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Financing

Whether you're selling or buying your home, you probably have questions about the financial aspects involved. If you're a seller, you want to know about the tax implications of selling a home, estate/beneficiary concerns and assumed mortgages. These issues are addressed in the Sellingsection. If you're a buyer, you must secure a mortgage, the legal document providing you possession of the home and your lender ownership interest until the loan has been repaid. You'll also want to learn about initiatives to promote affordable housing in California, which you can read about in theHousing Affordability section of C.A.R. Online.

First-time buyers will want to review each section of the outline below to prepare for the process that lies ahead. If you're an experienced buyer, you may want to use certain sections to brush up on specific financial topics. Or, you might find information about mortgage types helpful because you're considering obtaining a different kind of mortgage this time around.

In addition to information about mortgage types and the mortgage process, you'll also find resources for general homebuyer assistance programs and insurance needs.

Initiating the Mortgage Process

posted Dec 16, 2009, 10:07 PM by Casey Elliott

Inform Yourself First

First-time and experienced buyers alike may find themselves overwhelmed by the mortgage process. With so many options -- each offering unique advantages and disadvantages -- determining the early steps to take can be baffling.

Before initiating the mortgage process, you'll want to be fully educated. Whether you peruse Web sites or attend a mortgage seminar, there are many ways to find out what to expect. And as always, your REALTOR® can answer any questions you may have, as can financial planners, mortgage brokers, or lenders.

What's in a Price?

As you initiate the mortgage process, you'll want to ensure that your monthly payments fit into your budget. Are you aware that the price isn't the only factor contributing to the amount of your monthly payments? In actuality, the price is comprised of principal, interest, taxes and insurance, which combined, are commonly called PITI. To determine your average monthly payment, lenders suggest devoting no more than 28 percent of your gross income to PITI. Of course, how much home you can afford depends greatly on other factors as well: your income, credit, savings and financing, to name a few variables.

Applying for a Mortgage

Prior to applying for a loan, you'll need several items, including pre-approval information (if applicable), the ratified sales contract, earnest money and a home inspection report.

A ratified sales contract is proof that both buyer and seller have agreed on the final purchase deal. It serves as the final contract subsequent to the purchase agreement and any counteroffers. This contract specifies the amount of your downpayment, the purchase price, the type of mortgage you're seeking, and your proposed closing and occupancy dates.

When you visit your lender, you'll need to complete a Uniform Residential Loan Application. This document asks detailed questions about you, your income, your assets and liabilities, your credit history, and the property you plan to buy. Check with your lender about the additional documentation you'll be required to supply, which can include paycheck stubs, tax returns, bank account statements and other articles.

Decisions to Make

Once you've arrived at the application stage, you'll need to know what type of mortgage you want and the mortgage amount. 

Keep in mind that the type of mortgage you select directly affects the home price you can afford and the amount of your mortgage payments. Your ratified sales contract may depend on your ability to secure approval for the kind of loan you choose.

You've probably already estimated how much money you want to borrow. The best way to determine the exact amount of your mortgage is to base the figure upon the purchase price of the home and the amount of your downpayment. If you're using your pre-qualification from a lender to determine the amount of your loan, remember that pre-qualification is only a ballpark figure and not equivalent to being pre-approved.

Know Your Rights: The Real Estate Settlement Procedures Act

Under the Real Estate Settlement Procedures Act (RESPA), you're protected from abuses during the residential real estate purchase and loan process. You're also entitled to better information because the law requires the involved parties to disclose costs of settlement services.

RESPA is intended to assist you in obtaining fair settlement services through the disclosure of applicable costs and information, protect you by eliminating kickbacks and referral fees that would unfairly increase the costs of services, and prohibit other practices that increase the cost of services.

Your REALTOR® can inform you of RESPA's provisions in more detail. If you encounter any practices that seem unethical or in violation of RESPA, consult your REALTOR®.

Homebuyer Assistance Programs

posted Dec 16, 2009, 10:06 PM by Casey Elliott

In the Golden State, the primary sources of home funding include downpayment loans and grants, mortgage credit certificates, sleeping seconds and bond-rate financing, In addition, many local, state and national housing assistance agencies offer programs to help first-time and low-income homebuyers obtain affordable housing. In fact, your REALTOR® can use Fannie Mae's Homebuyer Funds Finder to help you learn more about financing options that are available in your community.

Most federal programs carry similar stipulations for eligibility: You must not have held primary ownership in any property within the last three years and your household income must not exceed 80 percent of the U.S. Department of Housing and Urban Development's (HUD) median income level per region. Once you?ve selected a house, call the local housing authorities or ask your REALTOR® to contact the local Housing Department or Community Development Department to find out about homebuying assistance programs that are available in your area.

You also can research assistance options that may be offered through your employer. For example, some companies allow employees to borrow against their 401(k) or pension funds. Other employers, especially state and federal government municipalities, offer direct assistance as a company benefit. Or, if you're a veteran, you're eligible to take advantage of the assistance programs offered by theCalifornia Department of Veterans Affairs (Cal-Vet).

In addition to the federal programs available, many state agencies and individual cities offer financial-assistance programs for homebuyers. Here are a few options:

The California Housing Finance Agency

With a mission to "assist first-time homebuyers in achieving the dream of homeownership," theCalifornia Housing Finance Agency (CHFA) has been helping state residents obtain affordable housing since 1975. The Agency offers myriad programs targeting consumers' different needs. For example, if you're seeking a new construction loan or a resale loan in under-served counties, you may participate in the 100% Loan Program (CHAP). These loans include a standard 97-percent CHFA fixed-rate, 30-year mortgage and a 3-percent CHFA downpayment assistance second mortgage, also known as a sleeping second.

Through the California Homebuyer's Downpayment Assistance Program (CHDAP), buyers receive a deferred-payment junior loan for up to 3 percent of the purchase price. Intended to be used with a CHFA or other first mortgage, this junior loan allows the primary loan to be recognized as the senior lien.

CHFA's School Facility Fee Downpayment Assistance Program provides $108 million in downpayment assistance to homebuyers of newly constructed single-family homes. The program is split into three sub-programs: Economically Distressed Areas targets certain regions of the state in need of new construction; Maximum Sales Price $130,000 is available to all California homebuyers regardless of income, prior homeownership, or location; and the First-Time Homebuyers Program is for buyers whose income doesn't exceed the moderate level according to county and family size.

All of CHFA's grants can be combined with other conventional forms of assistance to help with various housing-related fees like closing costs and pre-paids.

Downpayment Assistance Programs

First-time buyers face unique obstacles to homeownership. For many first-timers, the largest barrier to homeownership is the downpayment. Recognizing this, local governments and other organizations offer downpayment assistance loans.

For most downpayment assistance programs, available loans generally carry a low interest rate. As long as you reside in the home for 20 years without selling, transferring or refinancing the property, the loan will be forgiven. Many programs require that you apply for preliminary loan approval from a loan lender.

Mortgage Credit Certificates

You also have the option of increasing your income with a mortgage credit certificate (MCC). Low- and moderate-income homebuyers can obtain a tax credit for a specified percentage of their mortgage interest, which allows their take-home pay to be increased by reducing their federal income tax liability. The credit may be applied each year the recipient keeps the house as his or her principal residence with the original mortgage.

MCCs can be used with fixed-rate, 15- or 30-year Federal Housing Administration, VA and privately insured loans for single-family and condominium homes. However, bond-backed loans offered through agencies such as CHFA, the Southern California Home Financing Authority or Cal-Vet aren't eligible for use in conjunction with an MCC.

If you don't want to be tied to a house for 20 years, you may appreciate that an MCC requires only a three-year residence commitment. However, MCC recipients may be required to pay recapture tax if they sell their property within nine years of purchase at a gain and the household income has increased beyond MCC criteria.

First-time, low- or moderate-income homebuyers who haven't owned a home in three years may obtain a mortgage revenue bond (MRB). MRB loans are offered at 30-year low interest rates that vary depending upon the area. Bond qualifications stipulate that borrowers can't earn more than $72,680 for a family of three or more. Recipients must select a home in the county of the issuing agency.

Gifts

Federal and state governments, local communities, and non-profit organizations offer homeownership assistance in the form of grants or gifts. These gifts don't have to be repaid as long as borrowers meet the individual program's requirements.

For example, the Housing Action Resource Trust (HART) is a non-profit housing and community development organization providing downpayment and other housing assistance. Through charitable contributions by builders, sellers and businesses, HART provides up to $15,000 of financial assistance' which is considered a gift with no obligation of repayment' to recipients. The gift may be used toward most transaction-associated fees, including debt and collections mandated by an underwriter to qualify for a mortgage.

To qualify for a HART grant, you must be eligible for a Federal Housing Authority loan and provide a downpayment of at least 1 percent of the purchase price. Although there are no income-level restrictions, participants must demonstrate need and complete a homeownership-education class. The program also requires a fee of $650 per home under $100,000 or $950 per home over $100,001, payable by the builder, lender or participant. If you pay the fee, that sum can be applied to your 1-percent downpayment. While HART's eligibility requirements are somewhat lenient by industry standards, there is a catch: The seller or builder must make a matching tax-deductible contribution to the organization.

This article was revised from "Finding Funds," which originally appeared in the May 2001 issue of California Real Estate magazine online.

Selecting the Right Mortgage

posted Dec 16, 2009, 10:05 PM by Casey Elliott

Selecting the type of mortgage that will best suit your needs is not a simple undertaking. The right mortgage will depend on many different factors, including your financial situation and how you expect it to change in the future, how long you'd like to keep your house, and how comfortable you are with the possibility of your mortgage payment changing.

For example, a 15-year fixed-rate mortgage can save you thousands of dollars in interest payments over the entire term of the loan, but your monthly payments will be greater. With an adjustable-rate mortgage, you may start with a lower monthly payment than a fixed-rate mortgage -- but your payments could increase when the interest rate changes.

The best way to find the right mortgage for you is to discuss your finances, plans and preferences with a mortgage professional, whom your REALTOR® can recommend.

Fixed-Rate Mortgages

Fixed-rate mortgages, the most common type of mortgage, offer consistently stable monthly payments. Your property taxes and homeowner's insurance may increase, but your monthly payments typically won't fluctuate.

With fixed-rate mortgages, you have the option of choosing a 30-year, 20-year, 15-year or 10-year repayment plan. You also may shorten the loan through a biweekly mortgage, thereby allowing you to make the equivalent of an extra month's payment per year. In selecting the length of your repayment, remember that a shorter loan carries higher payments but accrues less interest and allows you to build equity quicker.

Adjustable-Rate Mortgages

The interest rate on an adjustable-rate mortgage (ARM) is dictated by changing market rates. When interest rates rise, your monthly payments will go up, and when interest rates decrease, your monthly payments will go down accordingly.

ARMs often provide a lower initial interest rate than fixed-rate mortgages, attracting people who need lower payments early in the loan in order to qualify for a mortgage. ARMs also can benefit people who plan to move or refinance in the near future or those who expect their incomes to increase in the coming years.

Before applying for an ARM, find out how high your monthly payments can go throughout the life of the loan. An ARM includes two caps or limits on interest rate increases; one cap states the boundary for how high your interest rate can go up during each adjustment period, and the other cap sets the maximum total amount of all interest adjustments over the entire term of the mortgage.

The rates of an ARM typically change once or twice a year, and there is usually a lifetime cap on both the individual rate adjustments and the total amount the rate can change over the life of the loan. By applying the terms of the caps to your mortgage payments, you can anticipate the worst-case scenario prior to applying and determine if this figure is in line with your finances.

Reverse Mortgages

A reverse mortgage is a special type of loan made to senior homeowners that allows them to convert the equity in their homes to cash for living expenses, home improvements, in-home health care, or other needs.

A reverse mortgage takes its name from its reversed payment system. Instead of monthly payments by the borrower to the lender, the lender makes monthly payments to the borrower. With a reverse mortgage, older homeowners can stay in their homes and maintain or improve their standard of living without taking on a monthly mortgage payment.

To obtain a reverse mortgage, you must meet certain criteria that differ greatly from the qualification requirements for other mortgages. Reverse mortgages are generally limited to borrowers 62 years or older who own their own homes either outright or nearly so. Homes also must be clear of tax liens. And, unlike other mortgages, seniors don't have to meet income or credit requirements to qualify for a reverse mortgage.

Borrowers typically have the option of receiving the reverse mortgage's proceeds in the form of a lump-sum payment, fixed monthly payments for life, or a line of credit. A reverse mortgage's interest rate is usually an adjustable rate that fluctuates monthly or yearly. However, the size of monthly payments that borrowers receive doesn't change.

Balloon Mortgages

Balloon loans are short-term mortgages with some of the features of a fixed-rate mortgage, like low interest rates, but without the benefit of full amortization. As opposed to a 30-year fixed-rate mortgage, balloon loan payments only cover part of what you've borrowed during the term of the loan. At the end of the term, you're required to pay off the loan's balance by refinancing or making a lump-sum payment.

Balloon mortgages are typically five-, seven- or 10-year loans, so they can be beneficial to borrowers who anticipate selling or refinancing their homes in a short period of time.

Many companies offer a conversion feature at the end of the loan's term. For example, the loan may convert to a 30-year fixed loan at the 30-year market rate plus a certain percentage point. To qualify for a conversion, you usually need to be in good standing with the payments on your balloon loan. Balloon mortgage programs with conversion options are also called a 7/23 convertibles or 5/25 convertibles.

Buy-down Mortgages

Today's mortgage lenders have developed variations on the old buy-down method of offering an interest rate that is 2 percent below the fixed rate for the first year and 1 percent below the fixed rate for the second year, followed by 28 years of paying the regular fixed rate. Buy-downs now charge higher interest in the beginning of the loan to cover the future yields.

For example, if the current market rate for a fixed-rate loan is 8.5 percent at a cost of 1.5 points, the buy-down gives the borrower a first-year rate of 6.5 percent, a second-year rate of 7.5 percent and a third- through 30thyear rate of 8.5 percent. The cost would be 4.5 points.

Location Efficient Mortgages

Location Effecient Mortgages are available through a partnership between Fannie Mae and private lenders for homebuyers in select communities nationwide. In California, LEMs are available in the San Francisco Bay and Los Angeles areas. The are targeted to consumers who live in areas where public transportation is available, reducing the need to rely on cars, as well as the costs associated with doing so. The LEM is a fixed interest rate, 15- to 30-year mortgage that requires a downpayment of at least 3 percent of the appraised value of the property and has a 97 percent loan-to-value (LTV) ratio.

Government Loans

The Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and theRural Housing Services (RHS) are agencies that offer government-insured loans. To obtain these loans, you must apply through a lender that is approved to provide them. All of these agencies require certain minimum standards for the properties being purchased.

Through the FHA, you can purchase a home with a very low downpayment, typically 3 percent to 5 percent of the FHA-appraisal value or the purchase price, whichever is lower. In addition, the FHA's applicant standards are more lenient than conventional loans; you don't necessarily have to have a spotless credit record or a high-paying job to qualify. FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a particular region.

The VA program allows qualified veterans to buy a house costing up to $203,000, in most cases with no downpayment and at below-market interest rates. Moreover, the qualification guidelines for VA loans are more flexible than criteria for either FHA or conventional loans. The VA application process is similar to any other type of mortgage loan, and many VA loans can be processed and closed without waiting for credit application approval. To determine whether you are eligible, check with your nearest VA regional office.

The Rural Housing Service, a branch of the U.S. Department of Agriculture, offers low-interest-rate mortgage loans with no downpayment requirements to low- and moderate-income borrowers who live in rural areas or small towns. The RHS also offers programs for home renovations and repairs. Check with your local RHS office or lender for eligibility requirements.

Graduated Payment Mortgage

The Graduated Payment Mortgage (GPM) is another alternative to adjustable-rate mortgages. Contrary to an ARM, GPMs have a fixed-note rate and payment schedule. However, GPM payments typically are set for only one year at a time. Each year for five years, the payments graduate at 7.5 percent to 12.5 percent of the previous year's payment. You may obtain a GPM in 30-year and 15-year repayment schedules.

Borrowers can maximize their purchasing power through the GPM's lower qualifying rate. GPMs also can be attractive in a market with rapid appreciation. In markets with moderate appreciation, a borrower who needs to move during the scheduled negative amortization period could face financial problems.

All About Insurance

posted Dec 16, 2009, 10:05 PM by Casey Elliott

More than likely, your home will be the biggest purchase you make in your lifetime, so you'll want to protect your investment with the right types -- and amounts -- of insurance coverage. The following is an overview of the kinds of insurance that you may either be required to purchase by your lender or choose to purchase to ensure your home is adequately protected. To determine the exact coverage you need, consult your mortgage professional.

Homeowner's Insurance

Homeowner's insurance protects your property from financial losses as a result of fire, burglary and a range of other hazards. This form of insurance guards both your interest and your lender's.

The majority of lenders require basic homeowner's insurance (HO-1), which provides coverage against damage by fire or lightning, glass breakage, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, theft, smoke, and vandalism. It also covers liability for injuries occurring on the premises, which is recommended by most lenders.

If you feel like basic insurance coverage isn't enough, you may opt for broader homeowner's insurance (HO-2), which covers hazards like falling objects, ice, snow and sleet, problems with heating, and plumbing and electrical systems damage, in addition to what's included under HO-1. If you decide on comprehensive homeowner's insurance (HO-3), all dangerous occurrences will be covered, with the exception of natural disasters like floods, earthquakes, wars and nuclear attack.

If you own an older home, you may want to consider HO-8, which covers dwelling and personal property in the event of 11 hazards. Unlike HO-1, this form of insurance covers repairs or actual monetary values instead of rebuilding costs. HO-8 policies are advised for historic homes whose replacement costs outweigh their market values.

Private Mortgage Insurance

Private mortgage insurance protects your lender against financial losses if you default on your mortgage and go into foreclosure. Mortgage insurance is issued by the Federal Housing Administration (FHA), other government agencies and private companies.

If you make a low downpayment, the lender usually will require that you obtain private mortgage insurance that will cover the lender's losses. Mortgage insurance isn't typically required for a mortgage with a higher downpayment, because if a borrower in that situation defaults, the lender should be able to sell the home for more than the loan balance.

After you've built up at least 20 percent equity in your home, you typically can cancel your mortgage insurance. Contact your servicer to learn the cancellation procedure. These guidelines are determined by the issuing organization's investors.

Title Insurance

Title insurance guarantees the simple -- yet vital -- fact that you own your property and no one else has a claim to it. If you hold a mortgage, you'll be required to pay the one-time premium for title insurance. Title insurance is a wise investment, as it guards against any false claims that may arise.

As opposed to traditional health or home insurance, title insurance protects you against claims referring to before the policy's effective date. A range of claims from the past can be brought against your property's title, including forgery, clerical errors, undisclosed heirs and improper interpretation of wills.

There are two types of title insurance policies: the lender's policy and the owner's policy. The lender's policy protects the lender's interest for the amount of the loan -- not necessarily your home's purchase price, if the two figures differ. This type of policy, approved by the American Land Title Association, is issued to institutional lenders. In addition, the lender's title policy covers any losses that the lender would incur if the interest of another creditor, such as a second mortgagor, takes precedence in the event of a foreclosure.

The owner's policy covers your losses or damages if it's determined that the property belongs to someone else, there's a defect or lien on the title, the title can't be marketed, or there's no access to the land. Your owner's policy will stipulate the date by which the terms are effective -- the key to your ownership rights.

Most homeowners never have to file a title insurance claim; however, that doesn't mean that you should write this form of insurance off as superfluous. In the event that a third party makes a claim about your property, title insurance can make the difference in retaining your house.

Home Warranties

Home warranties serve different purposes depending on whether your home is newly built or older. If your home is brand new, you'll want a warranty protecting the home's workmanship, mechanical systems and wiring for up to 10 years. For older homes, warranties offering one-year service agreements are common. The terms of coverage vary greatly.

Refinancing Your Mortgage

posted Dec 16, 2009, 10:04 PM by Casey Elliott

Would you like to increase your monthly cash flow? Or maybe your children are nearing college and you're exploring options to finance their tuition? When interest rates drop, homeowners who financed their homes under higher rates often consider refinancing. The primary, tangible benefit of refinancing under lower interest rates is that it lowers your monthly payments -- sometimes significantly. In addition, refinancing can shorten the term of your mortgage and help you build equity faster.

Because refinancing a mortgage means essentially taking out a new mortgage, you'll encounter many of the same procedures the second time around. In most cases, borrowers pay off their original mortgages first.

Should You Refinance?

When deciding if refinancing is right for you, there are several factors to consider. Like the standard mortgage process, refinancing can be expensive and time-consuming. Some mortgage experts suggest a rule of thumb that refinancing is worth your while if the market interest rate is at least two points lower than your current loan's rate.

Others recommend that you weigh the costs of refinancing versus your monthly savings. Factors to consider include points, application and attorney's fees, appraisals, changes in tax benefits, and prepayment penalties.

You also may want to consider how long you plan to stay in the house. Some mortgage professionals advise that it generally takes at least three years to fully realize the savings from a lower interest rate, given the costs of refinancing. By following the above steps, you can determine how long it will take you to break even and start saving money. If you may move in the next couple of years, refinancing might cost you more than it will save you in the long run.

Who Benefits From Refinancing?

Homeowners in a variety of situations can benefit from refinancing. If you'd like to get out of a high-interest-rate loan to take advantage of lower rates, refinancing may be a good option. In addition, you may want to refinance if you're interested in trading in an adjustable-rate mortgage for a fixed-rate mortgage to ensure that your payments will be set for the life of the loan. Refinancing also can assist homeowners who want to convert to an adjustable-rate mortgage with a lower interest rate or more protective features. Other reasons to refinance include converting to a loan with a shorter term in order to build equity faster. Or, if you'd like to cash out your equity to use toward a major purchase, refinancing can do the trick. Whatever your situation, your mortgage professional can guide you through the refinancing process and discuss your options in greater detail.

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