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Homeownership 101
Before you purchase a home, read our helpful hints to help you feel more comfortable during the home buying and mortgage process.

Buying a New Home Financing Your Home
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Why it still pays to buy a house

An analysis by the Joint Center for Housing Studies at Harvard University shows that if you bought a house in 1983 and sold it in 1991, you would have enjoyed real annual growth in equity of 4% to 22% in 10 of 12 markets studied. Fact is, even if the value of a home lags behind inflation by a percentage point or two, leverage makes the equation work for most people: If you put $20,000 down on a $100,000 house and the price rises 3%, that $3,000 capital gain translates into a 15% return on investment. You also should consider such items as tax benefits and maintenance and selling costs for the homeowner, and returns a renter could earn if he invested the down-payment money. After taking all kinds of subtleties into account, the number crunching still favors buying. Real estate expert Anthony Downs of the Brookings Institution shows that a homeowner's return on investment in the 1980's was high even in the Midwest, where houses appreciated just 3.6% a year vs. inflation of 4.6%. A buy vs. rent study of individual homes by Merrill Lynch finds that if appreciation lags behind inflation by two percentage points, you still won't lose by buying. Says economist Karl Case of Wellesley College, who closely follows housing prices and investment decisions, "Housing almost always gives you a very good return."

Making the Most Out of a $10,000 Investment
Often overlooked when comparing investment options are the leveraging and tax advantages of purchasing a home. This hypothetical example in the chart below analyzes those benefits over a 10-year period by comparing the experiences of two households. One household used $10,000 in savings as a downpayment on a home; the other buys a $10,000 Treasury bond and continues to rent. Looking at the bottom line 10 years later, the homeowner out-earns the renter by more than $49,000 on the initial $10,000 investment. Both households consist of a husband, wife, and one child. Each family has a combined income of $40,000 that increases 5 percent annually. The example assumes a property tax rate of 1 percent of value each year, hazard insurance of 0.4% of value per year, and a marginal tax rate of 15%.

HOMEBUYER: 1994 - 2004
Household makes a $10,000 downpayment on a $100,000 home. Finances $90,000 with a fixed rate loan at 9-1/4% interest. Assumes a 5% annual appreciation in value of home.   Total PITI Payment over 10 Yrs. $106,884
Tax Savings $14,533
Net Cost of Buying $92,351
Increase in Home Equity $63,612

RENTER: 1994 - 2004
Instead of buying a home, household invests $10,000 in an 8%, 10 year Treasury bond. Continues to rent a 2 bedroom apartment at $425 per month. Rent increases 5% annually.   Total Cost of Renting for 10 Yrs. $106,551
Tax Savings NONE
Net Cost of Renting $106,551
Proceeds from Bond Interest - Taxes $9,307

Bottom Line - 2004
Homebuyer earns $68,505 more than renter over 10 years.   Increased Equity in Home $63,612
Less Renter's T-Bond Earnings $9,307
Plus Net Extra Cost of Renting $14,200
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Four great reasons to buy

Why You Should Start Planning To Purchase A Home
If you've ever thought about buying a home, but decided that it was too big a financial gamble, think again. It's possible you haven't considered the risk of not buying a home. For the majority of working people, home ownership is the single most reliable way to achieve financial security. Without it, you may find it almost impossible to gain access to the kind of capital you'll need to support yourself in your later years, pay for your children's education or start a new business.

Home ownership among young Americans has dropped alarmingly in recent years. In 1980, 52 percent of all 25 to 34 year-olds owned a home. By 1990, only 45 percent did, and among 34 to 44 year-olds, home ownership had dropped from 71 percent to 66 percent. The primary reason for the decline in ownership among the young is cost. The price of housing more than doubled between 1975 and 1985, and mortgage interest rates skyrocketed.

Fortunately, the pendulum has swung back. Since 1991, overall housing prices have remained stable though in some areas of the country they have fallen by as much as 25 to 30 percent, and mortgage interest rates have dropped dramatically. But if, like many young people, you grew up in an overheated housing market, you may continue to think of home ownership as something beyond your reach. Here's why that attitude could be a big mistake.

  1. You may wait a long time to see rates this good again.
    Suzanne recently saw a house selling for $125,000. She has $20,000 in savings to use as a down payment; a $105,000 30-year mortgage at 7.5 percent would cost her $733 a month, and she might have another $150 a month in real estate taxes, for a total of $883.

    Suzanne is hesitating: $883 feels like a stretch for her now, since she's paying only $650 for her rental. But if she waits, and prices and mortgage rates rebound to the levels of five years ago, the exact same home might cost her $150,000, and she could be paying a 9 percent interest rate. The bottom line: She would be stuck with mortgage and tax payments of $1,190 - almost twice her current rent - for exactly the same home.
  2. Renting deprives you of big tax breaks.
    Home ownership is one of the last remaining tax shelters. In the example above, Suzanne would be able to deduct about $9,300 in mortgage interest and real estate taxes on her annual tax return. She earns $30,000 a year, which puts her in the combined 31 percent federal and state tax bracket. Therefore, her tax savings could come to about $2,900 a year, or almost an additional $250 in take-home pay each month. If she rents, she'll get no tax breaks whatsoever.
  3. You need to start small to trade up.
    You may feel that there will be plenty of time to get into the housing market when you feel financially secure. The problem is, you'll probably need the profit you'll make by selling your "starter" house to be able to afford the one that you'll want in the future.

    Between 1968 and 1992, the median price of a single-family home rose an average of 6 percent a year, according to the National Association of Realtors; over longer periods, the increase has been between 3 and 4 percent. That's great - if you buy early and hang on to your purchase. If you don't, you'll have to keep up with those increases through other investments, which is generally difficult to do.
  4. Your future is going to be expensive.
    Financial experts generally suggest that to retire, you'll need to build up enough in savings and investments to generate yearly income of 70 percent of your pre-retirement income. That's a tall order - and a reason to start amassing some serious capital soon.
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How to increase your purchasing power

There are several factors that lenders take into consideration when determining how much they will lend to you for your home purchase. The three most important factors are your income, debts and down payment. Any one of these can greatly impact the amount of mortgage you qualify for. Lenders are primarily concerned with the percentage of your gross monthly income that goes to your new monthly housing expense and to your new monthly housing expense plus your other monthly debts. As a general rule, no more than 33% of your gross monthly income should be going toward your monthly housing payment and no more than 38% of your income should be going to your housing payment plus other monthly debt. These guidelines vary by the amount of down payment you make and the loan program you choose. These are general rules for loans with loan amounts at or below the conforming loan limit.

If you have been pre-qualified and are not satisfied with the amount you qualify for, we have listed four of the most common obstacles to qualifying for a home below and possible solutions to each.
  1. Excessive Long-term Debt
  2. Inadequate Income
  3. Credit Problems
  4. Lack of a Downpayment
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Seven ways to accumulate a downpayment

One of the biggest problems facing potential homebuyers today is coming up with enough money for the downpayment and closing costs. The amount of money you have available can greatly limit or increase your purchasing power. Rather than saving all of the money yourself, there are options that may help. Here are some ways to accumulate the necessary funds that are acceptable to most lenders.
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Selecting a real estate professional

The majority of real estate transactions take place with the assistance of a real estate agent and for good reason. Working with a professional real estate agent is the most efficient means of shopping for a home and can help make the homebuying process an easy, hassle-free experience.

A real estate professional:
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Four things to avoid when purchasing a home

There are four major actions to avoid before applying for a mortgage loan and during the loan process itself. Any one of these four things could impact your ability to qualify for a mortgage loan so it is critical to avoid any of them until after your loan has closed or your loan officer has advised you.
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If you must take any of these actions, contact your loan officer. He or she can help you by pre-qualifying you, if necessary, and advising you of your options. A successful loan closing will be your reward!
Showing your home effectively

When your home is on the market and you're hoping for the best price, it is important to do everything in your power to make the best impression on potential buyers. You want to show your home in a manner that will have the greatest impact. Here are several tips from successful real estate agents:

If you put some thought and effort into putting your home's best foot forward before it is shown the first time, you should be able to find a buyer quickly.
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The three biggest mistakes people make when refinancing or buying a new home

Mistake #1 - Failure to examine/repair credit problems prior to loan application
Nearly all potential new homeowners and borrowers have no idea what type of credit they have or how to repair any adverse credit that they have. They fail to realize that credit is one of the key factors in acquiring a mortgage or refinancing a current mortgage. Credit problems slow down the process of getting a home loan and can damage one's ability to make other purchases.

What is good credit?
Good credit usually means a person has about five or six solid pieces of seasoned credit (such as a car loan, a current mortgage, a credit card) that are at least two years old and indicate no late payments. Of course, rarely is anyone's credit history perfect. One 30-day late payment on your credit report won't take you you out of a good credit category. Most underwriters, those who approve loans,are looking for trends. Isolated incidents do not carry as much weight as an established history of paying bills well past their due dates.

How can I repair my credit?
In most cases, a letter or phone call to the credit card company or business that originally gave you the credit can put you on the right track for having a "scar" removed from your report. Sometimes the company will require you to pay off the balance of your debt or send in a letter explaining why you were late with your payment. However, if you have a history of late payments, you may have to let time take its course, waiting while you build up a record of timely payments on outstanding debt.

Can high levels of debt affect my ability to buy a home?
Yes. And there is an easy way to determine if you have too much. Most loan programs will not allow your monthly mortgage payment (plus housing expenses) to exceed 28% of your total gross monthly income. Also, they will not allow your total monthly debt (mortgage payments, car loans, installment loans, credit cards, rental losses and alimony/child support) to exceed 36% of your total gross monthly income. (Note: these are guidelines only. Special circumstances and special programs may be able to overcome excessive ratios) If you exceed the 28% and 36% guidelines, you may want to consider paying off some of your debt in order to lower your monthly obligations before you apply. Remember, however, that some loan programs have more lenient ratios (such as FHA, VA, FNMA Community Homebuyer and Jumbos).

Mistake #2 - Failing to realize (in advance) how much money a lender is willing to loan you
Whether you are planning on refinancing or purchasing a new home, most lenders have strict guidelines on how much money they are willing to lend. The lender's decision is typically based on the loan-to-value ratio. In other words, lenders have limits on how much money you can borrow based on the value of your home.

For example, if you are refinancing, most lenders will not lend more than 90% of the appraised value of your home. So, if your house appraises for $100,000, you would be eligible for a $90,000 loan, assuming your current loan balance and closing costs equal $90,000 or more so that you are not getting cash out of the property.

On the other hand, if you are planning to buy a home, most lenders will allow your loan-to-value ratio to go as high as 95-97%, or even 100% with a VA loan.

So, if you are planning on buying a new home, make sure you have at least 3% of the purchase price - your own funds, not gifts or loans - available for the downpayment, plus closing costs. Closing costs include discount points, origination fees, attorney's fees, etc. They often run anywhere between 4% and 8% of the loan amount, depending upon your location and loan amount. The larger the loan, the smaller will be the percentage of that loan required to cover closing costs.

Is it possible for me to take cash out when I refinance and pay off some credit Ccrds?
Yes, but in most cases, this means you cannot borrow more than 75% of the appraised value of your home.

What can I do if I can't come up with a 5% downpayment?
The vast majority of loan programs look to the borrower to make a downpayment from his or her own funds of 5% of the value of the house. As mentioned, some will accept only 3%. Some of these still require 5% down, but will allow the remaining 2% to come from a gift from immediate family members, grants or unsecured loans from your employer, non-profit organization, government agency or first mortgage lender. In addition, if you are eligible for a VA loan, you can qualify for a 0% down payment loan (provided that you have sufficient VA eligibility)!

I am self-employed and earning a good living, but my tax returns are complex, usually in some stage of completion, and difficult to put my hands on. Can I get a loan ?
Yes. There are a number of "no income verification" programs available for people like you. Under the guidelines of these programs, most lenders will not loan you more than 80% of the appraised value of the property They will require that you have strong credit, have substantial liquid assets, and have been self-employed for a minimum of two years (with some exceptions). If you fit these criteria, there's a good chance you'll be approved for the loan you need.

Mistake #3 - Failure to find a reputable and experienced mortgage lender to help finance the home
Associating yourself with an honest, high quality, and service-oriented mortgage banker is probably the most important ingredient in finding home financing. This is an important decision in your life. It is probably one of the largest financial transactions you will make. It's not something you want to treat lightly. Dealing with the right lender can mean the difference between having your loan application approved or rejected. So, how do I find the ideal person to handle my loan?
This shouldn't be too difficult. There are many reputable, knowledgeable professionals. Just be sure to ask a few good questions before choosing one. We recommend asking:
  1. “Can you provide references?” If they can, call the references.
  2. “How long have you been in business?”
  3. “How, and when, can I get in touch with you?” Your loan officer should be available through many channels (phone, fax, pager, email) at times that are convenient for you.
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Application checklist

Have this information available to apply online or on the telephone:

Borrower information Employment/Income Bank accounts/Investments Creditors Purchases Fees
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The loan approval process

The loan approval process is relatively simple but can seem very mysterious if you do not receive an explanation of it. The loan approval process is much quicker than it ever has been.

Every mortgage application goes through these steps:
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How to rebuild credit

A poor credit rating can affect your purchasing power and your ability to get a home loan but there are some things you can do to restore your good credit Here are several ways you can go about rebuilding your credit.

Make sure your credit file is accurate.
Credit files are maintained by 3 large credit reporting agencies: TRW, Trans Union and Equifax. You can contact one of them and request a copy of your credit report for a small fee. Review the report for errors and outdated information. If you feel any of the reported data is inaccurate, you can request that the data be removed. The credit reporting agency will contact the creditor who has 30 days to respond and confirm the disputed items. If they do not verify it, the data will be deleted. If the creditor verifies that the information is accurate, you can write up to a 100-word statement explaining your side of the story and have the credit reporting agency include it in your credit file.

Contact your creditors.
Some creditors will remove derogatory information from your credit file if you pay a full or partial payment toward the debt. They may also "re-age" the account by making the current month the first repayment month and will show no late payments. You can call the creditor directly to do this.

Add positive information to your file.
Send information to the credit bureaus that shows stability and the ability to make payments on time. For any accounts that do not show on your credit report that you pay on time, you can send account statements and copies of cancelled checks to show your payment history and the credit bureaus may add them to your file. If you have long-term employment, have lived in the same place for a length of time, etc., be sure to add documentation to your file that shows this stability.

Get credit in your own name.
If you are married and your spouse has had financial problems, be sure that you establish good credit in your name alone.

Re-establish good credit.
If you have had credit problems in the past (especially a bankruptcy), it is important that you re-establish good credit. There are several ways to do this including the following. Satisfy judgments, liens, and collections.
Make it a priority to satisfy any unpaid items against you.

Make all of your current debt payments on time.
You are on your way to having rebuilt a solid credit file.
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Your Credit Report

It is always a good idea to obtain a copy of your credit report before applying for a home loan. By doing this, you can correct any errors on your credit profile in advance, establish credit, if necessary, or start repairing your credit file if you have had problems in the past. Lenders look very carefully at your credit as an indicator of your willingness to repay your loan. Having poor credit, little or no established credit or unresolved disputes with creditors can affect your purchasing power and your ability to get a loan. To avoid unpleasant surprises down the road, you can request a copy of your credit report for a small fee by writing to any one of the following credit bureaus:

Equifax Credit Information Services
P.O. Box 105873
Atlanta, GA 30348

Trans Union
P.O. Box 1000
Chester, PA 19022

P.O. Box 2104
Allen, TX 75013-0949

When you receive your report, check for the following items:
Having an established credit history is also important as lenders want to see a track record of debts owed that have been repaid. If you haven't already done so, apply for a credit card and use it to establish a credit history by documenting your monthly payments and your monthly payments to utility companies. Be careful not to accumulate too many credit cards, however, as this can be considered risky, as well.
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The top five reasons to refinance

Buying your home to begin with was probably a complex transaction. There was a lot of paperwork, a lot of anxiety, an avalanche of details involved in packing, moving, closing, unpacking. When you think about refinancing, you might remember those headaches and forget the idea. But there are a lot of reasons you might want to give it careful thought. Not only is loan processing much quicker and easier these days, but you may serve a lot of other very individual purposes as well. Consider the following:
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Why should I want a 15-year loan?

The most common loan applied for throughout the country is a fixed rate 30 year mortgage. That might be the right choice for you. But have you considered a fifteen year loan? What do you have to gain by choosing a shorter term?
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Why should I want the Bi-Weekly Mortgage Payment PlanSM?

The Bi-Weekly Mortgage Payment Plan(sm) is one of the easiest ways to build up equity quickly and pay off your mortgage loan years earlier than you would otherwise. The secret is making half of your regular monthly payment every two weeks. With 26 bi-weekly payments a year, you end up making 13 instead of 12 months’ payments. You can pay off a 30-year loan in as few as 22 years, just by using this plan. Wouldn't you like to have your house paid off early? There are many reasons to elect to use this payment option.

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