What Those “Good Standing” Have in Common


In 2006, Freddie Mac conducted a Mortgage Literacy study to further investigate the causes of delinquency. The research uncovered that respondents in good standing had some common characteristics that could provide clues or tips for avoiding foreclosure.

  • Always pay your mortgage, and always pay on time
  • Live by your monthly spending plan
  • Make more money
  • Invest for the long-term
  • Maintain your good credit

Summary
At one time or another, many families experience serious financial problems। Sometimes, even small financial problems can grow into large ones that could, if left unchecked, destroy your good credit record and cause you to lose your home. While it’s difficult to imagine oneself in such an unpleasant predicament, it’s important to know that there are options to help you keep your home, or at the very least to help you preserve your credit. But the first, most critical step is recognizing the warning signs so that you can seek help.

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Alternatives to Foreclosure (Selling Your Home)


If catching up on delinquent payments is not possible, or you no longer want to keep your home, the lender might agree to put the foreclosure on hold to give you some time to sell your home। This gives you an opportunity to sell the property and walk away with your equity. At the very least, it could prevent you from harming your credit through the foreclosure process, which could make it more difficult and more expensive to get credit in the future.

  • Assumption. An assumption permits a qualified buyer to take over your mortgage debt and pay the mortgage payments, even if the mortgage is non-assumable. As a result, you may be able to sell your property and avoid Foreclosure.
  • Short Payoff. In cases where you sell your home for less than what you owe to the lender, the lender may accept this lesser amount as a “short sale” or a “short payoff.”
  • Deed in Lieu of Foreclosure. In some cases, the lender may accept the voluntary transfer of the title of the home back to them in exchange for cancellation of your mortgage debt. This approach could have a negative impact on your credit record, although not as much as a foreclosure. It may also have tax implications for you. This might not be possible if there are other liens against the home.
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What are the Alternatives to Foreclosure?


Workout options vary from lender to lender depending on the type of mortgage, your credit history, etc. Contact your lender for more information.

Alternatives to Foreclosure
Reinstatement. Reinstatement is when you are behind in your mortgage payments but you can make a lump sum payment to catch up on your overdue mortgage payments by a specific date (including any late fees or attorney fees). Some consumers borrow funds from family or friends to make these payments. A reinstatement is often combined with forbearance.

Forbearance. A forbearance agreement allows you to pay less than the full amount of your mortgage payment, or pay nothing at all, for a short period, with the understanding that another option will be used afterwards to bring the account current. This type of agreement may be used if your financial problems are short-term and you will be able to pay off the missed payments within a specific time in the future. Mortgage companies may consider forbearance when you can show that funds from a bonus, tax refund, or other source will let you bring the mortgage current at a specific time in the future.

Repayment Plan. If your mortgage is past due, but you can now afford to make payments, the lender may agree to let you catch up by setting up a schedule of repayments over six to 12 months. By adding a portion of the overdue amount on top of each monthly payment, you can bring your account current.

Loan Modification. The lender may be willing to modify or restructure your mortgage. Common loan modifications include adding missed payments to the existing loan balance, making an adjustable-rate mortgage into a fixed-rate mortgage, and extending the number of years you have to repay.

Refinancing. If you have enough equity in your home, you may want to try refinancing your home. The new mortgage could pay off the old loan along with any late fees and attorney fees. Be aware that if your credit history is poor, you may be forced to pay a higher interest rate or a higher monthly payment for the new mortgage.

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Why Don’t Homeowners Seek Help?


Despite the fact that there are resources to help, some homeowners never seek help.

Homeowners think, “I don’t need help. I can handle the situation on my own.”
In 2005, Freddie Mac conducted foreclosure avoidance research to find out more about delinquent borrowers. They found that more than half of the borrowers in foreclosure proceedings (in their study) had made no contact with their lenders. The top reason delinquent borrowers gave for not contacting their lenders was their belief that they didn’t need to seek help and that they could take care of the situation without the lender’s help. Given that the foreclosure process can take as little as one month in some states; this is a very dangerous gamble. It’s far better to seek help than to hope that things will improve.

Homeowners think, “The lender wants to take my home.”
It is a myth that a lender would want to foreclose on your home. Your lender would much prefer that you pay your mortgage regularly and be a good customer for life. In fact, lenders typically lose money in the foreclosure process, and so they are increasingly looking for ways to help homeowners avoid foreclosure.

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What Should You Do if You Get into Trouble?


If you experience a change in your financial situation and think that you might fall behind on your mortgage payments, there are some things you can do.

Call your lender! The most important step is to talk to your lender immediately.
Call your lender or talk to them if they call you. Ask to speak with someone in Default Management. Explain your situation and ask for help. Many lenders have special assistance they can offer to consumers in trouble to help them catch up on their mortgage payments. Considering that some foreclosures can occur in as little as one month, you must act immediately to prevent foreclosure and to minimize the impact on your credit.

Contact a housing nonprofit for advice.
The HOPE National Hotline, for example, is an independent, third party resource that is part of a HUD-certified, not-for-profit network dedicated to helping homeowners who are facing foreclosure. These counselors are trained to help you develop an action plan to address your situation. Spanish-speaking counselors are also available. You can call the hotline at (888) 995-HOPE. It is completely free to consumers and is available 24 hours a day, seven days a week.

Avoid scam artists! Be on the lookout for predators who would take advantage of your misfortune.

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How Do Homeowners Get into Trouble?


So, how is it that after all the hard work, planning, and saving it takes to buy a house, some people end up losing their homes to foreclosure? Is it carelessness or a lack of discipline with their finances? While these things would almost certainly contribute to financial disaster for a homeowner, the truth is that these are not the only, or even the most common, reasons for delinquency and foreclosure.

Reduction in Income, Illness, or Death
As it turns out, job loss, followed by illness or death in the family, are the top two reasons homeowners find themselves unable to pay their mortgages. In fact, more than 60% of delinquent borrowers surveyed in a 2006 Freddie Mac survey cited one of these two reasons for their difficulty. Let’s think about this for a minute. That means that any one of us, despite our best intentions, could be at risk for serious financial hardship if we don’t plan ahead. Life is full of surprises; and because you can’t always predict what life will bring, it’s critical that you prepare a safety net to protect yourself from life’s occasional turbulence.

Overspending
The third most common reason for default is excessive obligation, which could include overspending. This is one of the hardest financial lessons to learn, especially as it relates to overusing credit. As a homeowner, you will have many important financial obligations. At the same time, you will be bombarded with many unsolicited offers of credit. If you take advantage of these credit offers without adhering to your spending plan, you could get into serious financial trouble. Eventually you will have to pay the money back plus all of the finance charges and maybe even some expensive fees. Worse yet, you could face unexpected expenses related to repairing a car, fixing a leaky roof, or going to the hospital. Suddenly you could be thrown into deep financial trouble.

Sudden Increase in Expenses
Another situation that can lead to excessive obligation is a large increase in expenses without the benefit of a comparable increase in salary. This can be the case with some consumers who have adjustable rate mortgages (ARMs) or interest-only mortgages. Consumers initially find these options attractive because they make it possible to purchase a home with lower, more affordable monthly payments. Unfortunately, when the mortgage payments adjust according to the terms of the loan, some consumers aren’t actually prepared or equipped to handle the significant increase in payment. Unless you act fast to change your situation, you could find yourself in deep financial trouble.

Warning Signs of Excessive Obligation
  • You don’t have any savings
  • Your credit card balances are rising every month
  • You only make minimum payments on your credit cards
  • You're juggling bills and don’t know which one is most important to pay
  • You write a check on one credit card to pay another credit card
  • You have more credit cards than can fit in your wallet
  • You are at the limit of most of your credit cards
  • You don’t know how much you owe
  • You are receiving phone calls or letters about delinquent payments
  • You are dipping into your retirement account to pay your monthly bills
  • You are hiding your debts and credit card purchases from your spouse or partner
  • You always have to “moonlight” or take extra jobs to make ends meet
  • You are hoping to catch up on all your debts when you “win the lottery”

If these warning signs are familiar to you, get help now, while there’s still time.

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Foreclosure Prevention


We’ve talked about the importance of managing your spending and continuing to save wisely. We’ve discussed the value of maintaining your home. We’ve reviewed ways to prepare for emergencies and disasters. We’ve even looked at the different traps that lure homeowners and explored ways to avoid them. But what if—despite your best efforts—you start to have difficulty making your mortgage payments? What then? As unpleasant as it is to consider, there are homeowners who find themselves in this situation; and in cases where they are not able to remedy the situation, they lose their homes to foreclosure.

Foreclosure is a legal process by which the lender takes back ownership of mortgaged property (for example, a home) and sells it because a loan is in default, or in other words, because the owner is delinquent with their mortgage payments.

The process of foreclosure is different in every state, making it difficult to describe generically। In some states, a non-litigated foreclosure can take as little as 32 days. In other states, it’s a process that could take more than a year. In either case, the results can be devastating to your credit, making it far more difficult and more expensive to borrow in the future.

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Homeowner Beware- Avoiding Financial Traps


Because lending transactions often seem complicated, it’s not unusual for borrowers to rely on the expertise of professionals for guidance through the process. But what if your “professional” is actually a scam artist or predator looking to push you into a costly or risky situation? With their sweet talk and smooth assurances, these predators are often indistinguishable from legitimate lenders.

Home Title Scam
It’s hard to believe, but there are homeowners who have actually been cheated out of the titles to their homes. While these “deals” sound good because they provide brief, short-term relief in a cash crunch, the long-term effect usually tells a different story. Homeowners receive a fraction of what the home was worth, and they stand to lose all their hard-earned equity in the process.

Here are a few examples of how a title scam could occur:
  • Someone offers you fast cash for the title to your home, but leaves you saddled with the mortgage obligation.
  • Someone offers to give you a loan or help you finance much-needed repairs, and tells you that in order to secure financing, you must transfer your property deed or title so that someone with a better credit rating can obtain the repair loan on your behalf.Unfortunately, once you transfer the deed, the home is no longer yours.
  • Someone offers to take over your mortgage and your title (allowing you to remain in your home as a renter) so that you can buy the house back when you get on your feet. Consequently, there’s no guarantee that you’ll ever own the home again.

Home Improvement Loan Scam
Every year, shady home improvement contractors scam thousands of consumers.

Home improvement scams come in various forms, including the two most common:

  • The contractor asks for money up front and leaves after completing little or no repair work.
  • The contractor helps you get a loan to finance repair costs that then grow beyond the original estimate and agreement. The repair costs, plus exorbitant hidden fees and high interest rates, become so expensive they’re ultimately unaffordable.

Post-Disaster Insurance Scam
Even in the wake of a disaster, homeowners must be on the alert. Insurance scams can happen in a number of ways.

Here are a few examples:

  • You’re waiting for your insurance claim to be processed. Someone offers you a lump sum payment in exchange for the right to your insurance money once it arrives. These “advances” are generally not a good idea because you could end up getting much less than what the insurance company eventually pays out.
  • Your contractor asks you to sign a “direction to pay form” that allows your insurance company to pay the contractor directly, even before the repair work is completed। Don’t do it, or at least wait until all work is completed, you’ve inspected it, and you are satisfied with the final product.
  • Someone offers to loan you money for home repairs while you wait for your insurance money. In return, they ask for (1) a post-dated check, (2) your auto title, or (3) your tax refund. These scams are almost always high-interest loans. While they may give you some short-term relief, the long-term cost could be devastating. Before agreeing to one of these loans, make sure you know just how much it’s really going to cost you.

Equity-Stripping Foreclosure “Rescue” Scam
For most of us, taking advantage of someone in trouble would be unthinkable, but the equity stripping (or equity skimming) foreclosure “rescue” scam does just that. Scam artists seek out homeowners near foreclosure and offer them what they think is a way to stay in their homes. What the homeowner doesn’t realize is that in the process, they’re signing away the house and the equity. They get to stay in their houses, but suddenly they’re just tenants.

Predatory or Abusive Lending Practices
When unscrupulous lenders are at work, they are capable of many forms of predatory or abusive lending practices:

  • Repeatedly encouraging you to refinance your loan within a short period of time, and charging high points and fees with each refinance. They may claim that you’re getting better rates each time, but be sure to consider how much you’re paying in additional fees and interest with each new loan transaction.
  • “Packing” a loan with single premium credit insurance products, such as credit life insurance, and not adequately disclosing its inclusion, cost, or additional fees associated with the insurance.
  • Charging excessive rates and fees to borrowers who actually qualify for lower rates and fees offered by the lendar.

Avoiding Borrowing Pitfalls (from Freddie Mac’s Don’t Borrow Trouble®)
With so much at stake, how does a homeowner avoid falling victim to a scam or dishonest lending situation?

  • Say NO to “easy money.” Beware if someone claims that your "credit problems won't affect the interest rate." If a solicitation for a loan sounds too good to be true, it probably is। If a solicitation is really appealing, get it in writing!
  • Shop around. Always talk to several lenders to find the best loan for which you qualify. A loan product or lending practice may not seem predatory until compared with a similar loan product offered by other lenders.
  • Understand the loan terms. Compare loan terms from different lenders. Understand the best loan terms available in the marketplace and compare the APR (annual percentage rate) of loans from different lenders. The APR takes into account both the interest rate and the points and fees of the loan. A nonprofit housing counselor or a lawyer can review the information with a borrower.
  • Find out about prepayment penalties. Know if the loan offered to you has a prepayment penalty. Whether a loan contains a prepayment penalty should be your choice. If it is a requirement of the loan, you may want to ask about other products that do not contain a penalty.
  • Make sure documents are correct. Be cautious of someone who offers to falsify your income information to qualify for a loan. Never falsify information or sign documents that you know to be false.
  • Make sure documents are complete. Do not sign documents that have incorrect dates or blank fields. Be wary of promises that a lender will “fix it later” or “fill it in later.”
  • Ask about additional fees. Question any items you didn’t request. Beware if you are told that single premium credit insurance is required to get a loan, or that purchasing it will help loan approval. Review every fee and compare different lenders’ fees to ensure the most competitive loan terms.
  • Understand the total package. Ask for written estimates that include all points and fees. The situation may not seem abusive until everyone gets to the closing table. If any fees or charges differ from what was previously disclosed, delay the closing until all terms of the loan are clearly understood.
  • Work with legitimate credit counselors. Get all the facts before deciding to combine credit card or other debts into a home loan. Beware of scam credit counseling and credit consolidation agencies—unfortunately, not all credit counseling agencies are acting in your best interest. Talk to a community-based consumer credit counseling agency or housing counselor before signing any new loan documents.
  • Protect home equity. If you are taking equity out of your property, take out the minimum amount needed. The equity in a home is a source of wealth, which builds up slowly over time.

If you’re not sure, don’t sign! Get advice first! Talk to a community-based consumer credit counseling agency or housing counselor.

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Disaster Recovery


The Federal Emergency Management Agency (FEMA) offers some concrete steps for recovering and rebuilding after a disaster:

Ensure Your Safety. Immediately after a disaster, look after the health and well-being of your family and others. Assist those with injuries and protect against any safety hazards that may occur as a result of the initial disaster.

Find Family Members. Before an emergency or disaster strikes, organize a system for communicating with family members. If you become out of touch with family members after a disaster, the American Red Cross may be able to help you find them.

Get Food and Water. Stock a three-day supply of food and water for emergencies. If necessary, seek help from organizations like the American Red Cross.

Find a Place to Stay. If your home is no longer safe, you will need to find shelter elsewhere. Listening to your radio or watching the local news could provide needed information on nearby places to go until you can make other arrangements.

Return Home Safely. Exercise caution when returning home from an emergency. Look for downed power lines, gas leaks, and other potentially dangerous situations before entering.

File an Insurance Claim. If it’s necessary to file an insurance claim, be thorough in the description of the damage. Take pictures and make a list of everything damaged or missing.

Apply for Assistance. Disaster assistance may be available from FEMA, the Small Business Association, or other organizations depending on your circumstances.

Cope with Stress. A disaster can lead to a whole range of emotions for its survivors. Take the time to heal emotionally, and seek help if you need it.
Bold

Clean Up the Damage. Learn how to save what you can. Clear the way for a new start.

Rebuild Smarter and Stronger. As difficult as it may be to start fresh, it’s also an opportunity to incorporate what you’ve learned into creating a brighter future.

Summary
Make safety a high priority in your home. Almost every day we hear unsettling stories of fires, floods, storms, and other disasters causing damage to homes and injuries to families across the nation. By implementing basic safety precautions and by preparing for emergencies, you can have some peace of mind that you’re doing what you can to prevent injury to your family and minimize damage to your future.

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Emergency Preparedness and Disaster Recovery


Emergencies and disasters strike unexpectedly and wreak chaos in your life. Though you can rarely control or prevent disasters, you can certainly plan ahead to be prepared for these emergencies. Even a small amount of preparation can help reduce your losses from disasters.

Emergency Preparedness
The University of Florida IFAS Web site provides an excellent online manual about preparing for and recovering from emergencies and disasters at ।ifas.ufl.edu/default.htm">http://disaster।ifas.ufl.edu/default.htm.


Here are some relevant tips:



  • Develop an emergency plan with your family. Decide in advance what you will do, how you will communicate, and how you will find one another in the case of an emergency.

  • Stock emergency supplies. Even a modest storm can cause temporary power outages and cut off power to your home. Stock important supplies, including a three-day supply of water and non-perishable food.

  • Keep a first aid kit in a convenient location. Store it in a convenient place in your home (in the bathroom or kitchen) and make sure everyone knows where it is located.

  • Post emergency phone numbers near all phones. Print emergency phone numbers for the police, fire department, doctor, pharmacist, hospital emergency room, and nearby relatives or neighbors. Train everyone in the family to use these numbers in case of an emergency. Remember to place your emergency numbers into your cell phone, especially if you are not able to access your land line.

  • Keep an up-to-date inventory of household possessions. In order to recover from a disaster, it’s important to have a thorough household inventory, including descriptions of your possessions, serial numbers, proof of your purchases, and photos, if possible.

  • Protect valuable household records. Keep your important household documents in a locked, fireproof and waterproof safe to prevent them from being destroyed in a disaster.

  • Maintain adequate insurance coverage. Before you experience any loss, review your insurance policies to make sure you understand your coverage. Ideally, you want to ensure that you have enough insurance to cover the cost of rebuilding or replacing your home. Look at your policy at least once each year to ensure that your coverage goes up with any increases in your home’s value.
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Working with Contractors


In the course of maintaining a home, you will most likely need repairs or improvements that require professional help, and you’ll need to call in a contractor. To ensure that the relationship with a contractor goes smoothly, follow these suggestions:

Shop around. Talk to friends or check with the local homebuilders association for reliable contractors. Call their references and, if possible, inspect their work. Check with the Better Business Bureau or the state Attorney General’s office to see if any complaints have been filed about the contractor.

Bid the job competitively. Unless the job is very small or urgent, have at least three contractors compete for the work. Make sure that contractors are providing bids (firm prices) rather than estimates (rough calculations) for the work. Ask about hourly rates for any extra work.

Hire a professional. Make sure the contractor is licensed and registered with the state. Get a copy of the license to make sure that it’s current. Make sure that the contractor has personal liability, worker’s compensation, and property damage insurance coverage. Get a copy of these documents to make sure that they’re current.

Read the contract. Make sure that you have a detailed written agreement that reflects your understanding of the work to be completed. Before signing the work contract, be sure you understand and agree to the terms of your loan contract and how you will pay. Be sure that your work contract allows you at least three business days to cancel.

Don’t pay in advance and NEVER pay in cash. On larger jobs, or at the contractor’s request, you may make progress payments. The amount of these payments should be written into the contract. Hold a substantial amount of the contract (up to 30 percent) for the final payment to ensure that the job is completed to your satisfaction.

Keep a written record. Your records should detail the progress of the work, payments made, approved changes in the work, and important conversations with the contractor. These records could help resolve disagreements at the end of the project.

Know how to settle a dispute. Some contractors may attempt to require that you submit any dispute to binding mandatory arbitration, meaning that a third party arbitrator would decide the outcome of your dispute, eliminating your right to present your case in court. While there is nothing wrong with voluntary arbitration, consumers who have this as their only option lose their right to sue the contractor if there’s a problem that can’t be resolved.

Exercise caution with contractors who …


  • Go door-to-door, telling you they just finished work at a neighbor’s house

  • Approach you, identifying a problem with your home that you hadn’t noticed

  • Use high-pressure sales tactics like asking you to sign something right away

  • Offer you special discounts on materials they say are leftover from other jobs

  • Only accept cash payments

  • Ask you to get the required building permits

  • Refuse to give an estimate up front

  • Give you only a cell phone number or post office box instead of a physical address

  • Tell you they can help you get a loan from a lender they know

  • Misrepresent the terms of any financing they arrange

  • Demand payment for the entire job upfront

Additional Resources



Summary
Maintaining your home is another important part of being a homeowner. Timely maintenance, repairs, and improvements help protect your home, provide your family with greater comfort, and enhance your home’s value.

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Before You Start a Home Repair or Improvement Project


Plan ahead. Create a list of all needed repairs and desired improvements. Then set up a schedule for repairs and home improvements. Remember your spending plan!

Do your homework. Study home repair books, take some classes, or talk to contractors and friends about your house. Seek information that can help you understand your home’s maintenance needs.

Know what you want. Be specific when describing (in writing) the proposed work, including dimensions, materials, colors, style, etc. For larger projects, it may be worthwhile to work with an architect or construction manager to develop plans and specifications.

Determine how you will pay. For larger projects, consider a loan from a bank or credit union, but NEVER sign the work contract before you know all of the terms of your loan. If your contractor offers a financing option, scrutinize the lender carefully. Make sure that the term and payments fit into your spending plan.

Consider the “life-cycle costs" of materials and appliances. Try to compare materials not just by their initial costs, but also by their maintenance costs and how long they will last. Using this standard, a hardwood floor, in the long run, would be a better investment than carpeting.

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Maintaining, Repairing, and Improving Your Home


Keeping your home in good repair is good for your family and contributes to the attractiveness of your neighborhood. In fact, regular maintenance can help prevent costly problems from occurring. It can help mechanical systems run more efficiently and last longer, and it can have an enormous impact on a house’s market value.

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Get Help to Find the Right Product


With so many variables, deciding whether it’s a good idea to refinance or borrow against your equity can be complicated, so one of the first things you should do is find a trusted adviser. A reputable, impartial housing or credit counselor can help you make the right decision. Typically, there is minimal or no cost to you for this service. Look in your own community for these valuable nonprofit resources:

National Foundation for Credit Counseling is a network of local consumer counseling organizations. Visit www.nfcc.org for the office closest to you.

NeighborWorks® America has a national network of nonprofit organizations supporting affordable housing and homeownership. Visit www.nw.org for the office closest to you.

Locate HUD-approved housing counseling agencies. Visit www.hud.gov for the office closest to you.

Summary
If you do decide to use your home equity, it’s best to use it as an opportunity to invest your money safely and wisely for long-term financial goals, not as a chance to spend money on items such as vacations and cars that have little return on investment। Also remember that since homes in most markets appreciate in value over time, leaving your appreciation intact could be an excellent way to save for college and your retirement.

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Look Before You Leap


Just as when you purchased your home, you’ll need to consider a variety of loan options when you are borrowing against your home equity. Many different types of lenders offer loan products, including those from banks, mortgage companies, credit unions, government agencies, and mortgage brokers.

Before you select the lender and loan product for you, you’ll need to understand what different lenders are offering to you.

Get quotes from at least three lenders. Compare what they have to offer. Start with your current lender (if you’ve had a good experience with them). Your existing lender may even offer some incentives or discounts to keep your business. Negotiate to get the best deal. Don’t be persuaded by high-pressure sales tactics to make a quick or uninformed decision.

Shop around. Compare similar combinations of interest rates, points, closing costs, fees, and the monthly mortgage expected by each lender.

Compare the annual percentage rate (APR), the total annual cost of borrowing money based on the loan amount, interest rate, added fees, and term.

Before you accept any offer, make sure you know the terms and whether there are any prepayment penalties.

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Ways to Borrow Against Your Equity

There are a variety of ways to borrow against your home’s equity.

Refinance Loan
At some point, you may think about changing your mortgage payments or terms by refinancing. Refinancing is when you get a new mortgage and use some or all of the proceeds to pay off the old mortgage. When you refinance, you complete many of the same steps you did when you got the first mortgage to buy your home. Since a refinance represents a replacement to your mortgage, borrowers use it in a number of ways:

Refinancing to save money on your interest rate. If interest rates are lower now than when you got your current mortgage, you could reduce your monthly payments and the total amount of interest that you pay over the life of the loan by refinancing at a lower rate. When considering this option, determine your break-even point. This is how long it would take you to recapture all of the costs of refinancing (closing costs, fees, points, and any prepayment penalties) through savings from the new mortgage payment. Do you plan to stay in your home for longer than it could take to recover your costs? If so, the savings you accumulate could be worth refinancing.

Refinancing to lower your monthly payment. If you would like to reduce your payment, you could either extend the term of your loan or switch to another loan product with a lower interest rate. If you choose to lengthen your loan term, it will take you longer to own your home outright and cost you more in overall interest charges and total costs associated with your loan.

Refinancing to convert one type of mortgage to another. What if your original mortgage is no longer the right fit for you? You could refinance to obtain a different loan type. If you have an adjustable-rate mortgage (ARM) and wish to switch from an interest rate and monthly payment that will likely increase, you could change to a fixed-rate mortgage. If you’re OK with a fluctuating interest rate, you could look for an ARM with a lower rate or better features. If you would like to improve the terms on a second mortgage, you could either refinance this loan with a better product or refinance both your first and second mortgages into a new first mortgage loan. If you have a balloon/reset mortgage, you must pay the mortgage in full at the end of the five- or seven-year term or consider refinancing.

Refinancing to build equity faster. If your financial situation has improved since you bought your home, you may want to get a mortgage with a shorter term. Your monthly payments will most likely be higher, but this will help you own your home sooner and pay less in total interest charges.

Refinancing to take cash out. This loan replaces your old mortgage with a larger one, and you keep the difference between the loan amounts to use for your intended goals. While the cash-out refinance is attractive, the interest rate could be higher than the rate would be if you were simply changing the terms of your loan. And remember that your total loan amount will be higher because you do need to pay back that “cash out.”

Home Equity Loan
This is a mortgage secured against your home. It is in addition to your existing mortgage. You borrow a set amount of money as a second mortgage or “junior lien.” Second mortgage loans usually have fixed interest rates that are higher than first mortgages. Home equity loans are often structured as 10- or 15-year loans—that’s a long time to pay it back! If you use the funds for a new car or vacation, the car will likely need to be replaced and most of your vacation memories will be long gone before you finish paying off your loan, so think carefully before you do that.

Home Equity Line of Credit
This is a specialized form of a second lien that is also secured against your home. A line of credit, in many ways, is similar to a credit card. It is a revolving line of credit, where the balance can go up or down. You can borrow money (up to the amount that has been approved) and pay it back as many times as you need during the term of the loan. Interest rates for lines of credit are usually variable, but you only pay interest on the amount you borrow.

Home Equity Conversion Mortgage (HECM)
A type of reverse mortgage that is an option for homeowners who can actually turn their equity into income. With the Department of Housing and Urban Development’s (HUD’s) government insured HECM, instead of making their monthly mortgage payments, seniors with HECMs can choose to receive monthly payments or access a line of credit. The borrowing homeowner must be at least 62 years old, live in the home, and be willing to receive counseling before obtaining the loan to ensure a good fit and either own the home outright or have a really low balance. For more information and conditions, please visit http://www.hud.gov/.

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Why People Borrow Against Their Home Equity


If you decide to use your home equity, do so for a good reason. Use it as an opportunity to invest your money safely and wisely for long-term financial goals, not as a chance to spend money on items that have little return on investment. Common reasons for borrowing against your home equity include:

Making home improvements
Financing a home improvement project that increases your home’s value could be a good investment.

Education
Improving your job skills could increase your earning potential। Providing for your child’s education is an investment in the future.

Consolidating debt
Converting high-interest, nondeductible consumer debt (like credit card balances, installment loans, and medical bills) into one payment may make repayment easier, but it’s only worthwhile if you can change your spending habits to avoid taking on new consumer debt.

Making investments
Starting a small business, investing in other real estate, or investing in stocks or bonds could help you increase the scale or diversity of your investments, but do find sound opportunities.

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What is Home Equity?


In the simplest terms, home equity is the difference between what your home is worth and the total amount you still owe। You can build equity in two ways: by paying down your loan balance through regular mortgage payments or by having your home’s value increase. Both may even happen at once. If you have built enough equity in your home, you can borrow against it (using your home as collateral).

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Borrowing Against Your Home Equity


Now that you’re a homeowner, you probably receive lots of offers for loans and lines of credit। These offers can be attractive, often promising the power to make large purchases or promising cash back that you can use however you’d like, but these loan options use your house as collateral. How do you know when or if it’s the right time to take advantage of one of these offers to borrow against your home equity? Your home is an important financial asset that you want to manage wisely. While borrowing against home equity gives you access to money for major financial events, it could endanger your financial security if you don’t borrow prudently.

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Spend Wisely


The very first thing you should do as a homeowner is to reconsider your goals and update your monthly spending and savings plans. Be sure to include all of the new and anticipated costs of homeownership, and be sure that saving remains a priority as well. While homeownership does bring the responsibility of additional expenses, it is more manageable over the long-term if you plan ahead. Plus, with a cushion of savings, you’ll be better prepared to weather any storm.

Things to consider now that you’re a homeowner:
Know your variable expenses. In addition to your steady monthly expenses, you now have expenses, like utilities, home maintenance, furnishings, and landscaping, which could vary month to month. Plan ahead by allocating a month’s worth of the year’s expected total into your spending plan.

Plan for large or periodic expenses. List your periodic expenses, homeowner association (HOA) fees, and property taxes, for example. Add the things you will need for your house, window treatments or new appliances, for example. Plan ahead by allocating a month’s worth of the year’s expected total in your spending plan.

Set priorities, goals, and limits. Always pay your mortgage, and always pay it on time. Consider it your highest priority every month. Once you incorporate your other new expenses into your spending plan, you’ll know how to spend your money more wisely. Your priorities should fit into your spending plan, not work against it.

Plan to save, and pay yourself first. Now that you’re a homeowner, saving may be more important to your success than ever. Make it a goal to save at least 10% of your income each month. You may need to work up to this amount, but you can develop a spending plan to help you get there.

Plan ahead for major purchases and home improvement. Try to accomplish this over the next 12 months by setting aside at least one percent of your home’s purchase price (for example, 1% of a $120,000 home over 12 months is $100 per month).

Build an emergency fund. Over time, save at least three months of your income in an emergency savings account for protection against unexpected emergencies, job loss, major home repairs, etc.

Consider making additional payments on your mortgage to save money. An extra $50 per month on a $100,000, 30-year loan at 7 percent could reduce the loan term by more than five years and save $32,000 in interest. Be sure to ask about prepayment penalties.

Summary
As a homeowner, the temptation to spend is everywhere, but managing your money is a very important part of being responsible. With the help of a spending plan and a little bit of discipline, you can make your mortgage payments on time, afford your other expenses, and maintain a savings for emergencies and other necessary items. Managing your money gets easier over time, and it benefits you in the long run.

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Spend Wisely. Save Wisely.


In the first few days after the move, you meet your neighbors, discover places to shop or worship, visit playgrounds and parks where the children can play; but you also start receiving “congratulatory” messages from lenders and credit cards companies eager to lend you money because you now have a home. It will be very tempting to give in—to spend money on things to make your home prettier or more comfortable. But before you do, give it some thought.

To achieve your goal of homeownership, you likely spent a fair amount of time and effort evaluating your wants and needs, changing your spending habits, developing a spending plan, and saving money. Those same money management skills may be more important now than ever.

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Responsibilities of Homeownership


For many families, the purchase of a home is the largest single investment they’ll ever make. Because you are now a homeowner, you too can benefit from all of the advantages of your investment. It’s also important, however, that you know how to protect your home and your family from the potential storms—natural and financial—of life. Life happens, and while we can’t always predict what’s coming our way, there are some very real things we can do to prepare for, prevent, and even recover from life’s challenges. That’s what this module is all about.

While we’d much rather prefer to paint a completely rosy picture of homeownership, the fact is that if you don’t manage your homeownership responsibly, you could put it in jeopardy, the worst-case scenario being foreclosure। It’s difficult to talk or think about the possibility of losing your home. Most people assume it could never happen to them. Understanding what could put you at risk and learning how to avoid those risks is really the best way to ensure your long-term success. The first thing you want to remember is to control your spending and to continue to save.

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Advantages of Homeownership


Homeownership offers so many advantages:

Since homes usually increase in value, it’s a great investment. Over time, the equity you build could be valuable in helping you finance your retirement or your children’s education, or perhaps it will help you move up to a larger home in the future.

The tax advantages help to offset some of the costs of owning.

If you chose a fixed-rate mortgage, you have the luxury of stable payments that won’t increase.

You have the freedom to decorate and personalize your home.

It’s a place for you and your family—perhaps even your extended family—to call home. One day, your family could even own it free and clear.

It’s a great reason to put down roots and make a difference in your community.

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Home Sweet Home


Now, let’s take a trip back in time to the day of your closing। Do you remember it? You arrived at the closing table probably a little nervous, but feeling a great sense of pride in all the work and effort you put into getting to that point. You started the process knowing that good credit, sound advice from friends and relatives and in many cases guidance from homeownership counselors could help you get your new home. You wrote down your goals, prepared a spending plan, and maybe even attended homebuyer education classes. And when the process was over and you were handed the keys, you sighed with pride, joy, and relief. You felt as though you had conquered the world. Now you have a house of your very own—the biggest investment you’ve probably ever made!

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Other Help: Homeownership Education and Credit Counseling

If you believe that you are not quite ready to begin the process of buying a home because of your personal circumstances, don’t give up. Divorce, losing a job, emergency medical expenses, other circumstances, and simply not having the financial literacy skills to manage your money well can all result in credit difficulties. There are other resources to help you build your credit and prepare you to buy a home.

Homeownership education can help you become a successful homeowner. It can provide more information on:
  • Preparing for the mortgage approval process
  • Understanding the issues involved in qualifying for a loan
  • Understanding the importance of establishing a strong credit reputation
  • Identifying the important elements of home selection
  • Selecting a home that is affordable over the long term
  • Learning about the financing and closing processes
  • Understanding how to avoid mortgage delinquencies, defaults, and foreclosures


Credit counseling can help you improve and build back your credit by providing:

  • Credit education
  • Confidential spending plan and debt counseling
  • Debt repayment programs
  • Financial management education

Look in your own community for these valuable nonprofit resources. Great ways to find help include:

National Foundation for Credit Counseling, a network of consumer counseling agencies. Check the yellow pages or visit www.nfcc.org on the Internet for the office closest to you.

NeighborWorks® America is a national network of nonprofit organizations who support affordable housing and homeownership initiatives in local communities. Check the yellow pages or visit www.nw.org on the Internet for the office closest to you.

Other nonprofit homeownership education groups in your area. Check your yellow pages under “credit counseling.” Or, on the Internet, search for topics such as “debt counseling,” “consumer credit counseling service,” “homeownership,” or “homeownership education.”

Types of Counseling
There are many different types of counseling available to you as a consumer to help you prepare for homeownership both before and after you buy a home:

  • Homeownership education is usually taught in group classes over a period of four to eight hours.
  • Homeownership counseling usually provides one-on-one assistance to help people prepare for homeownership.
  • Post-purchase counseling typically provides assistance after the closing, either in group sessions or through one-on-one meetings.
  • Landlord/tenant counseling provides information on owning and managing a property of two or more units when you are renting the remaining unit(s).

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Finding a Home: Other Helpful Hints


Here are some other helpful ways you can find an affordable home.

Contact local lenders, real estate professionals, the Federal Housing Administration (FHA), and the Veteran’s Administration (VA) about real estate owned (REO) houses they have taken back through foreclosure and are now re-selling.

Attend auctions. Auction properties are generally sold “as is.” Check them carefully before going to the auction. You may also need to be pre-approved for a loan to bid.

Call nonprofit community redevelopment organizations to ask about neighborhoods where special loan programs are available for low and moderate-income homebuyers। These organizations include the National Association of Community Development Corporations, the Enterprise Foundation, Local Initiatives Support Corporation (LISC), and Neighborhood Reinvestment Corporation.

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Finding a Real Estate Professional


Real estate professionals earn their living matching homebuyers with sellers. They are licensed by the state where they live and have taken classes in subjects such as real estate law and finance.

Working with a real estate professional to find a house can save you time and sometimes can save you money. They know what homes are worth and can tell you if a seller is asking too much money for the house being sold.

Real estate professionals can help you find the best home to meet your needs. They can also help with parts of the mortgage process but their role is different than a mortgage lender’s role. Ask your family and friends for the names of real estate professionals with whom they’ve worked. Or, review newspaper ads for a listing of open houses. Stop by and talk with the real estate professional showing the house.

You’ll want to choose a professional that makes you feel comfortable and can provide knowledge and services you need. If you prefer to speak a language other than English, for example, be sure to find a real estate professional that also speaks your language.

Most real estate professionals are paid a commission by the seller of the house when the sale closes. The buyer does not pay the real estate professional unless they have contracted with the buyer’s agent. A buyer’s agent is a real estate professional who is paid for by the buyer and therefore, solely represents the interests of the buyer.

Questions To Ask a Real Estate Professional
  • How long have you been in real estate?
  • Are you a full time real estate professional?
  • Are you familiar with the community in which I want to look?
  • Do you speak languages other than English?
  • How many homes have you sold in the last year?
  • What is the average sale price of the homes you sold last year?
  • Do you usually work with sellers or buyers?
  • How many buyers are you presently working with? Are you acting as the exclusive buyer’s agent?
  • How many sellers are you presently working with?
  • What do you consider your strengths?
  • Can you provide the names of three homebuyers as references?

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Getting Help in Choosing a Mortgage: Shopping for Mortgage Rates

When looking at different lenders, start researching current mortgage rates.

Be sure to shop around for mortgage rates because rates vary. Check your local newspapers and search the Internet. Lenders and local municipalities may also have programs that can help you lower your interest rate.

Keep in mind that interest rates frequently change, even daily, so contact several mortgage lenders on the same day to comparison shop and ask how long it will take to process your mortgage application.

Freddie Mac’s Primary Mortgage Market Survey has regional mortgage rate information। This survey is one of the most reliable sources of mortgage rate trends used by the mortgage industry. To find these rates, check your local newspapers or visit Freddie Mac’s Web site at www.FreddieMac.com/pmms.

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Getting Help in Choosing a Mortgage: Other Options

There are many public, nonprofit, and private organizations in your community that can provide you with information about the home buying process. Federal, state, and local governments, and private, public, and nonprofit companies across the U.S. are working hard to make homeownership affordable for low and moderate-income homebuyers, especially those who have never owned a home before or have not owned a home in the past three years. Remember to check out the following:

Local bank programs: All banks are required under the federal Community Reinvestment Act (CRA) to invest part of their earnings in programs to increase homeownership in certain neighborhoods. A CRA officer in your local bank can tell you what programs are currently available.

Bonds: Mortgage revenue bonds for first-time homebuyers are a type of financing where bonds are sold by cities, counties, or states and the money is used to provide low-interest financing for first-time homebuyers. Your city housing office can give you information about any planned housing bond issues.

Housing finance agencies (HFAs): HFAs work with state and local groups to revitalize neighborhoods and promote homeownership. They also provide financing for special uses, including rehabilitation of existing houses. Your state, city, or county HFA can tell you about loan programs it has funded or knows about.

Community development corporations (CDCs): CDCs are nonprofit agencies whose goal is reviving communities. Many CDCs not only have housing programs and offer housing counseling, they also work in the community to encourage business investment, build parks, and provide other community facilities.

NeighborWorks® organizations: These organizations provide services to low and moderate income homebuyers, including homeownership education, debt counseling, foreclosure intervention, loans for rehabilitation, and repair of existing properties. (http://www.nw.org/)

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Choosing a Mortgage: Other Flexibilities


Many of our nation’s immigrants come to the U.S. with a wide array of cultural beliefs and traditions, which influence their home buying and mortgage financing requirements. Many lenders have expanded their underwriting guidelines to accommodate diverse cultural practices and open more doors to homeownership for immigrant families.

If this is your situation, keep in mind that you can still qualify for a mortgage even if you:

  • Do not have a bank account
  • Have a limited or no credit history
  • Are a foreigner and do not have permanent resident status
  • Have been employed in the US for less than two years
  • Pool your funds with your extended family

Cash-on-Hand
Many people choose to use cash instead of personal checks, credit cards, or savings accounts. Cash-on-hand can be used as an alternative source of funds for the down payment or closing costs if you use cash as your main source of payment and do not have traditional banking or credit accounts.

Non-Traditional Credit History
If you do not have a traditional credit history, a lender can still establish a non-traditional credit history for you as long as you can verify your payment history of paying rent, insurance, utility bills, and the like with records and receipts.

Residency
If you are a non-permanent resident immigrant who lawfully resides in the U.S., you can still be eligible to get the same mortgage products from many lenders with the same loan-to- value (LTV) ratios as U.S. citizens and permanent residents. (A loan-to-value ratio is the loan balance you owe, compared to the appraised value of the house. The LTV is usually described as a percentage.)

Rental Income
If you rely on extended family members to provide financial assistance, the rental income they provide can be counted as part of your monthly income to qualify for a mortgage. As long as the related person(s) have paid rent and lived under the same roof with you for at least one year—and plan to continue to live with you in the new home—you can include this income as part of your stable monthly income. You will need to provide proof, like cancelled checks or a checking deposit statement, showing the amount paid to you.

Stable Monthly Income
Establishing stable monthly income over an extended period of time can be difficult for people who often change jobs, are recent college graduates, or have difficulty documenting work histories from their countries of origin. As long as you can demonstrate that your income is reasonably expected to continue for at least three years, there is no requirement regarding the length of time that you have been employed and no special calculations for your part-time and/or multiple jobs.

Pooled Funds
If you have lived together with your relatives for at least one year and plan to continue to live together, your pooled funds can be combined and used towards your down payment and closing costs to get a mortgage.


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Choosing a Mortgage: Affordable, Low-Down-Payment Mortgages


Saving enough money for a down payment can be hard and meeting lender underwriting requirements can be challenging. Sometimes this prevents people from buying a home.

However, many mortgage lenders offer low-down-payment, fixed-rate mortgages, and mortgages with more flexible underwriting to help people with these financial circumstances. Be sure to shop around and contact various lenders for all the specifics related to loans with these types of options.

Some mortgages need as little as 0% down payment (excluding closing costs). Others raise the maximum debt-to-income ratio, allowing you to qualify for a mortgage payment that is a larger percentage of your monthly income.

Ask your lender about fixed-rate mortgages with low-down-payment features like:

  • Small down payments (0% to 5%)
  • Additional sources of money for the down payment, like a federal, state or local government agency, nonprofit organization, employers, private foundation, or family member
  • Expanded debt-to-income ratios up to 42%
  • Options for people with limited incomes in high-cost areas
  • Homeownership education programs
  • Lower mortgage insurance costs
  • Seller contributions to your closing costs
  • Options for people who buy in designated areas

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Choosing a Mortgage: Types of Mortgage Payment


There are many different types of mortgages. It’s important to shop around to find the mortgage that’s right for you. The mortgage rate and length, or term, as well as points are all factors in deciding which mortgage is right for you.

The type of mortgage is also an important part of the decision. Some of the most common mortgages available today include:

Fixed-rate mortgages: Fixed-rate mortgages are stable and offer long-term savings. Because the interest rate never changes, the monthly principal and interest payment never changes either. Your payment could go up a little, however, if property taxes and insurance costs go up. A fixed-rate loan is the most common loan for first-time homebuyers.

Adjustable-rate mortgages: Adjustable-rate mortgages (ARMs) usually start with a lower interest rate, so your monthly payments are lower. This allows you to qualify for a larger mortgage than would be possible with a fixed-rate mortgage. The interest rate on an ARM is adjusted periodically based on an index that reflects changing market interest rates. It’s important to understand all the aspects of ARMs before you make your decision. ARMs are a good choice if you like to take advantage of favorable market conditions and/or expect your income will increase over the life of the loan. Also, if you decide to later refinance into a fixed-rate mortgage, you will incur closing cost expenses.

Balloon/reset mortgages: Balloon/reset mortgages may be a good choice for homebuyers who don’t expect to own their home past the maturity date of the balloon note: 5 or 7 years, for example. At the end of that time, you must sell your house or get a new loan, called a refinance. Expect to pay fees associated with a refinance.

Graduated payment mortgages: With this mortgage, you can start out making lower monthly payments; then over a period of years, your payments go up slowly. When the payments reach a certain amount, they stay fixed at that amount for the rest of the loan. Graduated payment loans are good if you think your annual income will go up.

Interest-Only Mortgages: Instead of paying part of the principal (the loan amount) each month plus interest charges, interest-only loans require that the borrower pay only the interest for the first 5 or 10 years. After that, the borrower must either pay the balance of the loan or start paying both principal and interest monthly for the remaining period, perhaps 20 to 25 years. The potential risks are significant for interest-only loans, especially if the interest rate on the loan increases, and the required payments of both principal and interest are well beyond your ability to pay each month. After the interest only period ends, the monthly payment will be substantially higher than if you had used a traditional 30-year mortgage loan.

Option ARMs: Also called “flex” ARMs, these loans let the borrower decide how much to pay from one month to the next based on a few choices. The options range from making a full monthly payment (what you normally would pay in principal and interest for a traditional mortgage) to a “minimum” payment that does not fully pay for the interest due, but the shortfall is added to your loan balance. If you do not have enough money for your regular monthly payment, you can send in a low payment and not be defaulting on your loan.

Remember to shop around for the best mortgage rates. Contact lenders at banks and credit unions as well as mortgage brokers. Keep in mind that the lowest mortgage rate may not always be the best choice for you. Rates are important, but also consider the overall cost of the loan.

Look at other costs such as loan fees, origination fees, and points. Be sure to ask the lender exactly what he or she is quoting to you. Ask what the annual percentage rate (APR) of the loan is. The APR takes into account the interest rate and fees.

Ask for a “good-faith estimate” (GFE) in writing from each lender that you work with so you understand all of the costs and you can compare lenders। Required by law to be given to you by the lender after you submit an application, a GFE is a written statement itemizing the approximate costs and fees for the mortgage.

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Choosing a Mortgage: Components of a Mortgage Payment


When you obtain a mortgage to buy your home, you will generally pay off your mortgage debt with monthly mortgage payments. Your monthly payment will reflect the following costs:

Principal: The initial amount of money borrowed to buy your house. (This does not include the interest you will pay to borrow that money.) The principal balance (sometimes called the outstanding or unpaid principal balance) is the amount owed on the loan at any given time. It is the original loan amount minus the total repayments of principal you have made to date.

Interest: The cost you pay to borrow money. It is the payment you make to a lender for the money it has lent to you. Interest is usually expressed as a percentage of the amount borrowed.

Taxes: 1/12th of the estimated annual real estate taxes on the home that is purchased.

Insurance: 1/12th of the annual homeowner’s insurance premium. Private or government insurance on a mortgage is almost always required by the lender if your down payment is less than 20%.

You’ll most likely pay the taxes and insurance along with the principal and interest to the lender each month। In some cases, however, the lender may allow you the option to pay the taxes and insurance separately.

If your lender requires you to pay the taxes and insurance as part of your mortgage payment, the lender will open an escrow account, as we described earlier, to hold this money until payments are due.

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Finding a Mortgage Lender



Once you decide to proceed with homeownership, you’ll need to prepare to get a mortgage. You can get a mortgage from many different sources, like mortgage banking companies, commercial banks, community banks, credit unions, and other financial institutions. Mortgage brokers may be a source of information about different mortgage products available from a variety of sources.

Some places to start getting information include:

  • Your own financial institution. Sometimes financial institutions can offer better mortgage terms to current customers.
  • Real estate professionals
  • Relatives, friends, and co-workers who own a home
  • Homeownership education providers
  • Your local newspaper, telephone book, or the Internet
  • Churches or places of worship
  • Employers
  • Freddie Mac’s homebuyer education website, available in English and Spanish:
    Your Route to Homeownership (www.FreddieMac.com/homebuyer)
    El Camino a su Propia Casa (www.FreddieMac.com/homeownership/espanol)
  • National Association of Hispanic Real Estate Professionals (NAHREP) Web site,
    (http://www.realestateespanol.com/) available in English and Spanish.

Additional Resources
City and state housing agencies and nonprofit organizations can refer you to special programs in your area designed to help low-income homebuyers including:



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How Much Money Do You Need to Buy a Home?


In most cases, you’ll need money for a down payment on a mortgage, although with some mortgage products, you do not need a down payment. You’ll also need closing costs on a mortgage and other housing-related costs, such as moving expenses, maintenance, and repair costs.

Down Payments
The down payment is a percentage of the value of the property. The percentage will b determined by the type of mortgage you select. Down payments usually range from 0 to 20% of the property value.

You may be required to have private mortgage insurance, called PMI, or a government mortgage insurance, called GMI, if your down payment is less than 20%. Private mortgage insurance helps protect lenders from losses in the event that a homeowner defaults on the mortgage and loses the home to foreclosure.

Closing Costs
Closing costs include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed, and other settlement costs. These costs generally range between 2 and 7% of the mortgage amount. You will receive an estimate of these costs from your lender after you apply for a mortgage. Some mortgage programs provide assistance with closing costs. Discuss this option with your lender.

At the beginning of the loan and, again, at the beginning of every year, the lender estimates how much the taxes and insurance will cost for the year and divides the cost by 12. The lender collects the money on a monthly basis and saves it in a special account called an escrow account. When the bills are due, the lender pays them on your behalf. This is a convenience for the borrower and also protects the lender in case the borrower does not have money or just forgets to pay these expenses.

A point is 1% of the amount of the mortgage loan. For example, if a loan is made for $50,000,
1 point = $500.

Title insurance is insurance that protects lenders and homeowners against loss of their interest in the property because of legal problems with the title.

Other Housing-Related Costs
Whether you need to hire a moving company or not, moving costs money. In addition to the down payment, escrow accounts, and closing costs, you will have to save enough money to pay for move-in expenses, including:

  • Van rental or moving company fee
  • Changing the locks on doors, installing window bolts, and smoke detectors
  • Deposits and start-up fees for utilities, phone, cable, trash removal, and other services
  • Immediate repairs or work your home may need, such as cleaning and painting
  • New appliances, if necessary
  • Equipment such as lawnmowers and hoses, if needed
  • Decorating and furniture, if needed


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Helpful Hints


Create a spending plan with your estimated mortgage payment। Make sure to include taxes and insurance in your estimated payments plus the costs of any homeowners association or condo fees.

Remember to include in your housing spending plan, if applicable, the amount of money you send on a monthly basis to family members living in another country। This amount can impact how much you can afford to pay on your monthly mortgage payment over the term of the mortgage.

Also, remember to include in your housing spending plan the cost of your utilities and set aside an amount for future home maintenance and repair costs. Make sure that you can meet your other financial goals, such as having a baby, paying for college tuition, and saving for retirement. Once you review your finances, select a mortgage amount that allows you to meet your long-term goals and needs.

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How Much Can You Afford to Spend on Home?


For a general idea of your home buying power, multiply your annual gross income by 2-1/2. For example, if you have a household income of $50,000, you might be able to qualify for a $125,000 home. The actual number may be more or less, depending upon your individual situation, debts, and credit history.
Your gross annual income is the income you earn in a year before taxes and other deductions.

Under certain circumstances, it may also include rental income, self-employed income, and income from alimony, child support, public assistance payments, and retirement benefits.
Keep in mind that just because you qualify to buy a certain amount, it does not mean that you can afford or be comfortable with the monthly payments. You need to decide for yourself if you can live comfortably with the amount of your suggested monthly mortgage payment. Consider your particular circumstances and your future financial needs and goals.

Types of Homes and Ownership


Not all homeowners live in single family houses. There are many types of houses and many ways to own them. Before you shop for a home, think about what type of housing is best for your family.
Single Family: A home that is detached (stands alone) or attached to another house. When you buy a single-family house and the land it is on, you can make all the decisions about how you use the house and the land.

Duplex, Triplex, Fourplex: Homes with 2, 3, or 4 houses or units attached on a single lot. This housing is common in cities. If you buy this house, you own the land and all the houses on it. Many people buy these to share the property with parents, married children, or extended families. Others buy them to live in one unit and rent the others to help pay the mortgage.

Planned Unit Development (PUD)*: In a PUD, the homes are part of a subdivision that may have some common areas with parks or other features you share with your neighbors. You own your house and the land it is on, and you also pay a monthly or annual fee to an homeowners’ association to take care of the common areas. There are also usually conditions that set out extra rules about what you may do on your property, such as changing the paint color on the outside or building a patio, etc.
Condominium*: A home that is attached to other homes and shares common areas that everyone in the building or development owns together, such as grounds, hallways, and lobbies. Condos may look like apartments or townhouses. Each owner makes decisions and repairs on the inside of their own condo. A homeowners’ association, made up of the group of home owners, makes decisions and pays to maintain and repair the land and common areas.
Cooperative*: A type of group ownership of a property’s living units, which are often apartments, the land, and the common areas. Residents own shares of stock in the cooperative—a corporation that owns the building, land, and common areas. In some co-ops, all repairs or decisions are made by the group; in others, individual people or families make decisions and repair the apartments they live in. Similar to condos, co-ops have rules and restrictions, and association and maintenance fees.
*Please be aware that planned unit developments, condominiums, and co-ops have monthly or annual homeowners’ association fees that the homeowner is required to pay.

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