How To Finance a Home in Today's Market

Financing a home is a critical-and complex- subject for every home buyer. What you know about mortgage plans, rates, points, lock-ins, taxes, even selecting a lender, can literally save you-or cost you-thousands of dollars. Over the years of answering buyers' questions, we have seen many questions appear again and again. Those years of experience have been distilled into this Financing Handbook.

The handbook is divided into six chapters to take the mystery out of the entire financing process. Read the handbook cover to cover, or turn to the chapter that interests you most. Either way, our purpose is to share all the information you need-and then some. The more you know about financing, the better your decisions will be at every step in the process.
Once you have covered the basics in this handbook, you probably will have even more questions about your particular situation. We are standing by to help. When you are ready, let's get together personally to answer your specific questions. Ultimately, our goal is to provide you such exceptional service that you'll tell all your friends about us. That way we both win. You get a loan and a home you can live with for years. And we get a client for life.
We're looking forward to working with you.

CHAPTERS
Getting Started ..................................…...... 2
 Shopping For A Loan And Lender............. 7
Getting Qualified.........................…........... 10
Challenges And Solutions.......................... 13
Applying For A Loan ................................ 16
Closing The Loan ........................…..….... 19

 

CHAPTER I
Getting Started

Why should I buy instead of continuing to rent?
That's a good question. Believe it or not, buying a home is not for everyone. But it is one of the best ways for most people to build wealth in three different ways. 

Equity
First, a home buyer makes payments on a loan. By paying down that loan, your “forced savings" builds equity in your home that do not enjoy when you rent.

Appreciation
Second, you build wealth by the principle of appreciation in your home. While real estate markets may experience temporary downturns, homes typically appreciate in value. Over time, your wealth grows as your home becomes more valuable.

Tax Savings
Third, you build wealth when you have a mortgage because the Federal government lets you take an income tax deduction for all the interest you pay on your mortgage (thousands of dollars a year). That means you build wealth by paying  less in taxes each year you pay mortgage interest.

What are the basic steps in getting a loan?

• First you need to meet with a professional loan officer, who will “run your numbers." That means the loan officer will calculate your income versus your debt to determine how big a loan you can afford.
• When you complete a loan application with the loan officer's help
• Once the application is complete, the loan officer passes that information to the underwriters, the people at the bank or mortgage company who check out everything you've placed on the application and decide if you quality for the loan.
• Then, if everything passes their requirements, you receive a loan to purchase your new home.

Who do I talk to about a loan?
Several types of companies offer loans to home buyers. Financial institutions-such as banks, savings and loans, and credit unions-have certain types of loan programs they offer to the public and lend out their own money to buyers. Mortgage brokers usually do not provide loans from their own funds, however, they have access to loans from many investors-including banks. Who you pick really depends on many factors, the most important thing being whether you feel comfortable with the loan officer who will take your application.

How can I benefit from using a real estate professional to buy a home?
Purchasing a home qualifies as the largest investment for most families; therefore, it is important you team up with a qualified real estate professional who can help you through the complicated home-buying process. Real estate agents are state-licensed professionals who have met strict educational requirements regarding real estate law and practices. By using a professional, you will find the home of your choice without the hassles of going it alone.
Brokers and agents make it their business to provide every service connected with your home search, from expert advice in the early stages through careful monitoring of your settlement (also called "closing" or “escrow"). The more closely you work with one agent, the better your needs are known and the more effectively you can be served-saving you time, money and possible grief.

All agents are bound by law to deal fairly and ethically with both buyer and seller. Some buyers choose to work with a “buyer's agent." A “buyer's agent's" legal obligation is to represent the interests of the buyer. Therefore, a "buyer's agent," whose fee or commission may be paid by either buyer or seller, is able to negotiate sales price and terms on behalf of the buyer.
 
You benefit from an agent's services in many ways, such as:

• Helping you set up u plan of action through an analysis of your needs and your finances, the current housing market, and homes available in your price range.
• Personally conducting your search to find neighborhoods and homes that fit your requirements.
• Guiding you through the intricacies of making an offer on a home and presenting your offer to the seller.
• Assisting you through both the pre-settlement and settlement processes.

Today's financing techniques can be confusing. What are the basic kinds of loans?  Here is a brief explanation of four major mortgage plans.

Fixed-Rate Conventional Mortgage
A conventional loan is a loan made to a buyer by a commercial lender without a third-party participant, such as government  agencies like Veterans Affairs (VA) or the Federal Housing Administration (FHA). Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15, 20 or 30 years. The interest rate stays the same for the life of the loan; therefore, the monthly principal and interest payment remains constant. Shorter terms mean somewhat higher monthly payments. Shorter terms also mean more rapid equity growth in your property, faster mortgage pay-off and dramatic savings on total interest payments.

Terms of conventional loans vary among lenders. Some can be obtained with no down payment whatsoever. When the down payment is less than 20%, it is usually necessary to obtain private mortgage insurance (PMI) to protect the lender from a buyer's default.
Advantage: Quick processing and stable payments.

Adjustable-Rate Mortgage (ARM; also "variable rate')
The interest rate may go up or down over the years and is tied to a financial market index (such as one-year Treasury bills). Monthly payments may also be adjusted on a periodic schedule. Most ARMs set a maximum adjustment (or "cap") on possible increases to interest rates, monthly payments, and, or set a maximum cap on rates for the life of the loan.
Advantage: The lower initial interest rate and monthly payment allow the buyer to pay less in the early years for a larger loan and help buyers quality for a more expensive house than with a fixed-rate loan. Caps offer peace-of-mind rate ceilings.

FHA loan
Strictly speaking, the FHA (Federal Housing Administration) does not make loans: rather it insures loans, which increases lenders' willingness to provide low-down-payment loan programs.  With a FHA-insured loan, a home buyer can make a small down payment, a feature particularly attractive to first-time buyers. Second mortgages are permitted within specific guidelines.  Points (prepaid interest) can be charged by the lender. Your real estate agent may negotiate to have the seller pay the points. FHA buyers of single-family homes can finance 100% of closing costs.  The FHA charges an advance mortgage insurance premium, (MIP) fee which is rolled into the loan, as well as a monthly charge for all loans. Ask a loan officer how much the fee would be in your situation.  The FHA sets a limit on the size of loans it will insure. The maximum loan amount varies by location and changes from time to time.   Advantage: Low down payment, low interest rates, long terms. Many are fully assumable loans, no prepayment penalty, second mortgage permitted under certain circumstances.

VA Loan
Qualified veterans can take out loans up to a specific limit with no down payment. These limits occasionally change: check with a loan officer for current rules. VA-guaranteed loans can be combined with second mortgages and are full assumable by any qualified buyer.
Rates and points my be negotiated with the lender. Although no down payment is required, buyers pay a loan origination fee.

VA/FHA qualification guidelines are more flexible than those for conventional loans. Actual income qualifications are dependent on the type of loan requested.  Advantage: Usually no down payment, no prepayment penalty: assumption may make your home very attractive to buyers when you decide to sell (but you may lose your VA loan eligibility).

What are the tax benefits of buying a home?
Tax breaks enter the homeownership picture from all angles: buying, owning and selling. Remember, tax laws are constantly changing and complex, and you should consult with your professional tax advisor before filing any claims on your tax returns. Here are the basics as of this writing:

Home Buying
Tax savings begin with deductions allowed for:

• Settlement charges for the use of money, such as "points." A point is a sum equal to 1% of your loan amount. Even points paid by the seller are, in many instances, a tax deduction for the buyer!
• Prepaid interest on prorated loan payments made between settlement and your first mortgage payment. This prepaid interest is usually paid on settlement day as part of your closing costs.
• City, town and or county real estate taxes on the purchased property.
  Homeownership

Your home provides shelter for both you and your taxes. For example:

• The interest paid on your loan is deductible, as are your property taxes. This interest deduction is also a major tax advantage of owning a second home for yourself or relatives who do not pay you rent.
• You may deduct a portion of your home expenses if you have a qualified home office. However, special rules apply to the portion of your home used as a home office when you sell. Check with a tax professional for details.
• Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductible, subject to income limits.
  
  Home Selling
  When you sell your home, tax savings help defray many of the expenses of selling, such as:
  
• Up to $500,000 of any capital gain realized on selling your residence is excluded from taxation ($250,000 for singles and married persons filing separately).
• If you are paying a tax because your gain is larger than the $500,000 or $250,000 exclusion amounts, you can subtract the cost of home improvements from your net sales price. ("Net sales price" is your sales price minus closing costs, broker's and lawyer's fees.) You can also subtract title insurance fees, recording fees, transfer taxes and other acquisition costs. This reduces your gain and also your taxes.
• You can reduce your immediate tax burden in situations where the gain is larger than the exclusion amounts, by making an installment sale where you spread out your income-and taxes-over a period of years.
• If, when you sell, you have to pay a penalty for prepaying your mortgage, that charge can be deducted. Fortunately, few mortgages have prepayment penalties today.
• Under certain conditions, you may deduct moving expenses within limits.

POINT
A one-time charge required by the lender, which is paid by buyer or seller at settlement. Each point is one percent of the loan value. Example: one point on a $78,000 loan is $780; $78,000 x 1 % = $780. Points are charged by lenders to increase the yield on their loans; thus, they attract money into the housing market.
 
Shopping for A Loan And lender
How do I choose a lender? What kind of questions should I ask?

Probably the best way to find any professional is through referral. Think about it. How did you find your doctor? Layer? Accountant? Real estate agent? Most of us look to our friends and acquaintances to give us a name of a professional from whom they've received good service.

Ask for referrals
Each buyer's circumstances are unique, and once you've narrowed the field, you will want to discuss your case in detail with the lender. You’ll find out, for instance:

• Loans. What kinds of fixed-rate and adjustable loans the lender offers. `
• Terms. What terms are offered on adjustable-rate loans: rate adjustment frequency, maximum limit on each rate change, frequency of monthly payment adjustment, ceiling on payment adjustments, possible extension of the length of time on the loan pay-off, life-of-the-loan interest rate cap, conversion privilege, positive or negative amortization, etc.
• Down Payment. What amount of investment is required for a down payment.
• Prepayment. What the term (length of time) is to repay a loan, and whether there is a prepayment penalty if you pay off your loan before its due date. In some areas. pay-off penalties are illegal, while in other areas they are common. Ask the lender about the local practice.
• Fees. What fees are involved (credit report, appraisal, survey, legal costs, “points”, title insurance, etc.)
• Timetable. How long it will take to process your application
• Inspections. What inspections the lender will require.
• Insurance. What kind of insurance and how much coverage will be required.
• Lock-In. Is there a lock-in policy, and is there an additional fee for locking in an interest rate?

TIP:  Don’t judge a loan lender by the interest rate alone. Probably one of the most little-known secrets to saving thousands of dollars on your home purchase is shopping carefully for the right lender.

What's the best way to get a good loan that will increase my buying power?

Just like any product you might purchase, you shouldn't make your decision to bur- that product based on just one aspect of the product. most people don't buy a car just because it gets the best gas mileage. Other factors are involved.  The same is true of loan products. Most people go straight for the interest rate and think it's the single most-important factor. Actually, your personal financial situation is more important than the interest rate. What is most important to you: Monthly payment? Out-of pocket settlement costs? Overall cost for life of the loan?

Look At The Whole Product

Start with a comfortable monthly payment. See what interest rate goes with that payment. Then move on to how much it will cost you out of pocket to get that interest rate. If you don't have a lot of cash, you may not be able to get the interest rate you most want. How many points must you pay? How many years do you expect to carry this loan? Does the lender charge fees another lender does not charge?

Variable Questions
If you are looking at an adjustable-rate mortgage, you have another group of questions to ask. How often does the ARM adjust? How much does it adjust at every anniversary period? Is there a cap on how high the interest rate can climb? Is there a limit to how low the rate can drop?

Bottom Line
The bottom line is, are you comfortable with the terms of the loan? The only way to find that out is to ask questions and read the materials about the loan given to you by the loan officer.

Are there any other costs I should consider besides interest rates and down payments? 

Definitely! As discussed earlier, look at how many points the loan requires. In addition, ask to see a list of the fees the lender charges throughout the application process and at closing. (Actually this disclosure is required under the Truth In Lending Act. Ask the lender for a Good Faith Estimate when you’re shopping.)  Some of the fees you may encounter include: appraisal fee, inspections, mortgage insurance premium, title insurance (lender and homeowner).

Application Fee
This is the check you write to pay for the processing of your application.  It may or may not include your credit report.

Appraisal Fee
The lender wants to make sure the home you're buying is actually worth the amount of money the lender is about to pay for its purchase. While a separate company usually conducts the appraisal for the lender, it is still part of the cost of the mortgage process.
Inspections. While a traditional home inspection is not required to purchase a property, if you are buying a home with a government-insured loan, FHA and VA want to know if the property is in good enough shape for them to put their money at risk. In addition, most lenders require a pest inspection to make sure the home does not have an active infestation or hidden damage. Other inspections could include radon, flood plain, water purity, septic system or others, depending on the area.

Mortgage Insurance Premium
Private mortgage insurance (PMI) is used by lenders to protect them in case a borrower defaults on the loan. The insurance is required by most lenders on loans where the borrower makes less than a 20% down payment. If the borrower defaults, the insurance company pays the lender the amount covered under the policy. The first month's PMI payment can be included in the closing costs paid at settlement. (Also, "Mortgage Insurance Premium" or MIP for FHA loans)

Title Insurance
Title insurance protects the new homeowner and the lender from a bad title. When you purchase your home, an attorney will conduct a title search to ensure the home is "free and clear" of any defects in the title. This search is designed to make sure you own the property completely so that no one can come and claim ownership through an older title to the property. If that should happen, however, the title insurance is designed to pay the lender and owner for the value of the property to protect their interests. Be sure to purchase a homeowner's policy as well as the required lender policy, so that your interests are protected as well.

 

CHAPTER III
Getting Qualified

Exactly what price house can I afford?

The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for your down-payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and an emergency reserve.) The harder answer is how much you are qualified to borrow.

Rule Of Thumb
For starters, you can put the most frequently-used lenders' rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mort­gage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sales price).

28% Test
The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly hous­ing costs, including Principal, Interest, Taxes and Insurance (PITI), and condominium fees, if any. For example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per-month payment.

36% Test
The 36% limit covers both your PITI and long-term debts (more than 10 months) such as regular household expenses (mortgage insurance and or condominium or associa­tion fees), outstanding loans (car, appliances, school), alimony and child support (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment per month less monthly payments on any long-term debt.

In the above examples, the affordable loan payments for an income of $3,600 per month is a range between $1,008 for the home payment alone and $1,296 a month less any debt payment(Strict lenders may use only the 28% standard, even with no debts, or ask you no meet both standards. Other lenders may use less-strict standards for borrowers with excellent credit ratings.)

Needed Cash
In addition to your loan, the cash you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment "ranging from 0 - 20% or more of the sale price). Closing costs, moving expenses, possible immediate repairs, remodeling, or possibly new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.

Home Price Range
A loan officer can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment and you get the approximate range of home prices you can afford.

Buying Power
Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget and maximize your buying power. Different mortgage plans can dramatically affect your home payment - and thus, the home price you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards - again allowing you more home for your income.
 
Is it smart to borrow the maximum amount I qualify for?
This is mostly based on your personal financial comfort level. Many people don't mind borrowing the maximum amount their income allows, while others want to take a much more conserva­tive approach.

• Borrowing the maximum, you ensure the highest possible tax deduction by having a higher mortgage and thus, larger inter­est payments.
• On the other hand, you could be "house rich" and "cash poor," meaning you have the house of your dreams, but have little money left over for anything else.

When is the best time to meet with a lender?

The sooner the better. It's a good idea to arrange your finances before you find a home. If you're actively house hunting but have not found the right home yet, ask the lender to do a screen­ing application. This "pre-qualifies" your income, debts and assets. It is not a guar­antee that you will receive the loan for which you have been analyzed, but you are closer to approval than the buyer who has not begun the loan process. Better still, go the extra step to become "pre-approved" for a loan amount. Knowing where you stand concerning how much money a lender will  let you borrow (based on your income and credit rating) puts you in a good bargaining position. Sellers faced by deciding between two buyers - one not yet  qualified and the other a pre-approved "cash buyer" - may favor the buyer for whom getting a loan is almost a sure thing.

Pre-approval is a much more involved process. In essence, you must go through the complete loan application and have the underwriters approve you for a conditional loan. A loan application is taken and you undergo the financial scrutiny called for in the approval process. The only thing lacking after pre-approval is selecting a home of choice, getting the necessary inspections and appraisal of that property for the lender's approval, and final confirmation of your finances.

What is credit scoring? And why should I care about it?

Credit scoring is a process where a lender determines how much of a risk you present if the lender decides to loan you money. Several factors are used to tabulate your score, including:

• promptness or lateness of payments
• how much credit you carry
• how many times credit reports have been requested, and various other factors.
• Your credit score is a rating of your credit worthiness. To maximize - buying power in the future, you should be concerned about your credit score.

TIP: A few ways to protect your credit score include:

• Paying bills on time
• Resisting the temptation to switch your debt around from one credit card to another on a regular basis
• Keeping your balances on credit cards as low as possible.

CHAPTER IV
Challenges And Solutions

I'm self-employed. Are there special requirements for me to get a loan?

Yes. Anyone who owns 25% or more of a business is considered self employed. There will be some special requirements for those in this classification.  First, your loan officer will need the last two years' income tax forms to verify your income.  Your also need to have ready a profit, loss statement for the business.  Be ready to describe how long you have been involved in the type of business you are in.  Depending on your lender, other information may be required.

Can I buy a house if I've filed bankruptcy?

Lenders are most concerned about how your credit has been managed recently. Lenders generally like you to wait about four vears after bankruptcy has been discharged before applying for a loan. In this time period you can rebuild your credit with a good payment history and appropriate management of credit. With care, there is no need for a past bankruptcy to stop you from purchasing a new home.

If I've been foreclosed on before, can I buy a house again?

Yes you can. However, be prepared to wait. A foreclosure is the worst blemish that can show up on your credit history. The lender sees you have borrowed money on a home before, but failed to repay it until the home had to be repossessed and sold on the auction block. Though you may have felt circumstances were beyond your control, the lender is slow to loan money again to someone who has had a home foreclosed. By waiting and rebuilding your credit, you will also rebuild your ability to obtain a loan with an acceptable interest rate and terms.

If you are determined to buy now there is probably a lender in the marketplace that will loan you money. But expect to pay higher interest rates and receive stricter terms. The closer you are to the time your home was foreclosed, the higher the interest rates will be.

How are alimony and child support payments treated on my loan application?

If You Pay
If you pay alimony it is considered a debt, just like credit cards and installment debt. Child support payments are also considered a debt and will be calculated in your debt-­to-income ratios. The only exception is if you are entering your last year of payments. Lenders will not count monthly payments on loans that have entered their last 10 months.

If You Receive
If you receive alimony or child support, these incomes can be used in the qualifying process. You must have proof however, you have received these payments consis­tently for 12 to 24 months, depending on the underwriter. Your recordkeeping must be meticulous. Photocopy each check or obtain copies of canceled checks from the bank.

My credit is less than perfect. How can I repair my credit?

This is a task, again, that takes time. Lenders look at your credit history of the last several years for timely payments and careful credit management.  As you begin the application process, total honesty is the best policy. Be up-front about a bankruptcy. Tell your lender if you have new judgments. It is better to come clean early-on than to back pedal once a bad report comes in.

Step One
The first step in credit repair is to make sure you start making payments on time and managing your credit prop­erly. If your income is sufficient, simply ensure you send in your payments on time. In other cases, you may need to increase your income while you are paying off debt to guarantee you have enough money to make your payments on time. If you are unable to increase your income, make arrangements with your creditors for revised payment schedules that you can afford.

Step Two
Quit charging on the credit accounts you're trying to pay off. You can either close the accounts and continue paying on them, or just cut up the cards so you can't use the card while you're paying it off. Closing the account shows the lender you intend not to use it any longer. If accounts are open, the lender knows you could use them and cause a cash-flow problem once again.

Step Three
Write a letter to the lender explaining why you had a period of late payments, judgments, or whatever else is on your credit report. In addition, explain how you have rectified your situation and what has changed in your economic life to ensure it won’t happen again. Many underwriters are understanding and forgiving of periods of hardship in a buyer’s life.

Step Four
Finally, don’t allow anyone to run credit reports prior to your application for your mortgage. Every inquiry on your credit lowers your credit score. The lender suspects you’ve been rejected by other lenders, and that explains why several companies were looking over your credit history. Numerous inquiries signal that you have not learned the credit management skills necessary to have a mortgage.

CHAPTER V
Applying for A Loan

What should I bring to my first meeting with a loan officer?

Lendrrs' loan application questions vary, but, in general, they will include:

• The kind and amount of mortgage loan you wish to obtain.
• The verifiable source of your down-payment money (bank account statement. gift, etc.).
• The length of time you wish to borrow the money.
• Your current address and the length of time you've lived there and at your previous address.
• Your employment history, your current employment and income, and your employer's name and address.
• Your Social Security number.
• A list of your assets, including your gross monthly income, bank balance(s), possessions (car, furnishings, jewelry, etc.), stocks and investment values.
• Your debts and account numbers (including car payments, credit cards, etc.).
• A copy of your sales contract, if you have one.
  

What happens after I complete the loan application?

A lender takes several steps in processing your application, and different procedures exist in different areas. Primarily, your lender is busy with the following:

Appraisal
Getting an appraisal of the home you want to buy to determine if it's worth the price you are paying.

Checking References
Gathering reports on your employment, income and debt-paying ability to determine if you are a good credit risk.

Verifying Accounts
Verifying bank deposits to satisfy down-payment and closing-cost needs.

Inspections
Ordering inspections, such as Housing or building-code compliance, Completion of repairs the seller agreed to make, and Pests, termites or other wood-boring insects.

Insurance
Verifying hazard insurance coverage to make sure the home is protected against major losses.

Underwriting
Once all the documents are assembled, a review of your application to determine whether or not your loan is approved.

How long do processing and underwriting take? Can I speed up the process?

How long it may take before your loan is approved depends on what kind of loan you apply for, the efficiency Of your lender, the lender's workload and your own diligence in supplying required information.

Working with your real estate team, including your loan officer and your real estate agent, you'll be kept aware of any needed action:

• Has your bank supplied your account information?
• Have your credit-card companies produced reports?
• Is your insurance policy guaranteed to be in effect by settlement day?
• Have your relatives provided the "gift letter" that must accompany cash donations
• Has your employer verified your income, etc.?

When do I know if I'm approved?

When your application is approved, your lender will send you a loan commitment letter with the loan amount, interest rate and monthly payment in writing.

TIP: Five Credit Mistakes To Avoid Before Applying
#1. Applying for more loans or credit cards just before applying for a mortgage loan.
#2. Purchasing large-ticket items.
#3. Authorizing credit reports on your credit.
#4. Using up all your cash reserves to pay off all your debt.
#5. Switching or quitting jobs just before the application process.

What is a lock-in? Is it better to float my interest rate or lock it in early?

Interest rates on mortgages fluctuate daily according to the marketplace. At application, buyers have two choices. The buyer can lock in on the rate that is quoted, or the buyer may “float’ the interest rate, meaning the rate continues to move with the market.
The benefit of a lock-in is you have peace of mind knowing what your mortgage payment will be from the time you are approved.

With floating, you may be able to get a lower rate by waiting for rates to go down. Either decision should be based on your comfort level, and after you’ve carefully considered the money markets that affect interest rates.

Chapter VI
Closing The loan

What are some inside tips to get cash for the down
payment and closing costs?

Down payment and closing costs funds can come from several resources. First, of course, is your own savings, or equity from the sale of your old home. For some buyers – especially first-time buyers – that is a difficult task. That’s why many lenders and government programs allow purchasers to receive money from sources other than their own pocket.

Co-signer
A co-signer on a loan is a person who applies with you for a mortgage. It also means that person will take on the risks associated with a loan, such as being held accountable for the payments if you default on the loan. In addition. this debt will appear on their credit report.

Gifts
You can receive a gift from relatives to use as a down payment. The gift can be in a lump sum from one source. or you may use several gifts to accumulate your down payment. A popular .program from FHA is the Bridal Registry, where newlyweds receive cash gifts and place them into a designated account to be used for the down payment. Relatives can also dip into their own 401(k) programs or Individual Retirement Accounts (IRAs) for gift money to their children or grandchildren for purchasing a home.

Loans
You can borrow from your own 401(k) account for down payment money. While you will lose the investment dollars until they are paid back into the account, you are allowed to pull that money out without penalty and then repay it over time. Keep in mind that the loan is calculated in your debt income ratios. Check with your financial advisor on any tax consequences, before pulling your money out of retirement savings plans.

Personal Assets
Cash can also he drawn from other investments and assets you may own. Stock, can be sold for cash, as can items such as a second car, boat, etc. If you want to hold onto those items but still need the equity, out of them, you can approach sour bank- or credit union and apply for a loan secured by those items Again, the monthly payment will be added into Your debt income ratios.

Seller
Your real estate agent may be able to negotiate seller subsidies in the contact negotiating process. Many loan programs will allow the seller to assist the buyer with up to 6% of the sales price. Sellers can also pay for points or a number of items paid for before settlement.

What are same creative ways to lower the monthly payment?

Creative thinking can lead to a few often-overlooked ways of lowering your monthly payment. Among them are the following:

Buy Down The Loan
By paying a little extra every month for a year or two and specifying that the extra money go toward the loan's principal, you can reduce the amount of the monthly payments you make later, as well as shorten the length of the loan. Relatives can also help by setting up an escrow account that will contribute to the principal and interest payments each month for a specified period of time.

Purchase The Home On A Shared-Equity Basis
There are many forms of equity sharing, in which the assisting party, often a relative, owns part of the home and shares in the profits when the house is sold.

Set Up A Secured Loan Or Second Trust
The loan will be repaid monthly, with any balance due on the sale of the house. The drawback is that in case of foreclosure, the second trust is paid from proceeds of the sale, if anything is left after the first mortgage is paid.
 
What's the difference between "earnest money" and a down payment?

Earnest money is deposited by the buyer at the time a contract is presented to show you're "earnest" about buying the seller's home. Earnest money checks range around the nation from just $100 to several thousand dollars to as high as 5% of the sales price. Ask your real estate agent what the customary practice is in your area. The earnest money is typically payable to the listing real estate company and held in escrow until the transaction is closed. At settlement, earnest money is credited toward the down payment.

The down payment, on the other hand, is the cash a buyer pays at closing to make up the difference between the sales price and the loan amount. Down payments range from zero to 20% or more, depending on the type of loan. Usually, the lower the down payment, the higher the monthly payment for the loan.

Can I get my earnest money deposit or down payment money back if the contract falls through before closing?

Your down payment money is not taken until your home actually settles. If something happens with the contract before your closing date, you will not have ever written that check.
On the other hand, the earnest money deposit is made at the time your purchase offer is received by the sellers.

Unfortunately, not all transactions go through. If the contract off is not accepted because the buyer and seller cannot come to an agreement on sales price or terms, your earnest money deposit check is returned to you. If, however, your contract is ratified and either party later violates the contract, the resolution is not as simple. If the buyer is in breech of contract, the seller could claim ownership of your earnest money deposit. In contested situations. the cases are often decided by arbitration and sometimes through the courts.

What actually happens at settlement?

In some areas, you and your real estate agent meet with the sellers, their real estate agent, and a settlement officer, title company representative or attorneys representing the seller and or you, to settle the transfer of the property and close the transaction. In other areas, an escrow officer does all the preparations for closing and contacts the buyer and seller to come in individually and sign their respective documents separately.

In either case you will need to provide:

• Your homeowner's insurance policy and, paid receipt for one year's coverage, sometimes paid at closing.
• A certified or cashier's check (payable to yourself and ready to be endorsed to the seller, attorney or escrow company) for the balance of your down payment and your closing costs.
• Your regular check book so that you can pay any incidental costs. Typically, all closing costs are calculated in advance and your certified check is usually sufficient.
• You go over a list of adjustments presented on government standard "Settlement Statements" to settle what you and the seller owe each other in cash, taxes, etc
• You sign the mortgage and a mortgage note indicating your monthly principal and interest payments.
• After recording all signed documents, you then pay the seller, and the seller gives you the title (or deed).  Finally, you pick up your keys. The home is yours!

What does it mean when your loan gets sold? And how does that work?

Many lenders today sell the mortgages they make to investors, giving the lender new cash to lend to another borrower. Although the transaction doesn’t change your payment, it does mean you’ll send your payment to a new address.  Don’t panic. Reselling mortgage loans is a common occurrence. Loans, just like other products, can be sold and bought on the secondary market.

If your loan is sold, two things should happen immediately. You should receive a letter from your original mortgage company telling you of the sale and advising you of the new mortgage company. You should also receive a letter from the new mortgage company telling you they are the new owner of your loan.

Am I stuck with this loan far 3D years?

While your lender has the option to sell your loan, you also have the option of changing loan companies through refinancing. If interest rates fall significantly over time, you could even save hundreds of dollars each month with a lower payment if you refinance to a lower interest rate.

Another option is to pay off your loan early by adding an extra amount to your monthly payment to be applied to the principal of your loan. By adding ~one extra payment to your loan per year (making 13 payments instead of 12), you would knock years off your mortgage, build equity quicker and save thousands of dollars in interest payments.
Before you decide to refinance, talk to a loan officer to get an analysis of your up-front and closing costs before making an application. Even though you could save money on a monthly basis, if refinancing costs too much to get that lower payment, it may not be worth the expense.

First consider how much longer you plan to stay in the home. Then calculate how much it will cost you to refinance. Divide the refinancing cost by the monthly swings. If the break-even date is greater than the time you plan to spend in the home. think again about refinancing. You should also take any tax implications into account. With a lower interest rate, you'll pay less to the mortgage company or bank and more to Uncle Sam.
For homeowners who are more interested in reducing their monthly bills than the up-front cost of refinancing (which can sometimes be combined with the mortgage). refinancing makes sense.

What does it mean to refinance?

In essence, when you refinance you pay off the first loan with a new mortgage. Before you shop for a new loan, contact your current lender to see if they have a program that will net you the same results as going with another company.

Your financing options are as numerous in refinancing as they were when you first bought your home. You still have the options of many types of fixed-rate or adjustable-rate mortgages , and VA or FHA loans to name a few. When you refinance you actually are purchasing your home again.

Another option is to cash out some of the equity in your home that has accumulated from payments on principal and price appreciation. Keep in mind, however, if you take out your equity now, you may reduce or eliminate your gain from the eventual sale of your home. By removing you equity earlier, you may be spending the cash you will need to move up to your next home.

Financing a home is a critical-and complex- subject for every home buyer. What you know about mortgage plans, rates, points, lock-ins, taxes, even selecting a lender, can literally save you-or cost you-thousands of dollars. Over the years of answering buyers' questions, we have seen many questions appear again and again. Those years of experience have been distilled into this Financing Handbook.

The handbook is divided into six chapters to take the mystery out of the entire financing process. Read the handbook cover to cover, or turn to the chapter that interests you most. Either way, our purpose is to share all the information you need-and then some. The more you know about financing, the better your decisions will be at every step in the process.

Once you have covered the basics in this handbook, you probably will have even more questions about your particular situation. We are standing by to help. When you are ready, let's get together personally to answer your specific questions. Ultimately, our goal is to provide you such exceptional service that you'll tell all your friends about us. That way we both win. You get a loan and a home you can live with for years. And we get a client for life.
We're looking forward to working with you.