Buying a Home
901. Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.
902. Mortgage Insurance Premium: The lender may require you to pay your first year’s mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.
903. Hazard Insurance Premium: Hazard insurance (homeowner’s insurance) protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require the borrower to bring to the settlement a paid-up first year’s policy or to pay for the first year's premium at settlement. You can shop around to find the best policy for your needs.
Tip: A free brochure with tips on shopping for homeowner’s insurance is available from the National Association of Insurance Commissioners at www.naic.org.
904. Flood Insurance: If the home is in an area considered at risk for flooding, the lender will require you to purchase flood insurance.
Section 1100: Title Charges: Title companies and/or real estate attorneys process the paperwork for the mortgage closing, conduct searches of the title, facilitate the transfer of funds, and make sure the proper documents are recorded with the city, county and/or state. Title charges can vary in different parts of the country, and whether the buyer or seller pays them is also often based on the custom in that area.
1101. Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee should be negotiated between the seller and the buyer.
1102-1104. Abstract of Title Search, Title Examination, Title Insurance Binder: A title search will be conducted to make sure there are no problems that could hold up the legal transfer of the title to the property. The charges on these lines cover the costs of the title search and examination.
1105. Document Preparation: This is a separate fee that some lenders or title companies charge to cover their costs of preparation of final legal papers, such as a mortgage, deed of trust, note or deed.
1106. Notary Fee: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them.
1107. Attorney's Fees: You may be required to pay for legal services provided to the lender, such as an examination of the title binder.
Occasionally, the seller will agree to pay part of this fee. The cost of your attorney and/or the seller’s attorney may also appear here.
1108. Title Insurance: The total cost of owner's and lender's title insurance is shown here.
1109. Lender's Title Insurance: The cost of the lender’s policy is shown here.
1110. Owner's (Buyer’s) Title Insurance: The cost of the owner's policy is shown here.
Tip: The lender’s title insurance policy will not protect you if there is a problem with the title. It is always a good idea to pay the extra amount for an owner’s policy to protect you as long as you own the property.
1200. Government Recording and Transfer Charges: There are various taxes and fees required by cities, states, counties and municipalities when you buy or sell a property. These may include fees for legally recording the new deed and mortgage; transfer taxes that are assessed by state and/or local governments; and city, county and/or state tax “stamps” which must be purchased as well. These fees – which can really add up -- may be paid by you or by the seller, depending upon your agreement.
1300. Additional Settlement Charges
1301. Survey: The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well. Usually the buyer pays the surveyor's fee, but sometimes the seller pays it.
1302. Pest and Other Inspections: This fee is to cover inspections for termites or other pest infestation of your home. It is required in some areas of the country.
1303-1305. Lead-Based Paint Inspections: This fee is to cover inspections or evaluations for lead-based paint hazard risk assessments and may be on any blank line in the 1300 series.
Protect Your Purchase
A home is a significant purchase. Whether you are buying a brand new home, or one that’s years old, it is always a good idea for you to hire a professional home inspector to inspect the home for problems and defects. This may cost $200 – $300, but it is money well spent if something is uncovered.
Don’t rely on the seller’s assurances that the home is fine, and choose an inspector who is well qualified and works for you. Visit www.ashi.com for a referral to a qualified inspector in your area.
If possible, accompany the inspector when he inspects the home so he can answer any questions you may have. If problems are discovered, you may be able to negotiate with the seller to have them fixed before you buy.
Types of Loans
Fixed Rate Loans: A fixed-rate loan keeps the same interest rate for the life of the loan. The most popular fixed-rate loans are 15-year and 30-year loans, though there are some 10, 25 and even 40-year loans are available.
The benefits of a fixed rate are:
• Your monthly payment will remain the same throughout the loan, which makes it easier to budget.
• If you get a relatively low interest rate when you get the loan, it will remain that way – even if interest rates in the economy go up.
Should I Choose A 15-Year Fixed or 30-Year Fixed Loan?
Your payment will be higher on a 15-year fixed rate loan than it will be on a 30-year loan. Your interest rate will be a little lower, though. Obviously the biggest advantage is that you’ll own your home free and clear in 15 years if you pay it off as agreed.
On the other hand, if funds get tight, you may be stuck with a payment that you can’t afford and be forced to sell your house. If you don’t have a lot of cash reserves, you may want to consider getting a 30-year loan and paying it off like a 15-year loan. Check to make sure your loan allows for extra prepayments. If so, you can make additional early payments when you can afford them.
On the downside, if interest rates go down you will have to refinance your loan (and pay new closing costs) to get a lower interest rate.
Adjustable Rate Mortgages (ARMs): With an ARM, the payments and interest rate can change based on interest rates in the economy. The rate and payment are set for an initial period (which can be as short as a month or as long as 10 years or more). After that, it can change.
For example, a 3/1 ARM will have a fixed rate and payment for the first three years, and then change every year after that. A 5/1 ARM will have a fixed rate and payment for the first five years, and then change every year after that.
The interest rate on an ARM is based on an index rate – a widely available interest rate. For example, a popular index is the COFI, or the Eleventh District Cost of Funds Index published by the San Francisco office of the Federal Home Loan Bank. Another is the LIBOR, or London Interback Offer Rate, which is the rate international banks charge each other for loans.
The lender will add a margin to the index. For example, the interest rate could be the COFI + 3%. If the COFI is at 2%, your rate will be 2% + 3% or a total of 5%.
Because the interest rate on an ARM can go up (and so can your payments) it’s important to understand any caps that may protect you. Periodic caps protect you each time the rate is adjusted. For example, a periodic cap of 2% would mean the rate could not rise more than 2% in one adjustment period. A lifetime cap of say 8%, would mean that the interest rate cannot rise more than a total of 8% over the life of the loan.
The main attraction of ARMs is a lower interest rate and payment – at least in the beginning. However, since rates (and payments) can rise, you may put yourself at risk if you can’t continue to make the higher payments. ARMs can also be confusing, so evaluate this option carefully and be sure to get answers to anything you don’t understand. Always ask your loan professional to calculate a worse-case scenario for you. If a low initial payment is the only way you can afford to buy a home, you may want to save up first until you have more of a financial cushion.
FHA Loans: FHA loans offer low and no down payment loans, and closing costs can be wrapped into the loan. This makes these attractive to consumers without a lot of cash to put down on a house. These programs typically offer flexible credit and income requirements as well.
They are insured by the Department of Housing And Urban Development (HUD), which means you’ll pay an upfront mortgage premium of 1.5% of the loan, which can be financed; and a mortgage insurance premium of .5% which will be tacked onto the loan each month. These loans may be a little more expensive than other conventional options, but again are popular for consumers looking for low down payment loans.
You'll need to work with a local HUD-approved lender, who can help you find the right program. There are a number of HUD-insured loan programs including loans to rehab properties in need of repair, loans for those with credit challenges, and special loans for teachers and police officers buying in neighborhood revitalization areas.
VA Loans: VA loans are made to qualifying veterans to purchase, refinance, or improve homes. You can borrow up to 100 percent of the VA-established reasonable value of the property.
The VA provides a guaranty on the loan that protects the lender against loss if the payments are not made. With the current maximum guaranty, a veteran who hasn't previously used the benefit may be able to obtain a VA loan up to $240,000 depending on the borrower's income level and the appraised value of the property. There is a nonrefundable funding fee of 1.25 – 3%, with an average of 2%.
Although the owner must occupy a VA-financed home, it is possible to purchase a 2 – 4 unit home and live in one of them.
Veterans need a certificate of eligibility and a VA-assigned appraisal, but otherwise, it is not much different than buying a home through a conventional loan. You’ll work with a lender that offers VA loans.
First Time Homebuyer: Today, the first time homebuyer has a variety of loan programs to choose from. If you’ve never owned a home before, talk with a mortgage professional to find out what type of program you may qualify for. There may also be local programs offered by community or government agencies available to you. Visit www. HUD.gov for information on local housing agencies that may be able to help.
Getting the Loan
There are many ways to get a loan to buy a home. You can see what your local bank, credit union or savings & loan has to offer. Or you may want to work with a mortgage broker who has access to a number of different lenders. Either way, it’s important that you feel comfortable asking – and getting answers – to your questions.
Paperwork, paperwork
The paperwork involved in getting a mortgage can seem endless! Now is the time to start getting organized, before you are ready to buy. Here are some of the documents you may need.
Not all may be required, but it will be helpful to have the items on the following list on hand when the application is filled out:
___ Sales contract, once an offer has been accepted on a home
___ Copy of the cancelled deposit money check
