying Process Do you know the main steps to take in buying a home? Using the steps listed on the column on the left, fill in the blanks with the steps in the order in which you think they should happen.

Steps

Correct Order

1. Get Pre-approved

__________________________

2. Closing

__________________________

3. Inspec�ons

___________________________

4. Decide Home Wants & Needs

___________________________

5. Select a Real Estate Agent

___________________________

6. Get Homeowner’s Insurance Quotes

___________________________

7. Apply for Down Payment Assistance

___________________________

8. Nego�ate Repairs

___________________________

9. Prepare Finances (Budget/Credit/Savings)

___________________________

10. Get Educated

___________________________

11. Offer Acceptance/Under Contract

___________________________

12. Apply for Mortgage/Compare Loan Es�mates

___________________________

13. Buyer’s Final Walk-through

___________________________

14. Make an Offer

___________________________

15. Shop for a Home

___________________________

16. Review Closing Disclosure

___________________________

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The Mortgage Payment and Other Costs of Homeownership

Before purchasing a home, many poten�al homeowners first need to obtain a home loan—also known as a mortgage loan. The lender is called the “mortgagee,” and the borrower is referred to as the “mortgagor.”

During this process, you will sign a promissory note sta�ng that you promise to repay the full amount over �me and that you will give the lender collateral—something of value—if you find yourself unable to repay the loan. If you cannot pay the money back, the bank will take your home and any money used for down payment or to build equity as collateral, effec�vely foreclosing on the home. In Texas, a deed of trust is used to establish the house as collateral for the loan.

What Does a House Payment Include?

A mortgage loan payment is o�en composed of four different parts and is also called a PITI or PITIA payment.

This house payment includes: Principal, Interest, Texas, and Insurance. If you live in a neighborhood with an HOA, you may also need to pay Associa�on Fees. These components are outlined below: •

Principal (P). The principal is the por�on dedicated to paying the balance of the loan.

•

Interest (I). The interest is the fee charged by the mortgagee for lending you the funds.

•

Taxes (T). These are your property taxes based on the county’s appraised value of your property. For each property, there is a tax break down that will show you the details of what makes up your property taxes. Taxes are due once a year to the county and may total in the thousands depending on the house value, your exemp�ons and loca�on. In many cases, it is best for first-�me home buyers to ask the lender to do an “escrow account” for the taxes. This means that the lender will es�mate what your annual taxes will be and they will divide that by 12 in order to get a monthly amount. They will add that monthly amount to your monthly PI payment. Depending on the lender, the loan type and the amount of down payment, you may be required to do escrow or you may have the op�on to not do it.

NOTE: Because the monthly amount the lender is collecting from you in escrow for your tax is an estimate, you could end up owning more or less at the end of the year when the final tax bill comes due. It is important for you to maintain savings in an emergency house fund so that you can cover the expenses when they come up.

•

Insurance (I). The two kinds of insurance that are o�en used in mortgage loans are homeowners insurance and mortgage insurance. Mortgage insurance is designed to protect the lender if you fail to repay the loan and may be required by the mortgagee depending on the loan type or amount of down payment put forth at the �me of purchase. This can prove costly, o�en coming out to approximately .85% of the loan value, which for the average house can be about $85-120/month. Most lenders will put these payments into an escrow account.

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•

Associa�on Fees (A) Some proper�es come with associa�on fees. These are not typically collected by the lender, but rather need to be paid to the associa�on itself. Associa�ons can foreclose on your home if you fail to pay your fees, so it is cri�cal that you are aware of the fees and pay them on �me.

Other Costs of Homeownership While the home mortgage is the largest expense associated with homeownership, there are also other expenses you should plan for. While some of these costs are one-�me up front expenses involved in purchasing a home, others will con�nue throughout your tenure as a homeowner.

Upfront Costs and Considerations • Purchasing Costs. Before you start shopping for a house, you will need to make sure to have enough money in your checking account to cover expenses that will occur throughout the course of the purchase process, including the inspection, earnest money, and option fees.

•

Down Payment. This is the money that you will invest in the house at the time of purchase. A larger down payment will result in a smaller loan, reduced payments or shorter repayment terms. Although the minimum amount of the down payment is often 3-5% of the purchase price, the lender may require that you pay for mortgage insurance as well. By paying 20% of the purchase price, you will be able to avoid paying for mortgage insurance entirely. Down payment assistance programs funded through HUD can also help you with your down payment.

•

Closing Costs. The “closing” occurs when all of the necessary paperwork has been reviewed and finalized, and both the buyer and the seller are prepared to complete the transaction. The term “closing costs” refers to the summary of the fees charged for the various services provided over the course of the transaction. This includes some purchasing costs such as the appraisal and credit report fees, fees relating to paperwork and other services provided, as well as prepaid expenses such as homeowners insurance. Closing costs typically vary between 2-7% of the purchase price of the home.

•

Reserves. Most lenders will want to know that borrowers have enough money in savings to weather a financial hardship and to keep the home well-maintained. Typically, they will want to see that you have access to enough cash to make house payments for 2-5 months without any new income, as this indicates that your future home is unlikely to be foreclosed upon. These surplus funds are referred to as “reserves”. Many lenders will accept funds saved in retirement accounts as reserves assuming that the rules of your retirement account allow the funds to be used for that purpose. It is a good idea to have some reserves regardless of whether a lender requires them, as it will allow you to maintain your home and to have some emergency funds just in case.

•

Moving expenses. Regardless of whether you will be paying for moving company services or cramming all of your belongings into your car, the cost of moving inevitably adds up. In addition to saving for the down payment and other upfront costs, make sure that you can afford for moving expenses, such as: • Vehicle rental or moving service fee • Changing locks on house, installing dead bolts, smoke detectors, and alarm systems • Deposits on utilities, phone, cable, trash • Immediate repairs or initial cleaning • New appliances and equipment, decorations and furniture

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Ongoing Costs As a homeowner, you may be surprised as to how expensive and time-consuming it can be to fulfill the basic requirements of regular home maintenance, particularly in conjunction with the additional costs that you will be expected to pay over the years. On top of the mortgage loan payments you will be paying every month, you should anticipate putting more money towards both utility costs and insurance than you otherwise would when renting a home or apartment. Remember to have enough funds set aside to cover any repairs or improvements that may need to be done on the house.

WORKSHEET: What to expect for upfront costs

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How Much Can You Afford?

How much you can afford to buy a home depends on your income, credit score, debt and cash on hand. As a quick rule of thumb, your PITIA should not exceed 30-35% of your total monthly income. Or another quick rule of thumb is that your total loan amount should be 2-3 �mes as much as your annual salary. However, it all depends on your other debts, credit score, size of down payment and in some cases, the loca�on of the home, as this can have an impact on the cost of insurance and amount of property taxes.

Although lenders will look at your gross income, your Avenue Counselor and down payment programs will generally look at your net income instead.

Throughout the course of this class, you may find that you may not be able to afford the kind of house that you hope to purchase. Nevertheless, you may want to consider taking this step and moving forward anyway, as the home you end up buying may appreciate in value, depending on interest rates and pricing. In the future, you may find yourself able to make the altera�ons and upgrades that you desire.

WORKSHEET: Housing Affordability

Total Gross Annual Income

$___________________________

(Add annual income from all borrowers to monthly income before taxes)

$___________________ $___________________

2.5 x x2.5

Low Range of Housing Cost

Gross Annual Income

Low Range of Housing Cost

Gross Annual Income

$___________________ $___________________ Gross Annual Income Gross Annual Income

Source: NeighborWorks® America, Realizing the American Dream

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$______________________________ $______________________________

x 3x 3

$______________________________ $_____________________________ High RangeofofHousing HousingCost Cost High Range

Chapter 2: Managing Your Money

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Chapter 2: Managing Your Money Introduction

One of the most important aspects of becoming a homeowner is being able to make wise decisions about the appropriate times to spend and save your money. Managing your personal finances as a homeowner may involve altering your spending habits so that you are able to pay your bills and to maintain the upkeep of your home.

This section will discuss: • • •

How to create a realistic spending plan Ways to set attainable goals and come up with a spending plan to achieve them How to reduce unnecessary expenses and ways to save money

By setting attainable goals and maintaining a budget, you will be all the more prepared for buying your own home and for paying for the routine costs that come with homeownership. For example, what if a branch falls on your roof during a storm? What if your washing machine breaks? By managing your money, you will be more prepared to handle the cost of unexpected repairs.

Why Create a Spending Plan?

•

To Prepare for Large Expenses. The process of homeownership comes with many large expenses, such as the down payment, closing costs, mortgage payments, and property maintenance. However, by coming up with a spending plan, you will be more prepared to take care of these costs along with your other expenses.

•

To Achieve Your Goals. By having a spending plan, you can figure out your top priorities and what steps to take to accomplish them.

•

To Encourage Savings. By taking time to manage your finances, you will be able to add to your savings account on a regular basis.

•

To Prepare for Unexpected Expenses. In an emergency, having a savings plan can help you feel more secure and enable you to cover surprise expenses.

•

To Identify Unnecessary Spending. When you don’t take the time to review your spending habits, you might not realize how much money you are spending on items that you neither want nor need.

Looking at your spending practices will allow you to re-prioritize and put your money towards the things that are most important to you.

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The Steps in Establishing a Spending Plan Step 1: Determine your monthly net income Your net income is the amount of money you receive each month after subtracting taxes and other payroll deductions. When calculating your income, include all monetary resources you receive each month (money from your job, your partner’s job, retirement benefits, child support, alimony, etc.). Reference any documents that show how much you earn at your regular job in addition to any other sources of income, and calculate the total amount you make each month.

Step 2: Calculate your monthly expenses Next, calculate how much you spend a month.

Remember to include the amount you put towards rent, utilities, insurance, groceries, restaurants, credit cards, doctor’s appointments, donations, car payments, and activities such as movies or other outings. Collect any bills and receipts that you have.

While you may not have receipts for everything you spend, you should be able to make fairly accurate estimates as to how much certain things cost. In the future, find a method of keeping track of your expenses, whether it is carrying around a small journal in which to write down your purchases or saving all of your receipts.

Step 3: Subtract your monthly expenses from your income Once you have subtracted your regular monthly expenses from your monthly income, you will be left with what is referred to as “discretionary income.” It is up to you to decide how much of this money should be spent on recreational activities and material goods, and how much should be saved for your future goals.

However, if your expenses turn out to be greater than your income, you are left with a deficit. In order to avoid depending on credit cards to pay the bills and sinking into debt, you will have to decide what expenses can be trimmed from your budget and/or how to earn greater income. Credit problems will be covered further in the Understanding Credit section.

“A goal is just a promise until you put a plan to it” - Peter Heij

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Developing a Spending Plan to Meet Your Goals One of the most effective ways of sticking to your spending plan is to discuss your budget with your family and work together to discover each person’s goals and how to best achieve them. By detailing the associated costs and benefits of each goal, be it learning how to play an instrument or buying a house, you will be able to work together to determine which goals are the most important to the entire family. In order to meet these aspirations, you will all have to decide on an appropriate spending plan and decide what should be trimmed from your monthly expenses and what should be saved.

As a family, come up with different ways that you will be able to help each other cut expenses and reach these goals. Listed are some effective means of trimming expenses: •

Use a list when grocery shopping, as this will encourage you to buy only what you need. Post it in an accessible place and add to it throughout the week.

•

Eat at home as often as possible, as eating out often can become very expensive. Make meals together, and bring your lunch to work.

•

Clip coupons together. Exchange coupons with friends and family, and save your receipts so that you can calculate how much money you’ve saved.

•

For big purchases, find at least three different available prices.

•

Shop in resale stores for quality used furniture, clothing, toys, and sports equipment.

•

Trade services with friends and neighbors rather than paying for them. For example, trade tax preparation for lawn mowing, or trade babysitting with neighbors when planning a night out.

•

Find fun, free activities in your area, such as going to parks, concerts, and museums.

Types of Expenses Fixed Expenses Although many living expenses are fixed and stay the same from month to month, such as rent, utilities, insurance payments, etc., there may be ways to reduce or eliminate them altogether. Are you able to carpool with a coworker to save money on gas? Are you able to reduce your monthly car payment by getting a better interest rate at the credit union?

Periodic Fixed Expenses There are additionally certain fixed expenses that are often paid only a few times a year, such as car insurance payments or sewage costs. Are there ways to decrease these periodic fixed expenses or eliminate others? Are you able to get a better rate on your insurance policy?

Flexible Expenses Amounts spent on personal items, groceries, and entertainment typically change from month to month, and are referred to as flexible expenses. What flexible expenses in your life can be reduced or trimmed from your budget? Are you able to decrease the number of cable channels that you pay for, or go out to eat less often?

Oftentimes people will spend much of their discretionary income on eating out and entertainment. These expenses are often the best place to start when attempting to save money and to reach your goals.

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Indebtedness Expenses Credit—extended through personal loans, credit cards, home mortgages, and car loans—allows you to purchase goods and services now and pay for them at a later date. However, this practice results in debt, an obligation to pay someone money for the amount spent while using credit.

The minimum monthly expenses due to one’s creditors are referred to as indebtedness expenses, for which you may receive bills or have to pay a monthly fixed amount. However, in order to pay off your debt more quickly and to save money on interest charges, it is a good idea to pay more than the minimum amount each month. Are you able to reduce your monthly payment through refinancing your debts at a lower interest rate?

Would you be able to decrease separate rates of interest through consolidating your credit cards and paying off one single card? Are there any debts that you are able to pay off in full now? This topic will be further explored in Chapter 3: Understanding Credit.

Money Management Tips

Here are some tips to follow while recording your spending plan: •

Plan according to your present income, not the income that you expect or hope to have. Whenever your income changes, redo your plan.

•

Plan ahead for six months. This will give you a realistic image of how well you are sticking to your plan, and where you’re headed financially.

•

Make sure your recordkeeping is simple and manageable, but also make sure to write everything down.

•

Include some spending money for each member of the household in addition to regular planned expenses.

•

Set money aside for home maintenance and upkeep. Put this money aside and into a savings account.

•

Make sure that the first “bill” you pay each month is the money you put into your savings account.

•

Discuss the spending plan with your household, and make sure that everyone agrees on it.

Ways to Make Money Management Easier •

Keep track of when bills are due. Schedule your fixed payments, your rent or mortgage, and your car loan payment so that it matches up with when you receive your paycheck.

•

Create a checking account specifically for paying your bills. This will also give you yet another way to identify how much money you are spending each month.

•

Open a savings account you can access in emergencies in addition to the funds set aside for future goals. By having a savings account, you will be able to handle unexpected expenses and still pay your bills on time, allowing you to avoid major problems in the long run.

•

Research whether your utility companies offer “average payment plans” or “level billing payments”.

These payment plans divide your bills into 12 equal payments per year, and will allow you to anticipate how much your utility payments will be no matter how much heat or air conditioning you are using per month.

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•

Think about consolidating your credit card accounts. If you have multiple credit card accounts, and owe money on each, find out whether or not you can consolidate them by using a cash advance from the card with the lowest interest rate to pay off the amounts due. If you transfer the balance from another account, many companies offer even lower rates. In order to prevent yourself from running up new debts after the transfer, make sure to cancel the other accounts over the course of several months. Calculate the amount you will need to pay each month to achieve your goal of paying off the consolidated balance.

•

If you are spending a considerable amount on car payments for a newer car, consider how important having a newer car is in relation to your other long-term goals. Contemplate selling the car, buying an economy model, and putting the difference into savings.

•

Examine the interest rates you are paying on your other loans, and find out whether or not your local credit union or bank will refinance those loans at a lower rate.

•

Follow your spending plan. Once your household has come together and consented to a spending plan, you owe each other the chance of reaching your goals by sticking to it.

Controlling Your Day-to-Day Spending Here are some methods of maintaining how much you spend day-to-day: •

Write down reminders of your goals and carry them with you. Whenever you are preparing to make a purchase, read your goals and decide whether that purchase will increase or decrease your chances of achieving them.

•

If available at your workplace, make sure that your paycheck is automatically deposited into your bank account through direct deposit.

•

Avoid impulsive shopping by putting items on layaway instead. Layaway plans usually do not come with finance charges, and will give you time to decide if you truly want the item that you have set aside.

•

Buy only what you need, and not out of boredom or because something is on sale. Make shopping lists and stick to them.

•

Above all else, avoid using credit cards if you have other means of payment. If you use a credit card and are unable to pay off the entire bill, a finance charge will be added to your expenses. Because debit cards withdraw money directly from your checking account immediately after purchase, there is no interest. However, to avoid overdrawing your account, it is important to monitor your balance regularly. This can easily be done online.

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The Importance of Saving

One of the most useful things that you can do while pursuing your financial goals is putting your money into a savings account at a bank or credit union. By opening a savings account, you will earn a payment for allowing that institution to hold your money. This payment, referred to as interest, adds up over time. For example, if you were to put only $2 into your savings account every day at 2% interest, you would save $1,504.09 over the course of two years.

In the interest of achieving your financial goals, look into ways to put 10% of your income into savings. Ask your employer if direct deposit is offered at your workplace, as it enables you to automatically put a specific percentage of your income into your savings account without your having to remember to do so.

Types of Savings Accounts Regular Savings Account Also referred to as demand deposit or passbook accounts, this is the standard type of savings account. Most banks and credit unions do not charge a fee for this type of account, and require low minimum deposit rates ranging between $5 and $200. While your money earns a relatively low interest rate, you are nevertheless able to withdraw or deposit money from this account whenever you wish.

Certificate of Deposit (CD) Although this type of savings accounts requires you to keep your money in the CD for a certain period of time and to make a larger minimum deposit—generally between $1,000 and $5,000—it earns a higher interest rate than a regular savings account. This rate of interest increases the longer you leave your money in the CD. If you withdraw your money from the account before the term is over, you may have to pay a fee.

Money Market Account This account requires a larger minimum deposit as well—ranging between $500 and $2,500—and limits the frequency of withdrawals from the account each month. However, it additionally earns a higher interest rate than that of a regular savings account.

Matched Savings Account This type of account is only used for certain significant purchases, such as buying a home. In a matched savings account, the amount of money that you put into your bank account is matched by a set amount that is significantly higher than the interest rate on a regular savings account. For example, for every $1 that you save, some banks may offer you as much as $3.

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Family Savings Account (FSA) programs and Individual Development Account (IDA) programs are examples of matched savings accounts. If you are interested in one of these programs, you will need to see if you qualify to open an account, as program requirements vary by area. For more information on IDA programs, visit http://www.covenantcapital.org.

If you are saving for a down payment for a house or a similar long-term goal, it might be a good idea to earn a higher interest rate through a Money Market Account or a Certificate of Deposit. Although you may want to keep separate savings accounts for different purposes—one for possible emergencies and one for saving for a house—you may also prefer to keep your savings in one account.

The amount that you put into savings is not as important as the act of saving itself. If the amount that you hope to put into savings is unrealistic, alter it as needed, but make sure to maintain the habit of saving.

Thinking and Saving Like a Homeowner If you aspire to become a homeowner, your spending plan should include putting money into savings and anticipating other costs associated with purchasing a home, such as loan fees, moving costs, insurance, and appraisals. These costs will be covered in more detail in Chapter 5: Shopping for a Home.

Consider how you will best handle the new and more costly expenses of homeownership. How will you manage higher insurance payments, utility bills, property taxes, and property repair? Put a portion of your income into a savings account so that you will be able to pay for these expenses when they occur.

When considering yearly household maintenance and repairs, some housing specialists recommend setting aside one percent of the home’s purchase price. Therefore, if your house was listed as $100,000 on the market, you should budget $1,000 for yearly upkeep. Be prepared to spend more on maintaining your property each year than you’d expect.

In addition to the home itself, you will likely need certain items that may have been previously provided in a rental home or apartment, such as a washer and dryer or furniture. However, it will be better in the long run to take time to find good prices and to save for these items, as buying them on credit right away could make paying your new mortgage payment more challenging.

Getting Help from Your Avenue Counselor

If you have taken the time to trim your budget and maintain control of your day-to-day spending, and you still find yourself unable to cover your expenses, you should schedule an appointment with your Avenue Counselor. This session will allow you both to come up with possible methods of changing your financial situation, and to determine how ready you are to purchase a home.

When preparing for your counseling session, make sure to gather your essential documents—2 months of paystubs, a draft of your household budget, a purchase contract and loan estimate (if available) and a photo ID— and email them to your Homebuyer Counselor beforehand.

Schedule an appointment today:

By Phone: (713) 864-9099

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WORKSHEET: Calculating Net Monthly Income Figure Your Monthly Income Your weekly pay or Your twice-a-month pay

$____________ (take-home pay)

x 52 ÷ 12

$____________ (monthly income)

$____________ (take-home pay)

x2

$____________ (monthly income)

Your Monthly Take-home Pay

$____________

Figure Other Household Members’ Monthly Income Weekly Pay or Twice-a-month pay

$____________ (take-home pay)

x 52 ÷ 12

$____________ (monthly income)

$____________ (take-home pay)

x2

$____________ (monthly income)

Other Household Members’ Take-home Pay

$____________

Other Monthly Income Second Job

$____________

Regular Over�me

$____________

Public Assistance

$____________

Child Support

$____________

Pension

$____________

Social Security

$____________

Other

$____________

Total Other Monthly Income

$____________

Total Net Monthly Income

$____________

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WORKSHEET: Monthly Budget

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Chapter 3: Understanding Credit

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Chapter 3: Understanding Credit Introduction

When working towards financial security and the homebuying process, it is beneficial to understand the role of credit and how to use it wisely. Because your credit represents your ability to repay funds after borrowing them, it is important to maintain good credit while pursuing this goal. This section will cover the advantages of maintaining good credit, and ways to improve your credit rating. It will additionally discuss: • • • • • • • •

Credit reports and credit reporting agencies Credit scoring How to fix mistakes on a credit report Common credit problems and how to fix them How to establish credit Ways to manage debt How to decrease the chances of identity theft Your credit rights as a consumer

Although poor credit and considerable debt may seem like insurmountable roadblocks when looking to buy a home, there is no reason for you to give up on your aspirations to homeownership. This chapter discusses various approaches that you may take in reducing your debts and constructing a better credit record. These methods may take a fair bit of effort, but with time and support from your Avenue counselor, you will be well on your way to good credit.

Your Credit Rating and You

If you have ever used a major credit card or financed a major purchase such as a large household appliance or a car, you have likely developed a credit rating. This rating demonstrates your credit history, in terms of: • • • •

The amount of money that you have borrowed From whom you have borrowed Whether or not you repay your debts on time How you are managing your current debts

This information is then used by creditors to evaluate your payment history before deciding whether or not to approve your application for a credit card or loan.

Why Does Good Credit Matter?

Because it indicates to lenders that you have repaid borrowed funds on time in the past, a good credit rating makes the process of getting a loan much simpler. Poor credit, whether due to not being able to repay the money borrowed or making late payments, or to issues beyond the borrower’s control—inaccurate data submission or instances of identity theft—will make it more challenging to convince a lender that you will be responsible in terms of repaying the loan.

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However, having good credit does far more than making it easier for you to obtain a loan. It additionally helps you to: •

Open a checking account. Before opening an account with you, banks will evaluate your payment habits and assess how likely you are to repay your debts.

•

Purchase or rent the items you want or need. Creditors often prioritize credit history above all else when considering whether or not to grant money for loans on major purchases or leasing agreements.

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Get a job. When pursuing a position that involves handling money, such as a bank teller, cashier, or payroll clerk, your credit history will signal to your potential employer that you do not have serious credit issues that could tempt you to embezzle funds from the company.

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Get a better rate on your insurance policy. When applying for certain types of insurance, good credit may be able to qualify you to pay a lower rate.

•

Borrow money at a lower interest rate. Credit history often serves as the foundation for loan rates. The better the credit, the lower the interest rate.

•

Lease rental property. A history of paying your bills on time will be one of the first things that your prospective landlord looks for when considering your rental application.

•

Establish utility services in your name. Utilities, such as electric, water, and gas, may not require people with good credit to put down cash deposits.

Credit is a useful tool that opens doors to many opportunities and makes it easier to pursue your long-term financial goals. However, if you wish to be able to establish a reputation as a responsible borrower, you must use credit wisely and pay your debts as you said you would. By maintaining good credit, you will be ready to follow your dreams of becoming a homeowner.

Credit Reports and Credit Reporting Agencies

Your credit report is composed of a detailed record of your credit history in addition to other identifying information that helps creditors and lenders to determine whether or not you are likely to pay back a loan in the future.

What is a Credit Reporting Agency?

Also referred to as credit bureaus, credit reporting agencies are companies that compile information about a consumer’s credit history in the form of written reports and sell these reports to creditors and lenders who wish to know how well you manage your finances. This information often comes from creditors such as mortgage lenders who send monthly statements concerning who has a loan, who has paid off their debts, who is in foreclosure, and who has either submitted their payments on time or has missed the deadline.

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Based on this information—along with information from other creditors—the credit reporting agency is able to maintain a credit file for each person. Even if you are married and share much of the same information, you and your spouse likely have separate credit reports. Employers, banks, insurance companies, and finance companies often obtain credit reports from these agencies to determine whether or not you are a worthwhile credit risk. Most credit reports come from three large, national companies: TransUnion, Experian, and Equifax.

Types of Credit Reports Different types of credit reports fulfill different purposes. The most commonly used are listed here: •

An infile credit report is provided by any of the three major bureaus, may or may not include your credit score, and is a means by which either the creditor or you yourself may assess the status of your credit and/or credit score. Many creditors use infile credit reports as a way to determine if they should lend you money, but must receive your authorization before ordering one. These requests may affect your credit score. This type of credit report is often used by mortgage lenders.

•

A consumer credit report —also referred to as a tri-merge credit report—combines all listed information collected in your credit file by all three bureaus, and includes any credit extension requests that have taken place during the previous 90 days. Requesting a copy of a consumer credit report may or may not affect your credit score, depending on the source of the request. If you request a copy of your own credit report with the assistance of a housing counseling agency, your credit score is unlikely to be affected. However, a request from a creditor will affect your score.

•

A residential mortgage credit report (RMCR) is a thoroughly-researched, frequently-updated report that contains data from all three bureaus and is used to determine whether or not you would make a good candidate when applying for a mortgage loan. The mortgage lender will typically obtain your permission to order an RMCR, and will charge you a fee. As a copy of the RMCR is requested for the purpose of extending credit, this inquiry will affect your credit score.

Ordering Your Credit Report In order to stay informed and to get a sense of how lenders and agencies will perceive your creditworthiness, you can order your own credit report. This will not affect your credit score, and is covered by the Fair Credit Reporting Act, a consumer protection law that requires credit reporting agencies to allow you access to your own credit report. Under federal law, you have the right to obtain one free copy of your credit report from each of the three bureaus every twelve months. If you are turned down for housing, insurance, credit, or employment due to a credit report from a specific agency, you may additionally order a free copy of that report within 60 days. For an additional cost ($8 to $12), an agency will send you a copy of your report plus your credit score based on the information in the report. Keep in mind that any changes in your credit history will be reflected by your credit score.

You can request a copy of your credit history reports from the three bureaus. These reports will likely differ from one agency to another based on the information that various creditors provide to the agencies. Request a copy from each bureau in order to get the most complete and accurate information.

EXPERIAN 1-888-397-3742 www.experian.com P.O. Box 2002 Allen, TX 75013

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TRANSUNION LLC 1-800-888-4213 www.transunion.com P.O. Box 1000 Chester, PA 19022

EQUIFAX 1-800-685-1111 www.equifax.com P.O. Box 740241 Atlanta, GA 30374

How to Obtain a Copy of Your Credit Report and Credit Score You can order a free copy of your credit report online, visit www.annualcreditreport.com, which will direct you to the three major credit reporting agencies. Although you will not have to pay to receive your credit report, accessing your credit score will cost a small fee ranging from $5.95 to$7.95. As this credit score is unlikely to be used for mortgage purposes, it is not recommended that consumers pay for their credit scores.

While making your request, you must include all of the information listed below. If you prefer, use the Order Form on the next page.

1.

2.

3.

4.

5.

6.

Full name, including your middle initial and suffix (Jr., Sr., III) Current address and zip code (no P.O. boxes) Any previous addresses with zip codes from the past five years Social Security number Year of Birth Verification of your current address, such as a copy of your driver’s license, current billing statement, or other valid document featuring your current address and phone number

It will take approximately two to three weeks to receive your report and/or score.

Follow the instructions included with the report if you have any questions about the information featured in the report or score.

Reviewing Your Credit Report Your credit report illustrates how you have historically handled your loans and credit card debt, and includes information as to the amount of debt you have, whether or not you make your payments on time, and if there are any loans that you have not paid back at all. Typically, a credit report will contain four types of information: •

Identifying information: Your name, date of birth, previous and current addresses, Social Security number, and previous and current employers.

•

Credit information: This information comes from companies that you conduct business with, and contains specific details about your credit card accounts, car loans, and other loans. This includes the date that the account was opened, the loan or credit limit amount, the amount of each monthly payment, and the loan balance. It also covers the last several years of your payment history— collection accounts, repossessions, as well as missed or late payments—and the name of any co-signer or spouse responsible for paying that account.

•

Public record information: This information is provided by public records from local, state, and federal courts, and details your history of how you handle financial obligations. Examples include foreclosures, bankruptcies, monetary court judgments, and tax liens for unpaid taxes.

•

Inquiries: This includes the number of times that you have applied for credit over the last two years, as well as the names of creditors who have requested a copy of your credit report. However, this does not include companies that have accessed your report for “pre-approved” credit offers. Even though you may see these companies on your own copy of your credit report, creditors will only see the requests that you yourself have made while applying for a credit card or loan.

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Account Types On a credit report, there are three basic types of accounts featured: individual, joint, and authorized user.

•

An individual account means that person featured in the file has sole access to the account and is likewise solely financial responsible for it.

•

A joint account indicates that two or more people use the account and each are responsible for payment.

•

An authorized user account indicates that the person named on the file is able to make charges on the account with the account owner’s permission, but is not legally responsible for paying the account.

There are three types of accounts commonly used by creditors that reference types of payment arrangements: installment, revolving, and open 30-day.

•

In an installment credit agreement, you enter a contract in which you agree to repay a fixed amount of credit in equal payments during a specific timeframe. Personal loans, major home appliances, furniture, and vehicles are often paid for in installments.

•

In a revolving credit agreement, you are given the choice of making a minimum payment each month based on the outstanding balance remaining, or paying in full each month. Credit cards on a revolving credit plan are often used by banks, gas companies, and department stores.

•

In an open 30-day agreement, you agree to pay back the full amount owed each month. Charge accounts for local businesses, entertainment, and travel purposes often require this type of payment arrangement.

What is a Credit Score?

A credit score is a number grade that reflects your credit report and influences lenders’ decisions to extend credit or approve loan applications. In the eyes of lenders, the better your score, the more likely you are to be willing and able to repay your loans as agreed upon.

The most widely used credit scores are FICO® Scores, the credit scores created by Fair Isaac Corporation. 90% of top lenders use FICO® Scores. FICO® Scores are calculated based on information in consumer credit reports maintained at the credit reporting agencies. In terms of FICO® Scores, the higher the better, with most scores falling between 350 and 800. A mortgage lender typically requires a minimum of a 620 credit score.

NOTE: A home mortgage is an expensive “product” that you are buying. It is important to shop around and get the best deal available for you. To do so, it is recommended that you obtain Pre-Approvals from at least three lenders. To avoid these inquiries having a negative impact on your credit score, you should make the three inquiries within a 14-day window.

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What Does a Credit Score Consider?

•

35% - On-time Payment history. This reflects whether or not you tend to make your payments on time. Keep in mind that late payments will hurt your credit score.

•

30% - Outstanding debt. This reflect the total amount that you owe, how many accounts you have open, and the proportion of balances to your credit limits or original loan amounts. Owing a significant amount of money on multiple accounts may indicate that you are overextended and less likely to make your payments on time.

• 15% - The length of your credit history. This reflects how long you have managed a line of credit. As long as the rest of your credit report is wellhandled, a longer credit history is preferable.

• 10% - Types of credit used. This reflects the various kinds of accounts (lines of credit) that you use—credit cards, mortgage loans, retail accounts, finance company accounts, and installment loans—as well as how many of each you have.

10% - New credit. This reflects your current inquiries for seeking new credit and newly opened accounts. Too many new accounts or inquiries can be harmful to your credit score.

•

Each of the above factors make up your overall credit score, and the relative influence of any one component depends on the overall information found in your credit report. Your race, gender, religion, nationality, and marital status have no bearing on your credit score, and your credit report is the only resource used when developing your credit score.

Any changes in the information in your credit report—such as opening a new account or payment updates— will result in corresponding fluctuations in your credit score.

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Sample Credit Report

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Credit Problems and How to Solve Them

If you have a low credit score, the most effective way to improve it is to learn to manage your credit wisely over time. In order to help you figure out what specific factors to focus on in the future, your credit score will be accompanied by a series of “score reason codes” that will explain why your score was not higher. Listed below are some tips for how to raise your credit score: •

Correct any inaccurate information. If you find any inaccurate information that could be lowering your score, make sure to get it corrected. As long as you order your credit report directly from a credit reporting agency or through an authorized organization designed to provide credit reports to consumers, your credit score will not be affected.

•

Pay your bills on time. Not paying your bills on time is one of the most influential factors in receiving a lower credit score. However, delinquent payments and collection accounts can be overcome over time with the assistance of your Avenue CDC financial counselor. By meeting with a member of our team, contacting your creditors, and working to pay your bills on time, you will eventually improve your score through consistent, timely payments.

•

Minimize outstanding debt. Make sure to keep your balances low on your credit cards and other accounts, as your score may be affected by high outstanding debt.

Consolidating your accounts or moving the debt around as a short-term solution may in fact further lower your score. Instead, work to pay off the debt.

•

Apply for and open new credit accounts only when necessary. If you are still relatively new to managing credit, make sure not to open a large number of new accounts, particularly in a short period of time. This can lower your average account age—which may have a considerable impact on your score if you lack extensive credit information—and be viewed as more risky by potential lenders. Keep your credit accounts manageable and avoid applying for credit that you don’t need.

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Use your credit cards responsibly. Generally, having credit cards and installment loans that you pay on time will result in a higher credit score. Someone who has managed their credit cards wisely may have a higher score than someone with no credit cards at all.

•

Re-establish credit if you have had problems. Another method of raising your credit score is to open new accounts wisely and subsequently pay them off on time. However, opening new accounts solely to have a better credit mix is unlikely to raise your score.

Although these tips are effective means by which you can improve your credit score, the specific steps that you need to take to do so may differ based on the contents of your credit report.

Correcting Errors and Omissions in Your Credit Report Having an accurate credit report is an essential part of your ability to get a new loan. Errors and omissions in one’s credit report are not uncommon, and can often be easily corrected at no cost to you. Listed below are the steps that you should take in working with a credit reporting agency to correct any errors on your credit report:

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Follow any directions provided concerning how to correct errors that accompany your credit report, and get in touch with the credit bureau about the mistake. You can contact the agency via telephone, by sending a written letter with accompanying documentation, or by using the dispute portal when you receive your report through www.annualcreditreport.com.

•

Send any necessary additional information that will help correct the error. The bureau will be able to tell you what to send. To make it easier to demonstrate where the error has occurred, it is a good idea to organize and maintain your financial records.

•

Write a brief letter explaining the situation. After receiving your complaint, the agency must look into the issue and contact you about their findings within 30 days. During this investigation, the credit reporting agency will get in touch with the creditor who has provided the potentially incorrect information. If the agency concludes that there is indeed an error, the creditor must inform the other agencies of the mistake.

•

Contact the creditor directly if the agency disagrees and claims that there is no error. When the disagreement is resolved, ask the creditor to send the updated, correct information to the bureau.

•

Write a consumer statement detailing your side of the story if the issue is not corrected. This consumer statement can be as long as 100 words, and will appear on your credit report. Oftentimes, a credit agency employee will be able to help your statement.

Common Credit Problems Lenders do not expect your credit history to be spotless from start to finish. However, by the time that you apply for a mortgage loan, your credit problems should be resolved and your report should demonstrate that you have been handling your credit responsibly for some time. If you have a history of late payments, but have consistently paid your bills on time for the past two years, the lender will be able to see that you are now able to manage your finances responsibly.

When you have had problems paying off your debts in the past, it will take time to remove it from your report.

Generally, accurate negative information can be featured on your report for 7 years, with the exception of bankruptcies, which may be featured for 10 years. This period typically begins from the date on which the event itself took place. Credit problems that make it more challenging for a borrower to obtain a loan include: •

A pattern of 30-, 60-, or 90-day late payments on current debts. Consistently failing to submit your payments on time or not sending the required amount can lower your credit rating.

•

Past poor credit performance. Missing payments on a credit account, even for a short amount of time, can reduce your credit rating.

•

Bankruptcies. Declaring bankruptcy—the legal process undertaken when you are unable to pay your debts—will leave a lasting mark on your credit report. When Chapter 7 is filed, the court may appoint a trustee who will pay off as much of the debt as possible by selling any applicable assets. The rest of the debts are nullified. When Chapter 13 is filed, you must use a court-approved payment plan to pay a portion or all of the debt.

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Judgments or liens. A judgment is a court order that automatically places a lien on your real property when you fail to pay a debt or loan. A lien is a legal hold or claim to your property that someone else can make as security for a debt or charge. For example, a tax lien may be filed by the taxing authority against your property or assets when you don’t pay your taxes.

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•

Past-due credit accounts and collection accounts. Collection accounts occur when an account has not been paid and has been transferred to a professional collection agency.

•

Charge-offs. This occurs when you have not paid your debts for a long time—generally at least 6 months—and the creditor has written you off as a loss. However, the debt is now owed in full and your account will be transferred to a professional debt-collecting firm.

•

Repossessions or foreclosures. When you fail to make payments for a considerable time on a secured loan—a loan in which something of value is offered as security—the lender may take that security. In a foreclosure, a home loan has not been paid and the house is taken as security.

Solving Credit Problems If you are feeling discouraged about the state of your credit report, keep in mind that lenders want to offer loans to every qualified borrower, and that you have multiple options that will help you get back on the path to good credit. These options include: •

Preparing a realistic spending plan and keeping an eye on your spending. If you tend to make late payments or to not send the full amount due, work on altering these habits. Our Avenue CDC housing counselors will help you prepare and assess your family budget.

•

Contacting your creditors as soon as possible. If you know that you will not be able to make your payments, write a letter detailing your situation to all creditors involved. Work with them to create a modified payment plan that you will be better able to manage. Seek help as soon as possible, as your creditor will be more likely to help you while the problem is still small.

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Seeing professional help. Your Avenue CDC counselor will be able to analyze your financial situation, explain the most frequent types of credit difficulties, assist you in ordering and assessing your credit report, and work with you to determine what steps to take in improving your credit.

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Paying any past-due accounts. If your credit report reveals any open collection accounts, it is unlikely that a lender will approve your loan.

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Negotiating discounted payoffs. Creditors are occasionally willing to lower the amount owed to them if they can receive it in cash now rather than collecting funds over a long period of time. Make sure to draw up an agreement in writing before submitting your payment.

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Negotiating a workout plan. In order to repay the past-due amount, you may need to establish a new payment schedule with the bank or institution that gave you credit.

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Writing a letter of explanation. If you normally make your payments on time and were unable to once because of an unusual circumstance beyond your control such as unemployment or an emergency, write a letter of explanation to your creditors. Ask the creditors and credit bureaus to include this letter in your credit file for future reference. When applying for a mortgage loan, request that the letter be included in your loan application file. This will demonstrate that you care about your credit

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report and paying your bills on time. If your record shows that you have consistently paid your bills before and after the event, many lenders will not hold it against you.

Many lenders will ask for letters of explanation for late payments or other problems in your credit report.

Write a brief, simple letter explaining the situation honestly without assigning blame to others or making up excuses. If you need assistance, ask the lender or your Avenue counselor for help. Many responsible borrowers have marks on their credit reports. Take the situation seriously, but remember that it is manageable.

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Negotiating a debt management plan. Credit counseling agencies often provide bill payment plans that will allow you to make lower minimum monthly payments or alter your credit terms until your debts are brought current or paid off. This is a long-term solution—it often takes four to six years to complete—and it must be agreed upon by you and your creditors. Occasionally, once the borrower has successfully completed 12 months of payments and has obtained approval from the debt management company, lenders will allow a borrower to obtain a mortgage loan.

Although establishing a debt management plan may delay the home-buying process, it may significantly reduce your total debt, help get your finances in order, and ultimately make it easier for you to obtain a home loan. However, if your credit problems are minor, it may not be an appropriate solution for you.

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Re-establishing your credit. Once you have taken care of all of your past-due accounts, prioritize making all of your payments on time and in full for at least one year.

Sample Explanation Letter

To Whom It May Concern, On May 16th, 2015, I was in a serious car accident involving four other vehicles on a busy interstate highway. The accident occurred when a large truck suddenly merged into a different lane without using a turn signal, causing the first in a line of vehicles to swerve and stop suddenly, ultimately resulting in a five-car pile-up. As the second driver in the line, I was left in critical condition and in the hospital for weeks, followed by a lengthy at-home recovery. During this period, I was unable to pay my bills on time, and could not go to work until properly healed. However, I have since returned to work and paid all of my debts as soon as I could.

Please consider these circumstances when assessing my credit history.

Sincerely, Natalia Martinez

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Credit Worries

If you suspect that you or a family member needs help to stop using credit cards or with compulsive shopping, contact Debtors Anonymous (DA) at (781) 453-2743 to find out about support services in your region. DA will also provide tapes and pamphlets that will help you in moving past your dependency on credit.

Be Wary of Quick Credit Fixes

You may be familiar with advertisements for credit repair services that feature slogans such as: “Bad credit? No Problem!”

“Erase Bad Credit Now!” “Remove Bankruptcy from Your File, Guaranteed!”

In most cases, these companies will charge you exorbitant rates for things that you can do yourself. The fact of the matter is that if the negative information on your credit report is correct, the only way to remove it is through responsible financial practices over a long period of time. Don’t put your trust in companies that won’t be able to deliver results.

Here are some red flags that you might see: •

The company asks you to pay upfront before services are rendered. According to the Credit Repair Organizations Act, credit repair services may only charge you fees after the promised services have been carried out in full. Furthermore, this law stipulates that a written contract be drawn up detailing the fee structure and services provided, and that customers are given three days to decide whether or not they want to rescind their contract.

•

The company recommends that you dispute all negative information in your credit report.

Regardless of accuracy, the company will bombard credit reporting agencies with letters disputing negative information, forcing the bureaus to delete the information while the investigations are conducted. However, once the information is deemed accurate, it will once again be included in your credit report.

•

The company offers to help you create a new identity. This is an illegal practice in which a company will recommend that, instead of using your Social Security Number, you apply for an Employer Identification Number. They will then advise you to use this along with a different phone number and address to create a “new” credit report. This practice is referred to as “file segregation”, and may result in your being prosecuted for fraud.

If you have had an issue with a credit repair company in the past, feel free to report it to your local consumer affairs office or your state attorney general’s office. Remember that there are laws designed to protect you in this process.

What if You Don’t Have a Credit History?

If you have never used credit cards and have never borrowed money to be able to make major purchases such as cars or home appliances, it is possible that you have no credit history whatsoever. Although it is preferable to have no credit as opposed to bad credit, it does make it more difficult for a lender to be able to discern whether or not you will be a responsible borrower. A lender will feel most comfortable extending credit to someone who has established a habit of consistent, timely payments.

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Nontraditional Credit If you have no credit history, it is still possible to demonstrate to lenders that you have a history of making regular, scheduled payments through a nontraditional credit history composed of bills, receipts, rent statements, canceled checks, and utility receipts from over the years. As long as you are able to provide this evidence that you are creditworthy, most lenders will accept these forms of nontraditional credit history.

One effective means of establishing yourself as creditworthy is through documentation of paying your rent consistently and on time. Such documentation includes canceled checks depicting when rent payments were made or signed statements from your landlord or management company. Other forms of nontraditional credit references include insurance payments, utility payments, child support, and any other major, recurring expenses.

Establishing Credit If you wish to establish a credit history or hope to re-establish credit after having developed a negative credit history, there are means by which you can do so. When engaging in the homebuying process, you should begin building your credit record at least one year before submitting your application for a mortgage loan. Here are some methods of building a credit history: •

Always pay your bills on time. In order to demonstrate that you are capable of managing your finances, use reference letters or canceled checks from your major, recurring expenses.

•

Open a savings account and checking account at a bank or credit union. Regularly depositing funds into a savings account will illustrate to lenders that you will be able to repay your debts. Make sure to use the check register and balance your account each time you write a check.

•

Use savings as collateral while applying for a loan. At the bank or credit union where you have your savings account, ask if the bank makes loans with savings as collateral to back up the loan. If you get a loan, make the payments in full and on time.

•

Apply for a limited-use credit card. Look for the card with the lowest annual percent rate (APR) offered by a department store, bank, or credit union. In order to avoid paying interest, make sure to pay the full amount due each month.

•

Apply for a loan with a co-signer. This co-signer will agree to be responsible for payments if you are unable to make them, and should have a good credit history. Furthermore, any bad information on your part also shows up on the co-signer’s history. You and your co-signer should discuss the weight of these responsibilities before making the agreement. Once again, make sure to make your loan payments on time and in full.

Managing Your Debts So They Don’t Manage You

As important as it is to clean up your credit report, it is equally essential to avoid credit problems in the future.

The most common way in which people find themselves in trouble is through racking up credit card debt— using credit is so simple that it can be easy to lose track of one’s expenses and be left unable to pay the bills.

Credit card offers that sound too good to be true often are. For example, many department stores and gas stations offer credit cards with accompanying discounts that will encourage you to shop at their locations, but then charge up to twenty percent interest. Furthermore, major credit card companies earn the most money when borrowers pay the minimum amount due, and benefit when you don’t pay off your balance each month.

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Getting Out of a Credit Crunch In this day and age, having some debt is practically inevitable. However, it’s important to keep this debt under control and to avoid cash flow problems, stacks of past-due bills, and a significant amount of unnecessary stress. If your debts are relatively minor, you can likely solve the issue by altering your spending habits. Listed below are steps you can take to do so: •

Add up what you owe to all of your creditors. Exclude long-term loans (e.g., car loans and mortgage loans) from this number, and divide by 12. Will you be able to handle that amount and pay off your debt within the year? If not, consider closing the accounts and cutting up the cards to avoid temptation.

•

Determine how many credit cards you really need.

Generally, it is wise to have a few credit cards from some trusted national banks, as long as they are handled responsibly and paid off at the end of each month. If you are unable to pay the entire balance, make sure to be prompt when making your minimum payments.

•

Pay off or reduce as many debts as possible. Create a long-term repayment plan that will best suit your needs—this may look like paying off the smallest debt or reducing the debt with the highest interest rate—and aim to lower the amount you put towards paying your debts to less than 10 percent of your monthly net income.

•

If you struggle with credit card debt, consider consolidating your bills on the card with the lowest annual fee and interest rate, and make sure not to charge any more on that account. Calculate the amount it will cost each month to pay off the balance in the next six months or year, and come up with a realistic budget that will allow you to pay that amount. If you are able to, pay more than the minimum monthly payment.

•

Create or revise the household budget. Add the amount that you will be putting towards your monthly debt payments to your spending plan, and be realistic about what you are able to afford.

Keep track of your spending, and come up with ways to reduce your expenses.

•

Pay cash for everything you buy until your debts are paid off. If you come across something that you unquestionably need and you lack the cash to pay for it, look into putting it on layaway. This will allow you to make a down payment and later claim the item once the full balance has been paid.

•

Establish or maintain your savings. While you pay off your debts, it is still important to prepare for emergencies and to avoid setbacks by putting money into your savings account.

•

Automate your payments. It can be easy to forget to pay a bill once in a while, and one way to prevent this from happening is to automate as many payments as you can. In most cases, you can authorize your creditors to electronically deduct funds from your checking account each month, and this may result in lower interest rates for some creditors. However, you will need to have enough money to cover these deductions.

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•

In the future, only take on as much debt as you can comfortably pay. If you are unsure about how much debt you will be able to handle, our Avenue financial counselors will be able to assist you in coming up with a realistic amount and ways to plan for the future.

“Power-Paying” Bills to Pay Off Your Debt Many people pay only the minimum monthly payments on their credit cards each month without realizing that this practice costs much more in the long run. For example, if you owe $2,500 on your credit card at today’s average 17 percent annual rate and make only the 2 percent minimum payment, it will take you more than 30 years to pay off your bill. Plus, you will have paid $5,233 in interest charges!

While assessing your spending plan, find luxuries such as movie theater trips and dining out, and set these funds aside instead. You may be surprised to find that by trimming these expenses, you can easily save $50 a month, which can now be put towards your smallest credit card bill. You’ll be able to pay the bill off much more quickly, save a significant amount in interest charges, and become even more motivated to pay off your debts!

Once your first bill is paid off, add the $50 a month to the amount put toward your smallest credit card bill, and put this total towards your next smallest payment. Continue using this model until each of your debts has been paid off.

Thousands of people every year face financial difficulties—whether caused by a lack of budgeting and keeping track of finances or racking up credit debts—but thousands of people also learn to handle their finances responsibly, and go on to share those skills with others. They learn to save their money and go on to fulfill their dreams of homeownership.

You can, too.

For more information, visit powerpay.org

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WORKSHEET: Power-Pay Calcula�on 1: Complete the basic informa�on below about your credit accounts.

Creditor

Balance

APR

Visa

$3,000

17%

Minimum Payment

$60

Months Remaining

(Balance + Minimum Payment)

3000 ÷ 60= 50 months

Calcula�on 2: Complete the informa�on for your first Power-Payment on the account with the smallest balance.

Creditor

Visa

Balance

$3,000

APR

17%

Total Monthly Applied

(Min. Monthly Payment + Monthly Savings)

$60 + $50= $110

Months Remaining

(Balance + Total Monthly Applied)

3000 ÷ 110= 27 months

Calcula�on 3: Complete the informa�on for your next Power-Payment on another account.

Creditor

Balance

APR

Total Monthly Applied

(Min. Monthly Payment + Monthly Savings, including min. monthly payment from creditor 1)

Months Remaining

(Balance + Total Monthly Applied)

Calcula�on 4: Complete the informa�on for your next Power-Payment on another account.

Creditor

Balance

APR

Total Monthly Applied

(Min. Monthly Payment + Monthly Savings, including min. monthly payment from creditors 1 + 2)

Months Remaining

(Balance + Total Monthly Applied)

PowerPay worksheet provided by NeighborWorks ® America, Realizing the American Dream

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SAMPLE: Power-Pay Debt Reduction Program Analysis Summary Creditor Name

Current Balance

Monthly Payment

APR

Approximate Time Without Power Payments

#1 Car

$10,000

$250

6.9%

3 years, 10 months

#2 Loan #3 Credit Card

$8,000 $2,000

$200 $35

11% 18.9%

4 years, 3 months 12 years, 4 months

Op�onal Extra Monthly Amount

$50

Op�onal Lump Sum Payment Amount Month Lump Sum Payment

Repayment Schedule Shows the �me and interest costs of paying the debt without power payments (on the le�) compared to �me and interest costs with power payments (on the right) Without Power Payments

P. Payments/High Interest First

No Extra Monthly Amount No Lump Sum Payment

Extra Monthly Amount: $50 Lump Sum Payment

Creditor Name

# of Payments

Total Paid

Interest Applied

# of Payments

Total Paid

Interest Applied

#1 Credit Card

148

$5,157.02

$3,157.02

30

$2,518.37

$518.37

#2 Loan

51

$10,011.27 $2,011.27

44

$9,895.13

$1,895.13

#3 Car

46

$11,396.48 $1,396.48

45

$11,394.91

$1,394.91

Total Monthly Payment: Varies Time to Repay: 12 years, 4 months Loan Amount Repaid: $20,000.00 Interest Paid: $6,564.77 Total Amount Paid: $26,564.77

Total Monthly Payment: Varies Time to Repay: 3 years, 9 months Loan Amount Repaid: $20,000.00 Interest Paid: $3,808.41 Total Amount Paid: $23,808.41

Summary of Benefits from Making Power Payments

Time required to pay off all debt reduced by: 8 years, 7 months Amount of Money Saved: $2,756.36

Op�ons Comparison – Includes Power Payments: Complete the informa�on for your next Power-Payment on another account.

Sequence of Debt Payoff Debts w/ highest int. rate Debts w/ lowest balance

Time to Repay 3 yrs., 9 months 3 yrs., 9 months

Amount Paid $23,808.41 $23,808.41

Interest Paid $3,808.41 $3,808.41

Savings $2,756.36 $2,756.36

Debt w/ shortest term Debts calculated as entered Without Power Payment

3 yrs., 10 months 3 yrs., 10 months 12 yrs., 4 months

$24,384.97 $24,384.97 $26,564.77

$4,384.97 $4,384.97 $6,564.77

$2,179.80 $2,179.80 none

Includes op�onal extra monthly payments of: $50

Includes op�onal lump sum payment in __ of $__

PowerPay analysis provided by Utah State University Extension Service, NeighborWorks® America, Realizing the American Dream

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Identity Theft: When Bad Things Happen to Your Good Name

Iden�ty the�—in which someone may take your name and personal informa�on and using it to create new accounts and make major purchases—can do considerable damage to your credit ra�ng. Although there is no way to guarantee that this will never happen to you, being responsible with your personal information will greatly lower the risk of identity theft. Here are some steps that you can take: •

Only give out your Social Security number only to people you trust and only when necessary.

•

Be careful with your personal information. Unless you are confident that you know with whom you are dealing, don’t give out your information over the internet, through the mail, or over the phone.

•

Shred documents that contain your personal information and account numbers.

•

Don’t carry extra documentation and credit cards. Unless you need them for a specific purpose, avoid having your birth certificate, passport, Social Security number, or extra credit cards on your person.

•

Create unique passwords and personal identification numbers (PINS) for accounts. Come up with passwords that are not based on information that is readily available.

•

Pay attention to your billing cycles. If you notice that your bills are not arriving on schedule, contact your creditors.

What to Do If You are a Victim of Identity Theft Some time may pass before you realize that your identity has been stolen, but as soon as you do, you must act immediately: •

Get in touch with the fraud departments of the three major credit reporting agencies. Request that a “fraud alert” be included in your record. If you suspect that your credit report is inaccurate due to fraud, credit bureaus are required to give you a free copy. Order a copy from each agency, inspect it carefully, and dispute any inaccurate information.

•

Contact all creditors involved. Inform them that your accounts may have been tampered with or that new accounts may have been created in your name. Go over your billing statements and report any fraudulent charges to your creditors. Follow up with written documentation. Request that accounts with fraudulent charges be closed immediately and that new cards and account numbers be issued.

•

File a police report. Provide as much documentation as possible to be used as evidence, and request a copy of this report to be used as proof of the crime for creditors and other institutions.

•

Contact the Federal Trade Commission. You can file a report with the FTC by visiting www.consumer.gov/idtheft, calling the FTC’s Identity Theft Hotline at (877) IDTHEFT, or by mail at Identity Theft Clearinghouse, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580.

•

Keep written documentation of your communications. Create a file containing copies of your credit reports, police reports, as well as correspondence and copies of disputed bills. Keep records of phone conversations with law enforcement officers, creditors, and others.

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Your Rights as a Consumer

If you feel that you have been treated unfairly or have been discriminated against by creditors and credit reporting agencies, remember that there are federal laws designed to protect consumers like you.

Equal Opportunity Act According to the Equal Opportunity Act, all consumers must be given equal treatment and an equal opportunity to receive credit, regardless of gender, race, religion, nationality, age, marital status, or documentation of public assistance. For example, when you are applying for credit, a creditor is not allowed to: •

Refuse to give you credit or discourage you from applying based on your age, race, gender, nationality, or because you receive income via public assistance, or ask you to disclose your religion, national origin, sex, or race. However, if you are applying for a real estate loan, a creditor may ask you to volunteer this information—with the exception of religion—to assist federal agencies in carrying out anti-discrimination laws.

•

Inquire about your marital status or ask questions about your spouse if you are applying for an unsecured, separate account. If you reside in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington), or are applying for a joint account or one secured by property, a creditor is allowed to ask you for this information. Furthermore, a creditor may not ask you about your intentions concerning having or raising children.

The Equal Opportunity Act additionally gives you the right to know if your application has been approved or rejected within 30 days of submitting the completed application. If your application was denied and you ask why, the creditor is legally required to provide the specific reason for this rejection within 60 days. If the denial is based on information given by a credit bureau, the creditor must disclose which bureau provided the data.

Truth in Lending Act Before signing a contract or loan agreement, you have the right to be provided specific details concerning the cost of the credit, as well as the payment amounts and associated due dates.

Fair Credit Billing Act This law covers open-end credit accounts, such as credit cards and other revolving payment arrangements, and discusses how billing errors—charges listing inaccurate dates or amounts, charges for goods and services that were never delivered or accepted, mathematical errors, and unauthorized charges—must be handled when disputed. According to federal law, a consumer cannot be held responsible for paying more than $50 when faced with unauthorized charges. If you suspect that one of your credit card bills is incorrect, you must: •

Find the address provided for “billing inquiries”, and write a description of the billing error to the creditor. Make sure to include your name, address, and account number. Include copies of receipts and supporting documentation, and save a copy of the dispute letter for your records.

•

Make sure that the letter is delivered to the creditor within 60 days after you have received the first bill containing the error. To ensure that the creditor has received your letter, send it via certified mail with a return receipt requested.

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Unless the issue is resolved beforehand, the creditor is required to send you written documentation acknowledging your complaint within 30 days of receiving it. This dispute must be settled in writing by the creditor within two billing cycles (but less than 90 days) of obtaining your letter.

During the investigation, you are not obliged to pay the disputed amount and any related charges. However, any part of the bill that is undisputed, including finance charges, must be paid. If the bill is found to be accurate, you must be told promptly in written form how much is owed and why. You will then owe the disputed amount and the associated finance charges that occurred during the investigation and in some cases, the minimum amount that you did not pay while the bill was disputed.

Fair Credit Reporting Act This law was created to increase accuracy and to make sure that the information acquired by credit reporting agencies in consumer credit reports is kept private. Under the Fair Credit Reporting Act, your rights include: •

You have the right to obtain a copy of your credit record, including all of the material featured in your file at the time of your request. You have the right to receive a free credit report if you are on welfare, are unemployed and plan to seek employment within 60 days, your credit report contains fraudulent information, or if information in your report has caused a denial of your credit application.

•

If your application for credit, insurance, or employment is rejected due to information found in your credit report, the involved party must provide the name and address of the credit bureau used.

•

Credit reporting agencies must investigate all filed disputes pertaining to incomplete or inaccurate information found in consumer credit reports. The agency must erase or correct any false or unverified information discovered, and is barred from re-inserting any disputed items into your file until it is verified and the source’s contact information is provided to you. At your request, the credit bureau must also send notices of amended information to anyone who has procured your credit record in the past six months. You may add a summary explanation to your credit report.

Fair Debt Collection Practices Act This law demands fair treatment by debt collectors and forbids any deceptive, abusive, or unfair debt collection practices. It applies to personal and household debts, money owed for medical care, and attorney fees. According to the Fair Debt Collection Practices Act: •

Debt collectors must identify themselves to you on the phone, and may not contact you before 8 AM or after 9 PM in your respective time zone. If you have an attorney, debt collectors are only allowed to speak to your attorney, and not to you.

•

If you send a letter asking the debt collector to stop contacting you at home or work, they may only contact you to notify you that there will be no further communication or that the creditor intends to take a specific course of action (e.g., a lawsuit). Sending this letter does not erase the debt or prevent a lawsuit from being filed against you.

•

Debt collectors are forbidden from harassing, abusing, or oppressing you, and must not lie about your debts, your character, or your record.

•

Debt collectors may only contact third parties once in order to gain your contact information, and are usually not allowed to divulge to anyone other than yourself that you owe money.

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Chapter 4: Obtaining a Mortgage Loan

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Chapter 4: Obtaining a Mortgage Loan Introduction

Due to the high cost of homes, you will likely need to obtain a loan to purchase one. Although the process of obtaining this mortgage loan is more complex than applying for other types of credit, with the informa�on detailed in this sec�on, you will be well on your way to ge�ng your mortgage loan. This sec�on will cover: • • • •

Mortgage loan/PITI payments The mortgage loan process and what lenders are looking for Different kinds of lenders and loan categories The different types of mortgage loans that are most commonly used by first-�me homebuyers

When you obtain a mortgage loan, you have agreed not only to pay back the loan in regular increments, but also that the lender can take back a certain item of value if you do not make your payments. When using a mortgage loan to purchase a house, the lender has the right to foreclose on the house and sell it if you do not make your payments. In some states, this arrangement is referred to as a deed of trust, and this dis�nc�on may alter the specific method of foreclosure used.

The 4 C’s of Credit

In order to determine whether or not you are a good credit risk, mortgage lenders will assess four components of your file—capital, capacity, credit history, and collateral.

•

Capital. The money readily available to you— savings accounts, bonds, cer�ficates of deposit, or other forms of easily atainable funds. The more capital you possess, the more a lender will feel that you will be able to manage your money and handle any poten�al financial difficul�es.

•

Capacity. Lenders will want to ensure that you earn enough income to be able to make your mortgage loan payments and s�ll have enough le� over to cover all other living expenses. Lenders will assess your current income, income history, earning poten�al, and the money that you owe in installment accounts, revolving charge accounts, and other monthly payments.

•

Credit History. In order to figure out whether you are likely to repay your loan, lenders will look at how you have handled debts in the past. You will need to convince the lender that any issues have been resolved and that you have not missed a payment in the past 12 months at least.

•

Collateral. Because the house will serve as collateral for the loan, the lender will assess its value and condi�on to ensure that it is worth at least the amount that you are borrowing and that it is livable and up to code.

PITI Payments Mortgage loan payments—also referred to as PITI payments—are comprised of four parts: principal, interest, taxes, and insurance. The principal is a por�on of the amount that you have borrowed and must now pay back, and the interest is the amount charged by the lender for lending the funds. The tax and insurance por�ons go towards property taxes, homeowners insurance, and mortgage insurance if applicable, and will be deposited into an escrow account by your lender.

In most cases, homebuyers who make low down payments are required to create an escrow account, which is used by the lender to pay for your property taxes and homeowners insurance. Rather than have you pay the

59

yearly tax and insurance bills yourself, a lender will simply deduct the amount due from your escrow account and pay the bill for you.

The Steps Involved in Obtaining a Mortgage Loan Many people find the process of obtaining financing for a house to be far more daun�ng than it has to be. By learning and understanding the mortgage process, you can feel more confident when speaking to lenders and move ahead in obtaining your mortgage loan: •

Research. Take �me to find the right lender and loan program for you. Find out the minimum credit scores and different interest rates and programs that each lender is able to offer.

•

Pre-approval. Before searching for your new home, it is important to know whether you will qualify for a mortgage loan, as well as how much you can afford to put towards a house. You will need to gather all available documenta�on—pay stubs, one bank statement, tax documents from the last two years, as well as any re�rement paperwork—and meet with a lender to apply for a mortgage loan. You will not bring in any informa�on about the house you’d like to buy.

•

Loan Applica�on. A�er signing a purchase contract, you will complete a standard mortgage loan applica�on. This form will cover your income, debts and credit, your assets, and ques�ons about the property you hope to buy. You will also provide the same documenta�on listed above.

•

Loan Processing. Once your loan applica�on has been submited it will be sent to a loan processor.

This loan processor will request a copy of your credit report in addi�on to an appraisal of the property in ques�on, and will verify your employment informa�on, rent, and bank account balances.

•

Underwri�ng. A�er reviewing your completed loan applica�on package, the loan underwriter will use the lender’s loan program guidelines to determine whether or not to approve your loan applica�on.

•

Approval. Once approved, you will be sent a commitment leter—a formal loan offer that details the loan amount and condi�ons—and given a certain length of �me to accept this offer before signing the leter and thus closing the loan.

•

Loan Closing. The closing is the day that the loan agreement is completed, and o�en takes place through a formal mee�ng between the borrower and lender. You will sign the mortgage note— agreeing to pay back the amount you have borrowed—as well as a mortgage or deed of trust— gran�ng the lender the rights to your property if you fail to make these payments.

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Ratios

Lenders want to ensure that you can afford to make the payments on your house. For this reason, limits are set on borrowers’ monthly debt payments, and are referred to as the housing ra�o and the debt-to-income ra�o.

Housing Ratio Also referred to as the front-end ra�o, the housing ra�o is the maximum percentage of a borrower’s gross monthly income that can be put toward the monthly mortgage/PITI payment, and is determined by the type of loan that you choose. It could be 25%, 28%, 31%, 33%, or more.

For example, if your gross monthly income is $5,000 and the loan that you have selected has a housing ra�o of 33%, then the maximum amount that you could spend each month for the house payment (PITI payment) is $1650 ($5,000 x 33% = $1650).

Debt-to-Income Ratio O�en called the back-end ra�o, the debt-to-income ra�o is the maximum percentage of a borrower’s gross monthly income that can be used for the house payment, in addi�on to all other debts. This percentage is also predetermined based on the type of loan and may range from 36 to 41%.

For example, let’s say that the loan program you’ve chosen has a 38% maximum limit on how much you can put towards the monthly house payment in addi�on to other debts, and that your gross monthly income is $5,000. Therefore, the most you could spend for the house payment and all creditor debts is $1900 ($5,000 x 38% = $1900).

Keep in mind that the higher your monthly debt payments, the less you will be able to borrow for your home purchase. Before applying for a mortgage loan, you may need to reduce your debt.

Prequali�ication During prequalifica�on, a lender will meet with you and ask you about your income and debts, receive a copy of your credit report, and calculate your housing affordability ra�os. The lender will then tell you: • • • •

The amount of money that the lender would likely be willing to lend you The price range of housing that you should look at based on this lend amount How much down payment you will need How much your monthly payments would be

There is usually no fee for prequalifica�on, and no obliga�on to get a loan through the lender. However, a prequalifica�on is not a guarantee of a loan.

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Your Rights as a Loan Consumer You have the right to have you mortgage loan application reviewed fairly. Federal laws do not allow loan applicants to be discriminated against or treated differently, because of their race, religion, age, national origin, sex or marital status or because they receive public assistance.

Two laws that protect you when you apply for a mortgage loan are: Equal Credit Opportunity Act Fair Housing Act Prohibited Practices in Rental of Housing 1.

2.

3.

4.

Refusing to rent, sell or negotiate Setting different terms, condition or privileges in services and facilities Producing discriminatory marketing Falsely representing the availability of a dwelling

You may think you are not be treated fairly or, you may think you were turned down for a mortgage loan because of bias. If so, you can report this to the federal government through your local HUD office.

Discrimination is illegal, but it does happen. If you believe you have been the victim of Fair Housing discrimination, talk to your counselor for guidance on how to file a Fair Housing Complaint.

Shopping for the Right Lender and Loan

By finding the right mortgage loan for you, you may be able to save thousands of dollars in the long run.

Who Makes Mortgage Loans?

Although many people only pursue mortgage loans from banks, mortgage loans can be obtained from many different kinds of lending ins�tu�ons. For example: •

Financial ins�tu�ons such as mortgage companies, credit unions, finance companies, and savings associa�ons

•

Government agencies, as well as state and local financing agencies

•

Sellers (builders, private developers, manufactured home dealers, or private individuals)

•

Although financing facilitators don’t offer loans directly, they may be able to help you obtain financing

Financing Institutions •

Banks. The tradi�onal mortgage loan providers, banks and savings associa�ons are o�en able to offer mul�ple loan programs and products, such as personal, business and home improvement loans. By obtaining a mortgage loan from your local bank, you would be able to keep your finances in the same loca�on.

•

Finance Companies and Mortgage Companies. Although finance companies provide various kinds of loans to individuals and ins�tu�ons, mortgage companies exclusively offer loans secured by home

62

mortgages. This specializa�on o�en leads to loan programs at good interest rates, as well as occasionally using their own funds for loans or serving as brokers for out-of-town lenders.

•

Credit Unions. These not-for-profit financial ins�tu�ons are coopera�ves that func�on through the shared ownership of each member for the purpose of best serving each individual. These members are o�en part of a common group (e.g., teachers) or of a specific community. Members are o�en offered good mortgage loans, interest rates, and fees. Ask your employer if there is a credit union available to you, or visit www.mycreditunion.gov to see if your area has a Community Development Credit Union.

State or Local Financing Agencies Housing finance agencies (HFAs) work with groups at the state and local levels to promote revitaliza�on and homeownership in neighborhoods, and may offer financing for the purpose of fixing up exis�ng homes or similar projects. For first-�me or low-to-moderate income homebuyers, HFAs may offer beter interest rates for financing or demand lower closing costs and down payments. City and county agencies are o�en able to provide the same services offered at the state level.

Sellers When purchasing a home, some sellers—private individuals or companies—will offer funds to help pay for the house. Although this can some�mes be a good op�on, you should be on the lookout for high interest rates, wraparound mortgages, and contracts for deed or land contracts. Make sure to obtain legal ownership via a note and a mortgage.

Mortgage Brokers Instead of loaning you their own funds, mortgage brokers work with both you and poten�al lenders to help determine the loan best suited for your needs and situa�on. The origina�on fee for this service can range from a few hundred dollars to one percent of the loan amount. Although many mortgage brokers will help you find the best loan program offered, some are addi�onally paid by the lender, and might therefore choose the lender who offers the broker the most money instead of the lender who will offer you the best loan. Before hiring a mortgage broker, research the broker’s qualifica�ons, whether or not he or she is a member of the Na�onal Associa�on of Mortgage Brokers (NAMB), the fee amount and who pays it, and the lenders that the broker works with.

Tips for working with lenders •

Get recommenda�ons: Ask friends and family members for sugges�ons, especially if they've recently obtained a loan.

•

Check creden�als: Mortgage bankers are regulated by either your state's department of banking or division of real estate. Check with the agency to see if a lender is in good professional standing.

Mortgage brokers may or may not be state-regulated. If not, check with the local chapter of the Na�onal Associa�on of Mortgage Brokers or the Beter Business Bureau to see if their record is clean.

The Library of Congress has a good index of state and local government websites.

•

Do your homework: Learn about typical mortgages and ask ques�ons when something looks amiss; a broker may be trying to pad closing costs or other fees at your expense.

•

Take care online: There are plenty of atrac�ve deals online, but first make sure you're dealing with a reliable broker or lender.

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•

Be extra cau�ous during peak season: Unscrupulous lenders and brokers are more apt to quote you bogus rates or slip in extra costs during peak home buying season, in hopes you won't no�ce.

Loan Categories

There are four main categories of home loans, each with their own subsets and types: conforming conven�onal loans, subprime loans, government insured loans, and below-market rate loans designed for lowincome homebuyers.

Conforming Conventional Mortgage Loans This type of loan is offered by for-profit lenders—banks, credit unions, mortgage companies, and savings associa�ons—to the borrowers with the most pris�ne credit records at the best rates available based on current market condi�ons. Interest rates, fees, and the maximum amount that can be borrowed under each loan program are determined by the lenders themselves. If making a down payment of less than 20 percent, the lender will require you to addi�onally pay for private mortgage insurance (PMI).

Subprime Loans Designed for borrowers who cannot obtain prime loans due to credit issues or related risk factors, subprime loans u�lize risk-based pricing to determine your interest rate and other fees. Banks, finance companies, and mortgage lenders use so�ware to calculate the likelihood that you will default on your loan. The “grading system” for subprime loans ranges from A-D, with lower ra�ngs featuring higher interest rates and fees.

If you have a history of credit problems and are unable to obtain mortgage financing via a prime loan, a subprime loan might be a suitable op�on for you. However, do plenty of research into loan pricing beforehand using the Annual Percentage Rate as your guide.

Government-Insured Loans Government-insured loans include loans from private lenders that the government insures or guarantees to the lender, such as FHA (Federal Housing Administra�on), VA (Veteran Affairs), USDA (United States Department of Agriculture) Rural Development, Rural Housing Service loans.

Although all rates are based on the current housing market and are determined by individual lenders, the policies that regulate lending decisions are laid out by the government. O�en�mes, government qualifying standards tend to be more lenient when allowing borrowers to purchase homes.

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FHA Loans. FHA-insured loans from approved lenders are available to any buyers who meet the requirements laid out by the government. A down payment of 3.5 percent of the sales price is required, and must come from the borrower, a family gi�, or from a grant provided by a non-sellerrelated nonprofit housing organiza�on. A Mortgage Insurance Premium (MIP) must be paid for the life of the loan. In addi�on, the FHA loan features an upfront mortgage insurance premium charge that can be financed as part of the mortgage loan.

FHA loans do not come with restric�ons on income level, but do set limits as to how much money the buyer can borrow based on median housing prices in the surrounding region. Typically, ra�os are 31/43.

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VA Loans. Depending on the dura�on of service, ac�ve-duty personnel and veterans of the U.S. armed forces can obtain VA loans. These loans are a good op�on for eligible par�es, as the borrower is not required to make any down payment up to loan limits which are based on the Fannie Mae/Freddie Mac maximum loan limits set annually. Some closing costs are required, as well as a VA funding fee ranging from 2.15% to 3.30% depending on type of military service and whether or not this is the first

�me that the VA program has been u�lized by the borrower. Both the debt-to-income and housing ra�os tend to come out to 41%.

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USDA Loans. Designed for low- and moderate- income prospec�ve homeowners in specified rural areas, these government-guaranteed loans require no or low down payments and have ra�os of 29/41. To determine your eligibility, visit htps://eligibility.sc.egov.usda.gov.

Below-Market-Rate Loans and Other Programs for First-Time Buyers Various organiza�ons—whether local or na�onal, government or private, profit or nonprofit—do their part to ensure that low- and moderate income earners are able to fulfill their dreams of homeownership. Listed below are some of the programs available: •

Affordable lending products offered by Freddie Mac and Fannie Mae. With these programs, local lenders can offer loans with reduced or no down payments, u�lize increased qualifying ra�os, and sell these loans to Freddie Mac and Fannie Mae.

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Local bank programs. In accordance with the federal Community Reinvestment Act (CRA), all banks must invest some of their funds into programs dedicated to promo�ng homeownership in specific communi�es. Rather than distribute these programs in the secondary market, lenders o�en place them in their own loan por�olios. Ask your bank’s CRA officer what programs are available in your area.

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State and local housing finance agency bond programs. In this type of program, funds earned through the sale of bonds by ci�es, coun�es, or states are then used to offer first-�me homebuyers lowinterest housing. Keep in mind that obtaining this financing is o�en compe��ve, as the rates are so low. For more informa�on, contact your city housing office.

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Local nonprofit programs. Avenue offers subordinate loan programs that can assist you in subsidizing the down payment por�on of your home mortgage. Ask your counselor for more details.

Different Types of Loans Fixed-Rate Mortgages The most common loan obtained by first-�me homebuyers, the interest rate of a fixed-rate mortgage does not change throughout the dura�on of the loan. Regardless of whether or not your property tax and insurance costs change throughout the years, the principal and interest por�ons of your PITI payment will remain the same. The stability of this payment system o�en proves to be the safest op�on for first-�me homebuyers.

Adjustable-Rate Mortgages Ini�ally, the interest rate of an adjustable-rate mortgage loan is lower than that of the average fixed-rate mortgage loan (usually by 1 to 3%) before adjus�ng at specific, regular intervals. The pre-adjustment period can range between one to ten years, a�er which the interest rate adjusts on a regular schedule (possibly yearly, depending on your contract). For example, the interest rate on a 4/1 ARM will remain the same during the first four years, as demonstrated by the first number: 4. A�er the four years are over, the interest rate is subject to change every following year, as illustrated by the number 1.

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Sample Loan Estimate

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Source: www.consumerfinance.gov, “H-24(B) Mortgage Loan Transac�on Loan Es�mate—Fixed Rate Loan Sample”

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Loan Documentation Checklist General Documents

Documents to Support Current Debts

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A�er reviewing your credit report, if not all of your debts are shown, for each missing creditor (bank, credit card, or person) with whom you have an outstanding debt: name, address, account number, balance, monthly payment

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Student loan verifica�on documenta�on (if unsure, visit the Na�onal Student Loan Database System at www.nslds.ed.gov to check on your loan status)

Social Security card and driver’s license other picture ID including Passport

Documents to Support Income

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The name, address, and phone number of every employer you have worked for in the last 2 years Most recent two months’ pay stubs W2’s and complete Federal income tax returns for the last two years

Evidence of All Other Income, Including:

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Child support payments (if you need this income for qualifying)

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Pension payments Seasonal employment income Government assistance

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Leter of explana�on for any derogatory credit items

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Leter of explana�on for any gaps in employment within last 2 years

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Chapter 7 or Chapter 13 bankruptcy [complete filing package including discharge papers and list of creditors (Schedule F)]

Social Security benefits

Documents to Support History of Consistently Paying Housing Expenses

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Documents to Explain Irregulari�es

Provide the names and phone numbers of your landlords over the past 24 months

Documents to Support and Recent Bank Ac�vity

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Most recent (60-90 days) savings account statements—All pages

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Most recent (60-90 days) checking account statements—All pages

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Most recent (60-90 days) brokerage statement(s) (Stock, 401-K, and IRA)—All pages

Other

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Veteran’s DD-214 and cer�ficate of eligibility

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Copies of divorce decree and marital setlement agreement

Source: NeighborWorks® America, Realizing the American Dream

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Mortgage Re�inancing: Is It Right for Me? When you refinance a mortgage on your home, you pay off the original mortgage and replace it with a new one. The terms and interest rate on the new loan may be different, but the property securing the loan is s�ll the same. Although refinancing your mortgage can reduce expenses, there may be addi�onal costs that can make it more expensive in the long run. The factors below will help you make an informed decision about whether or not you should refinance your current mortgage.

Re�inancing Costs Keep in mind that refinancing comes with nearly as many costs as the ini�al mortgage, including closing costs, �tle insurance, and atorney’s fees. Though many banks adver�se “no-cost” mortgages, this simply means that closing costs or either added to the loan balance or that you will instead pay a higher rate to cover them.

Therefore, when considering a refinance, it’s vital to determine whether or not the savings you’ll get from a lower interest rate will offset the costs you’ll incur.

Addi�onally, closing costs vary according to your rate. If you want the lowest available rate, your closing costs will be rela�vely high. Alterna�vely, if you accept a slightly higher rate, your closing costs will likely be reduced.

How Re�inancing Can Save You Money You’re probably already aware that a refinance can lower your monthly payment. However, a lower interest rate can also allow you to more quickly build up equity and pay off your loan balance.

Because your mortgage is amor�zed over a long period of �me, interest payments make up a significant chunk of the monthly payment, par�cularly during the first ten years of your loan.

If the term of your new mortgage matches how many years remained on your original mortgage, the amount you pay toward principal will go up. If you can afford it and don’t have other high interest debt, a good strategy is to direct the amount of money you save from a refinance toward extra principal payments. In this way, your monthly mortgage amount doesn’t change, but you can pay off your home much faster.

In most cases, a refinance that involves removing private mortgage insurance (PMI) will also help save you money. If your house has more than 20% equity, you will not need to pay PMI, unless you have a FHA mortgage loan or are considered a high-risk borrower. If you pay PMI and your current lender won’t remove it even though your house has at least 20% equity, you may want to consider a refinance for this reason alone.

Factors to Consider Before Re�inancing •

Current Interest Rate. Simply put, if you can get into a lower rate mortgage, a refinance is worth looking into. That being said, consider how long it will take you to recoup closing costs. For example, if you paid $2,000 to refinance your mortgage to a lower rate and your payment dropped by $150 per month, it will probably take you just over a year to break even. Generally, at least a half point to a full point reduc�on in the interest rate will save you enough money to cancel out the closing costs within a few years.

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Jumbo Loan. If your ini�al mortgage was a “jumbo loan,” but you have since paid down the balance to less than $424,000, you may be able to get a “regular” refinance. In other words, there’s a good chance you’ll qualify for a lower interest rate even if rates in general have not gone down significantly.

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Closing Costs. Since every mortgage, including a refinance, has fees associated with it, you need to understand how you’ll be paying them and if even it makes sense for your situa�on. For example, in a “no cost” mortgage, you are either tacking the fees onto the loan balance or accep�ng a higher interest rate to cover those fees. If you can afford it, you’ll save money over the long-term by paying the fees out-of-pocket. However, if you can’t afford it and plan to stay in your house for a while, adding the fees to your loan balance is likely to work out beter than accep�ng a higher interest rate.

But if you expect to move over the next few years, accep�ng the higher interest rate will be more advantageous.

Consider your whole financial picture when determining whether or not to finance your closing costs.

For example, if you have high interest credit card debt, but have cash on hand to afford the closing costs, it might make sense to pay off the high interest debt and finance the closing costs instead. Then, you can direct the payments that would’ve gone to your credit card to your home loan. In this way, you could pay off the closing costs faster than you could have paid off the same amount of credit card debt.

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Mortgage Prepayment Penalty. Some mortgage brokers and banks offer loans that have a mortgage prepayment penalty. While a loan with a prepayment penalty usually has lower fees or a beter rate, if you pay the loan off early, you’ll owe a fee which can be steep. The penalty is in place for a set period of �me and can some�mes go down with �me. But if you want to refinance your mortgage before the prepayment penalty expires, you’ll have to pay the penalty, which can ul�mately make refinancing more expensive than it’s worth.

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Length of Time You Stay in the Home. This is important in the context of closing costs and especially if you’ll consider a new loan with a prepayment penalty. When it comes to closing costs, you want to make sure you recoup the expense before you move. For example, if you paid $2,000 in closing costs and you now pay $100 less in interest each month, it will take 20 months before you actually break even and start seeing real savings. If you financed those closing costs by adding them onto the loan balance, it will take even longer.

If you aren’t planning to be in your home for at least two years, it’s probably not worth refinancing at all – unless, perhaps, you refinance from a very high rate to a much lower one, or if you trade out-ofpocket closing costs for a higher interest rate that is s�ll lower than your original mortgage rate. If you’re entertaining the idea of tacking a prepayment penalty onto your new loan to get a lower rate, you should be commited to staying in your home through the prepayment penalty period, which could be as long as five years or more.

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Your Credit Score. If your credit has improved since you got your original mortgage, you may now qualify for a lower rate. Check your credit report before you begin the process to confirm whether or not this is the case. O�en, a few years of �mely mortgage payments will improve your score such that you qualify for a lower interest rate.

Also, compare your debt and income now to what it was when you took out the original mortgage as banks generally require that your debt to income ra�o fall below 43%. If you’ve since accumulated significant debt or if your income has declined, you may not qualify for a lower rate or a refinance at all in spite of stellar credit.

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Amount of Equity in Your Home. Most lenders want to see some amount of equity in order to qualify you for a loan. Generally speaking, the more equity in your home, the easier it will be to refinance. A minimum of 20% is ideal, but you may s�ll be eligible for a refinance even if you have less, such as 10%. However, the terms may not be as favorable.

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Adjustable-Rate or Balloon Mortgage. Most people who have an adjustable-rate mortgage or a balloon payment mortgage count on refinancing at some point if they plan to stay in their home.

Since refinancing can take a while, give yourself enough �me to apply and get approved before your rate adjusts or your balloon payment comes due. Double-check your loan documents to make sure you know exactly when this date is and plan ahead.

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Loan Term. Many people refinance into a new 30-year mortgage over and over, and never get closer to the goal of owning their home outright. Since interest makes up the large majority of your payments in the first ten to fi�een years, you will pay a lot more in interest if you keep rese�ng the clock.

Therefore, it’s generally a good idea to request a loan term as long as the number of years remaining on your original mortgage, as long as you can afford it. This allows you to pay off your mortgage according to the original schedule, while s�ll reducing your rate. You can even refinance into a shorter term, which may raise your payment, but could get you an even beter rate and set you up to pay the loan off sooner.

Remember, don’t focus on the monthly payment to the exclusion of the loan’s term, your rate, and closing costs. For example, some unscrupulous mortgage broker may show you a loan with a lower payment that actually has a 30-year term, high expenses, and a rate that isn’t much lower than the rate on your current mortgage.

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People Listed on the Refinanced Mortgage. Generally, if you’re trying to add or remove someone from a mortgage, such as a�er a marriage or divorce, the lender will require you to refinance. This is done to determine whether or not the other person will qualify, or if you will qualify alone. However, you may be able to work something out with the mortgage lender in order to accomplish your goal without going through a full refinance. This is especially true if the person who will have been on both mortgages can qualify for the mortgage by themselves.

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Second Mortgage or Home Equity Loan. If you have a second mortgage, a home equity loan, or a home equity line of credit (HELOC), you may be able to save a lot of money by refinancing that into your primary mortgage. To determine if you can, add up all your home loans together. If your home’s current value exceeds the value of the loans, you may be able to refinance your loans into one. In this way, you’ll pay one low rate on the en�re amount instead of one low rate on your primary mortgage and a higher one on the second.

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EXERCISE: Approve or Decline Debra • • • • • •

Saves 10% of her paycheck every week and puts in bank Has purchased nothing with credit, pays for everything cash Employed as a substitute teacher for 5 years Completed high school and has some college Brings her own lunch from home to work most days to save money Credit Score - 0

Approve or Decline? ___________________________ Is Debra a high, medium or low risk for the lender? _____________________________ What are Debra’s Pros and Cons? ___________________________________________________ Kyle • • • • • • •

Has a Masters in Hotel and Restaurant Management Has $75K in student loans, has been late only 3 times within the last year Never late on all major accounts - car loan, credit cards, etc.…. but often pays his utilities more than 30 days late, some have recently gone into collection status Employed as a Hotel Manager for past 2 years Unmarried and has 3 children Earns $60K annually Credit Scores - 550, 585, 573

Approve or Decline? ___________________________ Is Kyle a high, medium or low risk for the lender? _____________________________ What are Kyle’s Pros and Cons? ___________________________________________________ George • Has $80K in savings • Turning 83 this year • Excellent credit, never late • Retired, receives retirement income of $3,200/mo.

• Wants a 30 year loan • Credit Scores - 800, 820, 808 Approve or Decline? ___________________________ Is George a high, medium or low risk for the lender? _____________________________ What are George’s Pros and Cons? ___________________________________________________

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Chapter 5: Shopping for a Home

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Chapter 5: Shopping for a Home Introduction

Now that you are ready to accomplish your goal of becoming a homeowner, it is time to delve into the purchasing process from hiring a real estate agent to signing the closing documents. This section will cover everything you need to know about shopping for a home, including: • • • • •

Choosing a real estate agent The home inspection process and what to look for How to save money on homeowners insurance The importance of appraisals and land surveys The closing process

Working With Your Real Estate Agent

Your real estate agent is one of the most important assets that you can have during the process of looking for and purchasing your new home. Although a real estate agent may not be required when purchasing a home, it is nevertheless a good idea to hire your own real estate agent so that you can have someone on your side.

Your realtor will be able to negotiate with the seller’s real estate agent or builder, to advocate for you, and to ask questions that you may not think to ask.

When purchasing a home, keep in mind that not all realtors are created equal. Each real estate agent has their own unique style and specialty, and you may find it helpful to ask a few questions before working with someone, such as: •

What kind of real estate properties do you specialize in?

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What does your typical client earn?

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What is the best way to reach you?

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Are you full-time or part-time, and what is your availability? If you are part-time, how much time do you spend looking at the housing market?

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What loans are you familiar with?

Who Pays the Agent?

Typically, the real estate agent working for the seller will earn a commission from a percentage of the total purchase price of the house (generally between 5-7%). A portion of this percentage is later negotiated and shared with the realtor working for the buyer of the property. To ensure your real estate agent marking in your best interest, make sure to obtain a written representation agreement from them.

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The Real Estate Agent’s Job Having a realtor to assist you with the homebuying process will enable you to get the best picture of which homes are available in the neighborhoods that you are interested in, as well as protect you during the sales process by possessing knowledge that you may not have about the housing market and terminology. Your real estate agent should: • Discuss what exactly you are hoping for in a house and location with you and your household • Provide information about prospective neighborhoods • Research houses in your house range that possess features that you are looking for • Identify and show you the houses that best suit your interests and needs • Assist you in formulating a purchase offer that will both protect you and appeal to the seller • Bargain with the seller to get the lowest possible price for your prospective home • Clarify the home inspection process and negotiate repairs with the seller • Provide references to the other professionals that you’ll work with throughout the homebuying process, including the home inspectors, appraisers, attorneys, and title companies • Help you understand the legal paperwork provided Due to the lengthy and sometimes strenuous nature of the homebuying process, it is essential to work with a agent that you feel you can trust. Make sure to get recommendations and referrals from friends and consider interviewing more than one agent before making the decision to work with them over the course of the next several months.

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Sample Residential Purchase Contract

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Home Inspections

With all the excitement of buying a new home, it’s easy to forget to have a home inspec�on performed as soon as you are under contract. Home inspec�ons are an instrumental part of the home-buying process that can save you a lot of �me and money in the long run. Keep in mind that homes inspec�ons are not required in the homebuying process, but highly recommended. Remember that a home appraisal and a home inspec�on are not the same thing. Appraisals will not provide you with a detailed look at a property that can help uncover deep-rooted problems and poten�al pi�alls. Here are five great reasons to have a home inspec�on before you buy: •

Don’t Judge a Book by Its Cover. Especially for those buying newer construc�on, a home inspec�on may feel like a waste of money. No mater the age of the home, there can be costly troubles unknown to the average buyer. Problems with wiring, plumbing and founda�on may not be visible during a showing and you’ll want to get an expert opinion.

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Save Money. Home inspec�ons generally cost from $300 to $500 depending on size and age of the home. Although this seems expensive in the mean�me, it is far cheaper to know about problems now than to have to spend thousands in the future.

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Nego�ate. One of the advantages of having a home inspec�on performed before you buy is the power it might give you to nego�ate a lower price. If a home you’re really interested in is on the edge of your price range, informa�on gathered during the home inspec�on may give you the bargaining power to talk down the price. You can also insert language into a purchase contract that allows you to back out of an agreement if the inspec�on turns up problems.

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Seller’s Repairs. Not only are you able to nego�ate a lower price, many buyers will request the seller to make the necessary repairs prior to closing. If the seller is unwilling to complete the repairs, es�mate the cost and ask them to take that amount off the sales price. Solid facts about the quality and condi�on of the home can give you valuable bargaining power.

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Know What You’re Buying. In the end the most important reason to have a home inspec�on before you buy is to really know what you’re buying. Research your poten�al home like you would any other major purchase. The more you know, the fewer surprises there will be down the road. Home inspectors can help you make a decision based on your current budget as well as your future �me and money investment.

Ten Important Questions to Ask Your Home Inspector 1. What does your inspec�on cover?

The inspector should ensure that their inspec�on and inspec�on report will meet all applicable requirements in your state if applicable and will comply with a well-recognized standard of prac�ce and code of ethics. You should be able to request and see a copy of these items ahead of �me and ask any ques�ons you may have. If there are any areas you want to make sure are inspected, be sure to iden�fy them upfront.

2. How long have you been prac�cing in the home inspec�on profession and how many inspec�ons have you completed?

The inspector should be able to provide his or her history in the profession and perhaps even a few names as referrals. Newer inspectors can be very qualified, and many work with a partner or have access to more experienced inspectors to assist them in the inspec�on.

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3. Are you specifically experienced in residen�al inspec�on?

Related experience in construc�on or engineering is helpful, but is no subs�tute for training and experience in the unique discipline of home inspec�on. If the inspec�on is for a commercial property, then this should be asked about as well.

4. Do you offer to do repairs or improvements based on the inspec�on?

Some inspector associa�ons and state regula�ons allow the inspector to perform repair work on problems uncovered in the inspec�on. Other associa�ons and regula�ons strictly forbid this as a conflict of interest.

5. How long will the inspec�on take?

The average on-site inspec�on �me for a single inspector is two to three hours for a typical single-family house; anything significantly less may not be enough �me to perform a thorough inspec�on. Addi�onal inspectors may be brought in for very large proper�es and buildings.

6. How much will it cost?

Costs vary drama�cally, depending on the region, size and age of the house, scope of services and other factors. A typical range might be $300-$500, but consider the value of the home inspec�on in terms of the investment being made. Cost does not necessarily reflect quality. HUD Does not regulate home inspec�on fees.

7. What type of inspec�on report do you provide and how long will it take to receive the report?

Ask to see samples and determine whether or not you can understand the inspector's repor�ng style and if the �me parameters fulfill your needs. Most inspectors provide their full report within 24 hours of the inspec�on.

8. Will I be able to atend the inspec�on?

This is a valuable educa�onal opportunity, and an inspector's refusal to allow this should raise a red flag. Never pass up this opportunity to see your prospec�ve home through the eyes of an expert.

9. Do you maintain membership in a professional home inspector associa�on?

There are many state and na�onal associa�ons for home inspectors. Request to see their membership ID, and perform whatever due diligence you deem appropriate.

10. Do you par�cipate in con�nuing educa�on programs to keep your exper�se up to date?

One can never know it all, and the inspector's commitment to con�nuing educa�on is a good measure of his or her professionalism and service to the consumer. This is especially important in cases where the home is much older or includes unique elements requiring addi�onal or updated training.

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Appraisals

An appraisal is a writen es�mate of a property’s market value performed and completed by an appraiser—an objec�ve third party who assesses the home in ques�on and provides their professional opinion as to the price that a buyer should expect to pay for the home under typical circumstances. This value is based upon a market analysis of recent sales prices for similar proper�es in the area, physical condi�on, and the appraiser’s own knowledge and evalua�on of the property. The resul�ng opinion or es�mate is developed using the three standard approaches to property valua�on: • The Cost Approach es�mates what it would cost to replace or reproduce the improvements as of the date of the appraisal, with deduc�ons for issues like physical deteriora�on. This is added to the land value to determine the value of the property.

• The Comparison Approach looks at proper�es of similar size, quality and loca�on that have recently sold in order to derive a compara�ve value. Varia�ons between the proper�es—more bathrooms, a smaller lot, etc.— are factored into the valua�on.

• The Income Approach es�mates the value of the property based on the net income the property produces and is generally used for commercial proper�es, not for residen�al property valua�ons.

Why is an Appraisal Required?

Lenders hire appraisers to determine the appropriate loan amount to offer for a home. Because home values can vary considerably, even in the same neighborhood, it’s important for the lender to have an objec�ve opinion of the value of a home before making a loan that will be secured by the property. Even though the buyer pays the fee for the appraisal service as part of the closing costs, the appraiser works on behalf of lender, not the borrower or seller. However, as the borrower, you are en�tled to a copy of the report.

What Factors Affect the Appraised Value?

During the inspec�on, the appraiser measures the house from the outside to determine square footage.

Usually no interior measurements are required. The appraiser takes notes concerning the features of your house such as room layout, number of bedrooms, baths, etc., as well as the general condi�on, appeal, func�onal layout, and any improvements made to the house. Items that usually contribute very litle to value are swimming pools, finished basements, landscaping, new roofs, new furnaces, etc.

What if the Value Isn’t What I Expected?

In a rapidly changing market, buyers and sellers are o�en surprised when the appraised value is higher or lower than expected. A higher value will not have an impact on the loan approval process, but a lower value may in turn reduce the amount that a lender is willing to lend. In order to make up the difference between the appraised value and purchase price, the down payment amount may be increased, or you may be able to nego�ate with the seller to lower the purchase price.

You may also work with the lender to request an appraisal review or a second opinion if there is addi�onal informa�on such as recent comps that may have been overlooked. If the comps that were used are unlike the subject property due to differences in condi�on or improvements, or if the appraiser is not familiar with the type of home or neighborhood, addi�onal informa�on can be useful in obtaining an accurate appraisal.

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Homeowner’s Insurance

Now that you are ready to purchase your own home, you will have to take measures that will protect your investment from both hazard and liability. Make sure to discuss with your insurance agent what coverage you should have for your home and geographical region. In order to obtain a mortgage loan, you will be required to purchase homeowner’s insurance. Listed below are ten ways to cut the cost of homeowners insurance: •

Raise Your Homeowner's Insurance Deduc�ble. Your deduc�ble is the amount of risk you agree to accept before the insurance company starts paying on a claim. Many companies offer deduc�bles equal to 1% of the home’s insured value. This may seem costly, but it is ul�mately cheaper than the higher monthly payments you would otherwise pay, or the rates you might find elsewhere. Consider raising your deduc�ble to at least $500 to $1,000, as you could save up to 25% on your premiums.

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Combine Your Homeowner's Insurance and Auto Insurance Policies. Consider buying your homeowner's and auto insurance policies from the same company, as some companies offer discounts for purchasing both types of coverage.

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Ask About Other Homeowner's Insurance Discounts. Companies may offer discounts for having smoke detectors, security systems, and more. If you're over 55 and re�red, you may qualify for an addi�onal 10% discount.

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Don't Buy Homeowner’s Insurance Coverage You Don't Need. It makes no sense to buy insurance to protect yourself against risks you are unlikely to encounter; for example, you are unlikely to benefit from earthquake coverage in a no earthquake zone.

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Make Your Home a Beter Insurance Risk. Ask your insurance agent what you can do to make your home less expensive to insure. Consider making changes and updates that will reduce the risk of damage from natural disasters or electrical fires.

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Know What Your Homeowner's Insurance Policy Covers. Make sure your home is protected from risks you cannot afford to cover yourself, and that your policy covers any home improvements you've made, major purchases, and increased costs of rebuilding.

•

Keep Your Insurance Coverages Up To Date. Before your homeowner's insurance policy is due to renew, read through your policy and discuss any relevant changes in your situa�on with an agent.

•

Avoid Risks That Insurers Shun. Some circumstances—owning a swimming pool, for example—may increase your cost of coverage or may be excluded from coverage altogether. Read the fine print in your policy under “Condi�ons and Coverages,” and consider whether you should opt for addi�onal coverage instead.

•

Improve Your Credit Score. Insurance companies are increasingly using credit informa�on to price insurance policies. In order to get the best policy, make sure to use credit responsibly, and to make your payments on �me and in full.

•

Shop Around for Homeowner's Insurance. Although some insurers offer longevity discounts—5% if you’ve been with the company for 3-5 years, 10% for 6+ years, etc.—you may nevertheless find a beter rate on your insurance by shopping around. Make sure to get quotes from at least three agents.

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1. Who and what is insured.

2. Policy terms.

3. Coverages Limits of Coverage, and Premiums.

4. Discounts Applied.

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What is a Title Commitment?

Obtaining the �tle of a property is the legal process that enables you to become the owner of that property. A �tle commitment is a commitment to issue �tle insurance, and is broken down into four parts or schedules— A, B, C & D. Schedule A - "A" is for "Actual Facts." This is where you will find informa�on concerning “who, what, where and how much”. The most important informa�on here will be the name of the person who holds the exis�ng �tle, the legal descrip�on of the land and the name of the proposed insured (buyer), the sales price and the name of the lender. What we want to make sure of is that all of the informa�on is accurate when it is compared to the sales contract.

Schedule B - "B" is for "Buyer No�fica�on." This is the sec�on of the �tle commitment that address where other par�es have any interest or control of the use of the property. Examples of this are u�lity easements and building setbacks. A u�lity easement is a common thing to find here. This would be a part of the land that a u�lity company has the right to use. A setback prevents the owner from building a certain distance from the front property line. Schedule B is also the area in which excep�ons will be noted. Excep�ons in this case are anything that will not be covered by �tle insurance.

Schedule C - "C" is for "Clear to Close." This is the area in which any issues must be resolved before the buyer can close on the property. Common issues here are an exis�ng mortgage that needs to be paid off, a marital status issue, unpaid taxes and liens on the property.

Schedule D - "D" is for "Disclosure." This final sec�on outlines all par�es who will collect any part of the insurance premium including underwriters, �tle agents and atorneys. It will also show the amounts being paid for the owner's �tle insurance policy, the mortgage company's amount and any endorsements.

The most par�cular en�ty looking at the �tle commitment will most likely be the lender if one is involved.

Lenders generally do not like to see any defects in Schedule C that cannot be cleared.

What is a Title Insurance Policy?

Owner's Title Insurance, called an Owner's Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-�me fee at closing and lasts for as long as you or your heirs have an interest in the property. Only an Owner's Policy fully protects the buyer should a covered �tle problem arise with the �tle that was not found during the �tle search. Possible hidden �tle problems can include: • • • •

Errors or omissions in deeds Mistakes in examining records Forgery Undisclosed heirs

An Owner's Policy provides assurance that your �tle company will stand behind you — monetarily and with legal defense if needed — if a covered �tle problem arises a�er you buy your home. The botom line is that your �tle company will be there to help pay valid claims and cover the costs of defending an atack on your �tle.

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Sample Title Commitment

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Land Surveys

Depending on where you live and the kind of property that you are hoping to purchase, the mortgage lender may instruct you to have a surveyor inspect the property. This surveyor will find the property lines of the home in question, and will take measurements of both this property and the surrounding land. This process will allow both you and the lender to know exactly how large the property is, whether or not there are sections of the land that other people have a right to use, the size and location of any new developments, and whether or not there are any potential issues with the property.

Even if a land survey is not required by the lender, it is nevertheless a good idea to have one done. For example, if you are purchasing an older property with unclear boundary lines and hope to build improvements on the land, you might find yourself building on land that is not legally yours. Listed below are the various findings that land surveys may uncover: •

Property Boundaries. Land surveys are designed to clearly define the boundary lines of the property that you hope to buy. The surveyor will plot out the precise size and measurements of the property, which will allow you to determine what portion of the land can be used for various developments and to ensure that the information provided by the seller is accurate.

•

Easements. Land surveys additionally point out any easements—rights given to certain individuals or institutions to enter and use part or all of your land—that you may not otherwise have been made aware of. Utility companies often have easements allowing them to enter properties, and access easements can allow other property owners to utilize your property to get to the road. It is important to know about these easements prior to owning the land, as they may bar you from making desired changes to your home.

•

Encroachments. Although it may not be clear from the information provided about the property, it is possible that the land you wish to purchase has encroachments—areas in which your property infringes upon the rights of another land owner. For example, the surveyor may discover that a fence has been built 3 feet over the property line and into the neighboring yard. It is often possible to negotiate away minor encroachments before the title is transferred to you, or for title insurance to pay the cost of others. However, if the surveyor discovers a major encroachment, you may want to consider looking into another property.

•

Survey Title Coverage. Before obtaining survey title insurance coverage, you will need to submit a land survey to your title insurer company. In case of any claims against you by neighboring property owners, this will enable your insurer to know whose claims to the property are valid. If it is discovered that a third party does indeed have a right to your property, this policy will cover any expenses that may occur as a result.

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Sample Land Survey

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Closing

Closing, or settlement, is a meeting during which the final documents are signed, and ownership of the home is transferred from the seller to you. This meeting is often attended by yourself, your real estate agent, the seller’s real estate agent, and a closing agent. Before closing, there are some steps you will have to take to make sure everything goes smoothly, including: •

Reading through your Closing Disclosure. Three business days before closing, you will receive your Closing Disclosure—a document detailing the terms of your loan as well as an itemized list of the fees you will incur on the day of closing. If you find any notable deviations from the estimated costs that your lender originally provided, make sure to find out why. Send to your counselor for review before closing.

•

Schedule a walk-through of the house immediately before closing to make sure that it’s in the same condition that you and the seller agreed upon.

•

Take your time and ask plenty of questions!

On the day of closing, the closing agent will detail the exact amount of money that you owe—down payment, taxes, purchasing costs, etc. —on your settlement statement. You will then sign a series of documents prepared by the title company—one stating that you have accepted a loan from your mortgage lender, and additional declarations and affidavits concerning your rights and obligations as a homeowner. Your title company will then transfer the amount owed to the seller on your behalf, enabling the seller to sign the deed and officially transfer ownership of the home to you.

What Happens After Closing?

•

Servicing Transfer—your lender may sell your mortgage a�er closing, a�er which you will receive a servicing transfer statement.

•

Mortgage Payment Adjustments—Property taxes, interest rate adjustments, etc. may alter your payments periodically.

•

If the property you purchase is part of a Homeowner’s Associa�on (HOA), you may need to inform them that you are the new owner of the property.

•

Homestead Exemp�on. If the property you purchased is your primary residence, you will need to file for your General Homestead exemp�on between January 1st and April 30th of the year following the year in which you purchased the home. For Age 65 or Disability Exemp�ons, you may file for the exemp�on within the current year if you turn 65 or become disabled on or a�er June 1st of the current year. To find out more, use the HCAD Homestead Exemp�on Filing App (pictured right).

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Sample Closing Disclosure

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Source: http://files.consumerfinance.gov

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Chapter 6: Protecting Your Investment

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Chapter 6: Protecting Your Investment Introduction

After all of your time, effort, and money-management, you have finally achieved your goal of homeownership!

This section is dedicated to demonstrating the various ways to maintain your home and finances so that you can reap the greatest benefit from your investment, and enjoy the many years of homeownership that lie ahead.

This section will discuss: • • • • • • •

Creating a healthy, safe environment How to become energy-efficient Preventive maintenance How to handle homeowners’ most common problems Record-keeping Preventing foreclosure Foreclosure and other options

Now that you have achieved your goal, you now have a duty to yourself and your household to protect it. By learning more about your community, knowing how to maintain your property, managing your finances, and knowing how to handle serious financial difficulties, you will be all the more prepared to appreciate and care for your new home.

Getting to Know Your Home

Before moving in, try to get some outside information about your new home. The home inspector, your real estate agent and, your neighbors might prove useful sources as well, especially in developments completed by the same builder.

Make sure to write everything down, and mark the following features with labels: • • • •

The main electrical switch The main cutoff valves for water and gas Fuse or circuit breakers, and the sections of the house they control Hot water heater thermostat

Remember to make a list of questions about the house, and find out the answers as soon as possible. Your real estate agent, home inspector, city building inspector, surveyor, listing agent, and neighbors are all valuable sources of information, and will most likely be happy to tell you all about your new home. Here are some sample questions you might want to ask: •

What is the building’s history? (Who built the house and when? Has the house ever been remodeled, and what was done? Have any additions or improvements ever been made? What contractor made those additions? What building permits were issued during this time?)

•

Are there any available blueprints of the house?

•

Are any appliances under warranty?

•

When is the garbage collected, and is there contact information available for these services? What is

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the local recycling policy?

•

Who provides water and sewer services and how do you contact them?

•

Are any other services provided?

•

How are energy efficient systems used? How are the thermostats programmed? How often should air filters be cleaned and replaced?

•

Did the seller conduct seasonal maintenance, and how much did this generally cost? If maintenance services were used, is there a way to get their contact information?

•

Has any work been done on the house by contractors, plumbers, electricians, carpenters, or roofers?

Would the seller recommend them, and what is their contact information?

•

Is there any extra paint that matches the interior and exterior of the house? If not, what paint colors were used? Keep in mind that very old paint should be thrown away.

•

Are there any extra materials available—such as carpet, wallpaper, and fabric—that will match what is staying with the house? Are there any special instructions for floor or carpet care?

Sellers will occasionally let you make multiple visits to the house before closing. Use this time to take measurements and make note of paint colors and other interior decorating choices so that you can begin planning your own decorative process.

Moving In The moving process can be both thrilling and stressful. However, by planning ahead, you will better able to eliminate this anxiety and instead focus on the exciting new future ahead of you and your household. Before the move, sort through your possessions and determine what items you truly want and need, and what can be donated, sold, or thrown away. While packing, tackle one room at a time and prioritize boxing up items that you won’t need until after the move. Wrap breakable items in clothing, towels, and blankets, and make sure to label each box so that you will be able to locate your items once you’re all moved in.

Creating a Healthy Environment In order to create a healthy, safe environment for your household, you can: •

Check that all of the smoke alarms in the house are functional

•

Make sure that the carbon monoxide alarm is working

•

Prevent mold growth by taking care of water leaks or indoor condensation as soon as they occur

•

Cut down on your pesticide use and instead use environmentally-friendly methods

•

Do not use a gas stove or any heater that uses kerosene or propane

•

Make sure that cleaners, pesticides, and solvents are only used in well-ventilated spaces

Household Safety and Security

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Household Safety and Security

After moving in, meet with your household to design a home safety program so that each member can be prepared in case of emergency. Here are some safety suggestions that you can discuss: •

Emergency numbers. In an easily accessible location, post the phone numbers of the nearest police and fire stations, as well as the number of the hospital that you plan to use. Add these numbers to your cell phone contacts. Find out via the police non-emergency line whether or not 911 can be used for all emergencies, and teach children to use 911 only in the event of a real emergency.

•

Fire safety inspections. Oftentimes local fire departments will send a home inspector to show you potential fire hazards. If this service is unavailable, your homeowners insurance agent may be able to meet with you to go over fire safety.

•

Smoke detectors. Smoke inhalation is the main cause of death in house fires. Smoke detectors should be placed outside of each bedroom, and in or near the living room and kitchen. Battery-operated smoke detectors should have the batteries replaced twice a year (a good way to remember to do this is to replace them during daylight savings time). Smoke detectors that do not run on batteries should still be checked regularly.

•

Fire extinguishers. You should have a fire extinguisher placed in your kitchen and in your garage, as well as one on each floor of your home. Learn how to use them, make sure that you have the right kind for your property, and make sure that every member of the household is well-versed of the escape plan in case of a large fire.

Keep in mind that fire extinguishers can expire after a few years and that they should only be used in case of a small fire.

•

Safety ladders. If you are trapped on the second floor during a fire and need to escape through the window, chain-link ladders can provide an exit strategy and can be easily stored.

•

First-aid kit. Make sure to keep a first-aid kit well stocked with up-to-date medications, bandages, and other necessities. Keep it easily accessible to adults and far out of reach for children.

•

Carbon monoxide detectors. Because it is both colorless and odorless, this deadly gas can easily escape detection before proving fatal. To be safe, install at least one detector near where you and your household sleep, and an additional one next to your home’s heating source.

Home Security In order to protect your home from burglaries and home invasions, there are many preventative measures that you can take, including: •

Making sure that each member of the household keeps doors and windows locked, both when you are home and when you are away.

•

Changing all of the locks before moving in.

•

Trimming back shrubs that conceal doors and windows.

•

Installing lighting for both the house’s exterior and yard; lighting that features timers or sensors are the most effective.

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•

Posting a “Beware of Dog” sign, regardless of whether or not you have a dog. If you’d like to make it more convincing, put a large water bowl in the front yard.

•

If you will be away from the house for a few days, ask trustworthy neighbors to keep an eye on things.

Contact your local post office and request that your mail be put on hold.

Saving Energy and Money

Your new home may come with higher costs for utilities such as water, gas, cooling, and electricity than what you are accustomed to paying. When you call the utility company to transfer the bill to your name, request that a representative come assess your home and offer energy-saving tips. However, there are many simple tasks you can complete that will help you and your family become more energy-efficient: •

When you leave a room, turn off the lights.

•

When brushing your teeth or washing the dishes, turn off the water in the meantime.

•

Plan out your meals so that you are able to use your oven for multiple dishes.

•

When attempting to keep the house cool, do not use major appliances or bake during the hottest time of the day. If possible, keep appliances unplugged when not in use.

•

Keep doors and windows closed when the air conditioning or heat is on.

•

Rather than turning up the heat, wear a sweater in the house.

•

Make sure that the thermostat is not too high in winter and too cold in summer. According to energy experts, keeping your thermostat around 78 when it is warm out and 72 degrees during the cool season is ideal. If possible, purchase a thermostat that can be programmed to provide less cooling or heating when you are away or asleep.

Energy-Saving Tips for Your Home •

Add attic insulation. To avoid energy loss, install high-quality insulation to your attic floors, walls, and ceiling. To ensure maximum efficiency, replace any ripped or matted sections.

•

Reduce water use by replacing shower heads and faucets to lower flow models.

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Install water-conserving toilets in your home.

•

Have your furnace or heat pump serviced once a year. Clean or replace your filters approximately once a month.

•

Install weather-stripping or caulking to your doors and windows to prevent energy loss and moisture damage. Inspect all plug outlets for air leaks.

•

Install storm doors and windows with screens to be used in spring and summer.

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•

Install fans or vents in the attic to create the proper distribution of air.

•

When purchasing major appliances, find the most energy-efficient models in your budget. Look for the Energy Star logo.

•

Maintain your heating and cooling systems. In order to reduce energy costs and to preserve the flow of clean air, regularly replace the filters on units. Clean vents and registers, and keep them closed in rooms that are not used often. Removing or covering air conditioners in the winter will prevent heat loss.

•

Look into purchasing a high-efficiency furnace. A furnace with an AFUE (Annual Fuel Utilization Efficiency) rating of at least 80 percent could reduce your energy bills by up to 25%.

Preventive Maintenance

As a homeowner, it is essential to maintain your appliances, as well as the interior and exterior of your property. What may at first appear to be a minor issue may turn into a considerable problem if left unattended. For example, if a small roof leak is not repaired, it could result in the beams warping and ultimately to wall damage and cracks in the ceiling.

Listed below are the general replacement costs for various aspects of your home: • • • •

50-gallon capacity electric or gas hot water heater: $400-$600 Tankless Point-of-Use water heater: $600-$1000 High-efficiency forced air furnace: $2,500-$5,000 Roof for an average three-bedroom home: $10,000-$15,000

Although you may at times be tempted for forego regular maintenance, preventing these issues from happening will preserve both your bank account and your peace of mind in the long run.

Do-It-Yourself Repairs Learning how to do your own repairs is a skill that will save you both time and money, and will help you feel more confident when speaking with contractors about large-scale repairs. However, it is important to make sure that you are up to the task. Before beginning a project, ask yourself if you are prepared in terms of tools, time, and experience.

If you wish to learn more before undertaking a specific task, there are plenty of resources concerning home repair and maintenance readily available to you, including: •

The internet. If you have access to a personal computer or public library, you will be able to find countless web sites and YouTube videos dedicated to DIY home repair.

•

Do-it-yourself manuals and videos from local bookstores or libraries. Search for manuals containing step-by-step instructions with pictures and diagrams, and for videos that demonstrate each part of the process.

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Preparing a Proper Tool Box When preparing to conduct your own repairs, you should invest in safety equipment—a pair of safety goggles and a first-aid kit are a must—as well as basic, good quality tools, including: •

Standard (straight-edged) and Phillips (cross-head) screwdrivers in multiple sizes: used to insert screws into various surfaces or to remove them.

•

Claw hammer: used to insert and remove nails from wall or wooden surfaces.

•

Slip joint and vise grip pliers: used for shaping or cutting wires, and for gripping things tightly

•

Crescent (adjustable) wrench: used to tighten or loosen nuts and bolts

•

Various nails, screws, brads, nuts, bolts, and washers

•

Hand saw: used to cut lumber or paneling

•

Flashlight with batteries: useful in power outages and electrical work in which you have to turn off a circuit

•

Tape measure: used for measuring and marking

•

Putty knife: flat knife used to spread spackle or wood filler into cracks or holes

•

Utility knife: used for everything from box-cutting to cutting floor tile

•

Plunger: used to fix clogs in plumbing lines

•

Caulking gun: plastic or metal holder that distributes caulk or other adhesives from a cartridge

•

Handheld power drill: used to install screws into metal or wood surfaces and capable of making different hole and screw sizes via changeable bits

•

Carpenter’s level: useful for hanging pictures and putting up shelves, this tool allows you to see if a surface is level

•

Sandpaper: smooths out various wood or wall surfaces and comes in different grades of coarseness

•

Ladders (including step and extension): step ladders are free standing and useful or interior and exterior work; extension ladders are designed for outdoor work such as roof repair

These tools will prove useful when completing minor projects. However, if you hope to take care of larger projects, it might be a good idea to consider investing in more specialized tools. If your home is in need of major plumbing, structural, or electrical work, consider hiring professionals so as not to risk further damage.

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How to Solve Common Household Issues Now that you are a homeowner, you should be aware of how to repair some of the common problems that you will likely face over the years. Even if you don’t think of yourself as particularly handy, you may be surprised to find how much you can take care of without the help of a professional. However, before beginning any project involving plumbing, make sure that you know where the house water shut-off valve is located.

Here are some strategies for tackling typical home repairs: •

Clogged toilet. This can generally be fixed with a plunger. Place the plunger over the toilet’s drain hole.

To create pressure, push down, pumping it up and down multiple times. Pull out the plunger. If this does not clear the block, it is possible that a hard object is lodged in the toilet trap, which may be dislodged by a stiff piece of wire with a hook on the end. Chemicals should not be used when unclogging a toilet.

•

Clogged sink, tub, or shower. If you are able to easily remove the piece that closes the drain, use a drain hook (i.e., a piece of wire with a hook on the end) to remove the hair or debris causing the blockage. If not, block the overflow drain with a piece of cloth or rubber ball. Fill the tub with water partway and pump the plunger several times over the main drain before releasing. You may need to repeat this step multiple times. Chemical drain cleaners may prove useful for this type of clog.

•

Running toilet. If you continue to hear water running after flushing your toilet, remove the tank cover and make sure that the tank ball and ball seat close tightly. It is possible that something is blocking the tank valve from closing properly or that the ball is out of alignment.

•

Tripped circuit breaker. If you turn on an appliance and the lights in the room turn off, it is likely that the circuit serving that room has overloaded. Unplug the appliance, and find out if any other lights or appliances have turned off as well. If so, unplug them or switch them off. Locate the relevant circuit breaker on your electrical service panel. If unlabeled, find the breaker that is set differently from the others. Set this breaker to the “off” position and then to the “on” position. Moving at least one appliance to another breaker will help prevent this from happening in the future.

•

Tripped electrical outlet in bathroom or kitchen. Many newer homes feature devices called ground fault circuit interrupters (GFCIs) that protect outlets found in rooms with running water. GFCIs prevent electric shocks from occurring when appliances plugged into them get wet, and may be identified by two small buttons—a test button and a reset button—in the middle. However, these devices can occasionally trip even when nothing is plugged in. If this occurs, push the reset button.

•

Malfunctioning heating system. If your house is colder than it should be, make sure that the thermostat is set to the heating position, and that the thermostat’s temperature setting is higher than the room temperature. If applicable, make sure that your furnace’s electronic pilot is set to the “on” position. If you do not have a conventional chimney, inspect the vent outlets and condensate drain for blockages.

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REFERENCE: Average Life Expectancy of Household Features and Appliances Item Exterior Walls Exterior Paint Roof Asphalt Shingle Roof Chimney Gutters and Downspouts Interior Surfaces Interior Paint Flooring Vinyl Flooring Ceramic Tiles Wood Laminate Heating and Cooling System Forced Air Furnace Central Air Conditioning Plumbing System Hot Water Heater (Gas or Electric) Sump Pump Septic System Faucets Bathtub/Sink Toilet Grounds and Yard Wood Deck Asphalt Driveway Appliances Washer/Dryer Dishwasher Garbage Disposal Refrigerator Oven/Stove

Average Life Expectancy 5 years 15-25 years 25+ years 15-20 years 5 years 15-25 years 25+ years 20-25 years 10-15 years 10-15 years 10-15 years 5-10 years 15-25 years 10-15 years 25+ years 25+ years 10-15 years 10-15 years 8-12 years 5-12 years 5-12 years 15-20 years 15-20 years

Source: www.freddiemac.com, Appliance Budget Worksheet, NeighborWorks® America, Realizing the American Dream

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REFERENCE: Home Maintenance Checklist

Image Source: ehomeamerica.org, “Home Maintenance Checklist”

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Keeping Records

One of the best ways to ensure that you are able to cut costs and manage your information is to maintain records of all of your expenses, insurance policies, warranties, and other forms of documentation. Household records and legal documents should be kept in a filing cabinet or fire-safe box, and your deed, mortgage papers, and other important documents should be kept in a rented safe deposit box at your local bank. It is also a good idea to scan your documents into PDF files and keeping a back-up copy in a safe place outside of your home. If you would like to discard of personal information, consider purchasing a shredder.

So that you are able to easily access your homeownership records and keep them protected, come up with a filing system that works well for you. Here are some suggestions for filing your documents: •

Collect important documents from the sale, including your signed purchase contract, title insurance policy, pre-purchase inspection reports, property survey, mortgage, loan repayment schedule, promissory notes, deed, and a copy of the original appraisal of the property. This information will be necessary if you ever decide to sell your house. Make copies of your important documents before storing them in a safe deposit box.

• Store a copy of your homeowner’s insurance policy in your filing cabinet.

• Hold onto owner’s manuals and service contracts.

• Hold onto receipts and warranties in case of future repairs, services, or defective products • In case of natural disaster or theft, keep a list of the model numbers of your belongings • Take photos of your major possessions, as well as the interior and exterior of your home, and store these photos in a safe deposit box. These will prove essential when filing insurance claims for theft, fire, or natural disasters.

• Files for home maintenance projects—particularly projects completed by a contractor—should be kept separately, and will come in handy when budgeting for improvements and repairs. If you decide to sell your house, these documents will also help you figure out your capital gain.

Federal Income Tax Now that you are a homeowner and are therefore subject to property taxes, you may find yourself facing some more complex calcula�ons every year, as the amount of taxes varies each year and each jurisdic�on set its own rates. However, by itemizing your deduc�ons, you can subtract the interest on both your property taxes and mortgage loan from your total income. If your itemized deduc�ons for property taxes, mortgage interest, and other homeownership-related costs are greater than the standard deduc�on in a given tax year, it is likely that the amount of federal income taxes you have to pay during that year will decrease, saving you money.

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2019 Standard Deduction Chart for Most People If Your Filing Status is…

Your Standard Deduc�on is…

Single or married filing separately

$12,200

Married filing joint return or qualifying widow(er) with dependent child

$24,400

Head of household

$18,350

Standard deduc�ons are higher if you are 65 or older or blind. See Publica�on 501 from the Internal Revenue Service, which can be downloaded from www.irs.gov. They are subject to change annually.

Source: www.irs.gov, “Standard Deduc�on”

Preventing Foreclosure

If you ever start to worry that you will be unable to make payments and are at risk of losing your home, the first step that you must take is to communicate with your lender as soon as possible. Lenders have a number of programs available that may assist you in getting through this period of uncertainty.

When you call the lender, be prepared to provide the reason that you are falling behind in your payments (e.g., if you just lost your job and are expecting a reduction in your monthly income). Listed below are some avenues available to you: •

Payment plan. In most cases, this will be the first option offered to you by a lender. During this process, you will send one full payment and one partial payment (a quarter to one half of the regular amount due) every month until the missed payments have been repaid in full.

•

Forbearance. After drawing up a formal, written agreement with your lender, you will be able to reduce or skip your monthly payments during a set period of time. Once the forbearance period is over, your monthly mortgage payments will resume, and additional funds will be paid to cover the past-due payments. Before pursuing this option, you must prove both that you are enduring a legitimate hardship that renders you unable to make payments and that you will be able to make your payments after the forbearance period is over.

•

Loan modification. If your financial difficulties are expected to be more long-term, a lender may suggest altering the terms of your loan through a written agreement. Examples of modifications include lowering interest rates, or lowering monthly payments while extending the duration of the mortgage agreement.

•

Partial claim. If your loan has mortgage insurance, your insurance company may lend you money to pay off any missed or partial payments by taking out a second loan on your home. This second loan is often at very low interest, and payments often begin only after you have had time to recuperate from the hardship. This option is occasionally used for FHA loans, and requires proof that your financial difficulties are over and that you will be able to resume your monthly mortgage schedule in the future.

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If the financial difficulties preventing you from making payments are of a more permanent nature, you may find yourself in need of a less expensive place to live. In order to avoid the strain of a foreclosure, there are two options that you can pursue: •

Short sale. If the amount that you owe is more than what your house is worth, the mortgage company may allow you to sell the property and to pay them a reduced loan amount. Preforeclosure sales are less costly for lenders than foreclosures, and allow you to avoid eviction via court order. In terms of your credit report, a short sale will have the same impact as a foreclosure. Before agreeing to a short sale, talk to your mortgage lender and a tax advisor to determine the various conditions and requirements that may be involved in this process.

•

Deed-in-lieu of foreclosure. Although this measure will have the same effect on your credit score as a foreclosure, this option will allow you to avoid the responsibility of selling your house. Instead, you will offer the lender the deed and keys to your house in exchange for the lender forgiving the loan.

However, lenders have no obligation to agree to a deed-in-lieu of foreclosure.

Deficiency Judgments Despite any of these measures that you may have taken—short sale, deed-in-lieu of foreclosure, or foreclosure itself—in some states, a lender may sue you for any funds lost during the sale of your home. This collection of funds, referred to as a deficiency judgment, is often not pursued by lenders, though they have the right to do so. When negotiating a deed-in-lieu or short sale, try to get a written statement from your lender saying that the lender will not pursue a deficiency judgment.

Delinquency Counseling Avenue CDC employs counselors who can answer any questions you may have regarding your mortgage, and who are ready and willing to assist you with any financial difficulties you may be facing. Your counselor will be able to meet with you in person to look at your documents, assess your current situation, and to help you as you look for the right solution to suit your needs. Your counselor will additionally be available to assist you in communicating with your lender, help you apply for programs that may alleviate your troubles, and help you through the process of saving your home from foreclosure.

Conclusion

Throughout the course of this text, you have learned about the joys and difficul�es of homeownership, from the ini�al steps of coming up with your goals and spending plans to the day-to-day responsibili�es of maintaining your own property. You have learned about your homebuying team, about how to improve your credit ra�ng, and about how to obtain the best mortgage loan program for you and your household. We hope that this informa�on serves you well as you pursue your dream and that you will feel more confident and knowledgeable as you take the next step in your journey to homeownership.

Good luck, and enjoy the many years to come in the comfort of your own home.

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Chapter 7: Grant Guide

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Chapter 7: Grant Guide State Programs

The Texas State Affordable Housing Corporation (TSAHC) and Texas Department of Housing and Community Affairs (TDHCA) offer many different down payment assistance programs (DAP) designed to promote homeownership in low-income communities. Listed below are some of the programs offered for eligible

FHA

HFA Conven�onal

3% down payment at 5.625% interest

3% down payment at 6% interest rate

4% down payment at 6.125% interest

4% down payment at 6.25% interest rate

5% down payment not available

5% down payment at 5.75% interest rate (2nd lien and requires minimum 680 credit score)

borrowers.

To find out what programs you may be eligible for and for more details about each program, visit http://www.tsahc.org/homebuyers-renters/take-the-eligibility-quiz. *Note: Borrowers with credit scores as low as 620 can now qualify for TSAHC grant programs. Furthermore, TSAHC no longer has Debt-to-Income Ratio requirements for DAP approval* Texas Professional Educators or Homes for Heroes Program • For Professional Educators: must be a full-time professional educator (e.g., Teacher, School Librarian, School Nurse) employed by a public school district in the state of Texas •

For Homes for Heroes: must be a full-time, paid Firefighter, Corrections Officer, Juvenile Corrections Officer, County Jailer, Peace Officer, Allied Health Faculty Member, Emergency Medical Services Personnel, Nursing Faculty Member, Public Security Officer, or Veteran in the state of Texas

• • • • • •

DAP is based on total loan amount Purchase price cannot exceed $311,706 for non-targeted areas (Houston-Baytown-Sugarland HMFA) Household income cannot exceed 115% AMI for non-targeted areas and 140% AMI for targeted areas Homes for Heroes recipients will receive a FREE Mortgage Credit Certificate (MCC) valued at $500 http://www.tsahc.org/homebuyers-renters/teacher-home-loans http://www.tsahc.org/homebuyers-renters/homes-for-texas-heroes-program

Texas State Affordable Housing Home Sweet Texas Loan • Household income cannot exceed 115% AMI for non-targeted areas and 140% AMI for targeted areas • Purchase price cannot exceed $311,706 for non-targeted areas (Houston-Baytown-Sugarland HMFA) • Must meet standard mortgage underwriting requirements demonstrating creditworthiness

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TSAHC Mortgage Credit Certificate (MCC) • Up to $2,000 tax credit per year for 30 years • Tax Credit = 40% of annual interest paid on the mortgage loan • Purchase price cannot exceed $311,706 for non-targeted areas (Houston-Baytown-Sugarland HMFA) • http://www.tsahc.org/homebuyers-renters/mortgage-credit-certificates TDHCA Mortgage Credit Certificate Program (MCC) • Up to $2,000 tax credit per year for 30 years • Tax Credit = 40% of annual interest paid on the mortgage loan • Purchase price cannot exceed $311,706 for non-targeted areas (Houston-Baytown-Sugarland HMFA) • Household income limit for 1-2 people is $69,3000; $79,695 for 3+ people • https://www.tdhca.state.tx.us/homeownership/fthb/mort_cred_certificate.htm Homeownership Across Texas (HAT) Grant Program • Can be applied toward required down payment and/or closing cost • 1% - 5% of the amount of the homebuyer’s mortgage loan • Household income limit for FHA is $82,225 and $114,400 for Conventional • Purchase Price cannot exceed $453,100 • Must attain loan from a Participating HAT Lender REACH Program through Avenue CDC and East West Bank • Down Payment Assistant as a grant • 3% of the purchase price up to $12,500 • Must qualify for a Home Ready Loan • Must be a low-income earner (100% AMI or below) or purchasing in a Low-Income Census Tract (LICT)

County Programs Montgomery County Home Fund Program • $14,500 Down Payment Assistance for individuals meeting income guidelines • Gross Annual Income below 80% AMI (Area Median Income) • Maximum sales price of home $200,160 Harris County Down Payment Assistance • Up to $23,800 in down payment assistance • Income cannot exceed 80% AMI • Liquid Asset Limit of $15,000 • Buyer’s front end debt ratio cannot exceed 39% and debt-to-income ratio cannot exceed 42% • Buyer must have at least one credit score of 620 • http://www.housingresourcecenter.hctx.net/dap.htm Harris County H.O.M.E. Program • Income cannot exceed 120% AMI • Buyer must purchase a home listed on the Harris County H.O.M.E Program website • Buyer’s front end debt ratio cannot exceed 39% and debt-to-income ratio cannot exceed 42%

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• •

Buyer must have at least one credit score of 620 http://www.harriscountyhome.hctx.net

City Programs

City of Houston Homebuyer Assistance Program • An eligible homebuyer at or below 120% AMI may receive $30,000 in assistance • The buyer’s back-end ratio cannot exceed 45% • The property must be found within property tax jurisdiction of the City of Houston

•

htps://recovery.houstontx.gov/hbap/

City of Baytown Homebuyers’ Assistance Program • Maximum of $4,500 offered for first-time homebuyers • Five-year forgivable loan provided at closing • Sales price of home cannot exceed $140,000 and home must be within city limits of Baytown • Income cannot exceed 80% AMI • http://baytown.org/city-hall/departments/planning-development/community-development/homebuyers-assistance Houston Community Land Trust • • • • •

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Affordable home purchase model, where you purchase the structure (home) but do not own the land.

The land is leased for a (renewable) 99 year lease and the buyer has exclusive use of the land.

New Construction homes ranging from $65,000 to $81,000 purchase price Buyers must be at 80% AMI or below to qualify http://www.houstonclt.org

Glossary of Key Terms

Appraisal- A written estimate of a property’s market value based on factors such as the property’s condition and sales prices of nearby comparable homes (82).

Capacity- Whether or not a borrower can afford to make their monthly PITI payments in addition to all of the other bills and expenses incurred every month (54).

Capital- The money readily available to the borrower during the purchase process, such as savings accounts, bonds, or other forms of easily attainable funds (54).

Closing Costs-The fees charged for the various services provided over the course of the home purchase. Closing costs generally range from 2-7% of the home purchase price (16, 65).

Closing- The completion of the home purchase, during which the final documents are signed and the title of the home is transferred from the seller to the buyer (91).

Closing Disclosure- A document detailing the terms of one’s loan as well as the fees to expect at closing (91-96).

Collateral- Something of value that the lender will gain possession of if the borrower does not make the agreed-upon payments. In terms of a mortgage loan, one’s home is considered collateral for the loan (15, 45, 54).

Commitment letter- A mortgage lender’s formal loan offer featuring the loan amounts and terms (55).

Credit Bureau/Credit Reporting Agency- A company (e.g., Experian, Transunion LLC, and Equifax) that compiles individuals’ credit histories into reports and sells them to lenders and creditors (31, 41-42).

Credit Report- A detailed record of one’s credit history that helps creditors and lenders determine whether an individual will pay back a loan on time (31-34).

Credit Score- A number grade that reflects the contents of one’s credit report; generally, the higher the score, the more likely that a lender will trust the borrower to pay back a loan (34-35).

Debt-to-Income Ratio- The maximum percentage of a borrower’s gross monthly income that can be put towards the house payment and other debts (56).

Deed- A legal document stating an individual’s ownership of a property (15).

Deed-in-lieu of foreclosure- An alternative to foreclosure in which the borrower will offer the lender the deed and keys to the property in exchange for the lender forgiving the loan (109).

Delinquency- When a borrower has failed to make payments on a loan or debt as agreed upon (109).

Down Payment- The money invested in the house at the time of purchase; costs can range from 3-5% of the home purchase price to 20% of the purchase price (16).

Earnest Money- Generally 1% of the home purchase price; an upfront cost designed to demonstrate a commitment to the home purchase (11, 16).

Easement- The rights given to certain individuals or institutions to enter and use part or all of one’s land. Easements are found when conducting land surveys (89).

Encroachment- Areas in which one’s property infringes upon the rights of another land owner (89).

Escrow account- An account set up by one’s lender composed of the Taxes and Insurance portions of the mortgage payment (15, 54).

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Forbearance- An alternative to foreclosure; a written agreement between mortgage lender and borrower to forego or reduce payments for a set period of time. Afterwards, payments will resume with additional funds to cover the missed payments (108).

Foreclosure- Occurs when a borrower is unable to make payments on a property; the lender will seize the property as collateral and the homeowner must forfeit all rights to the property (108-109).

Housing Ratio- The maximum percentage of a borrower’s gross monthly income that can be put toward the monthly mortgage payment (56).

Inspector- A professional who will assess the condition of the property during the home purchase process (12, 79-80).

Interest- In terms of a mortgage loan, interest is defined as the fee charged by a lender for the funds lent to the borrower and constitutes one portion of one’s mortgage/PITI payment. When applied to banking, interest is money earned by an individual by putting funds into a savings account.

Lien- A legal hold or claim to one’s property that someone else can make as security for a debt (41).

Loan Estimate- The document provided by a prospective lender detailing the expected loan amount, interest rate, monthly payment, closing costs, and lender’s fees (61-63).

Loan Modification- A written agreement between lender and borrower to alter the terms of a mortgage loan. This option is usually pursued when the borrower cannot make payments (108).

Mortgage Broker- An intermediary who works with borrowers and potential lenders to find the most suitable loan (58).

Mortgage Insurance- Designed to protect the lender in case the borrower fails to repay the loan; this may be required based on loan type or amount of down payment (65).

Mortgage Loan- The funds borrowed from a lender to be put towards a home purchase. This loan is paid back in regularly scheduled payments over a set period of time. Examples include Conforming Conventional and FHA Loans. (Ch. 4, 53-68).

Option Period- A period of time in which the buyer may terminate the purchase contract without loss of the earnest money. For this service, one must pay a fee—generally, $10 per day for 10 days.

P.I.T.I.- The borrower’s scheduled mortgage payment; Principal, Interest, Taxes, and Insurance (15, 54).

Pre-approval- A meeting with a prospective lender during which the borrower will bring all relevant documentation, excepting information about the property, and apply for a loan (55).

Prequalification- An initial meeting during which a prospective lender will tell the borrower their options concerning house prices, loan amounts, etc. Prequalification is not a guarantee of a loan (56).

Reserves- Surplus funds (typically enough to cover 2-5 monthly house payments) that will show a lender that the borrower will be able to handle financial difficulties in the future (16).

Short Sale- An alternative to foreclosure; if the amount owed is greater than the property’s value, the mortgage company may allow the borrower to sell the property and pay the reduced loan amount (109).

Survey- An examination of a property’s size, boundaries, easements, encroachments, and survey title coverage (89-90).

Title- The legal term that establishes ownership of a property. The transfer of title occurs on the day of closing (85).

Title Insurance- Also referred to as an Owner’s Policy, this is designed to protect the homeowner if issues with the title arise after the title search (85-89).

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