Buying a Home

I. INTRODUCTION

Buying a home is one of the great dreams that Americans have passed down to their children from generation to generation. For more than 50 years, American presidents from Roosevelt to Clinton have declared adequate housing a primary goal of American public policy. Today the home mortgage market in the United States is, at least a $7 trillion market – the largest by dollar volume of all domestic financial marketplaces. However, millions of families still remain without adequate housing.

1. Advantages of Home Ownership: Really, owning your own home is more than just an emotional "trip" or "dream." There are some positive reasons behind the desire for home ownership: 1. A home gives you roots in the community and helps to make you feel a part of the community in which you live; 2. Buying a home means acquiring an asset that will, most likely, increase in value; and 3. Owning a home provides tax advantages in the form of tax-deductible home mortgage interest and deductible state and local property taxes.
2. Disadvantages of Home Ownership: Buying a home has its disadvantages as well – for example: 1. Unless you are wealthy, buying a home usually means taking on a long-term (15-30 year) mortgage loan and making monthly payments without fail for a very long time (unlike a credit card, for example, that you may pay off next month); 2. Buying a home requires substantial savings to cover the required down payment and closing costs (usually amounting to several thousand dollars up front); and 3. Owning a home makes the buyer responsible for repairs and maintenance instead of leaving that responsibility to a landlord if you are renting a home or apartment.

II. KEY TERMS TO KNOW BEFORE DISCUSSING THE POSSIBILITY OF HOME OWNERSHIP.

1. Home mortgage loan: A long-term loan made by a lending institution to help a home buyer meet the seller’s purchase price and acquire a new or existing home; most such loans cover a period from 15-30 years, though most home buyers don’t stay in a house nearly that long, usually selling out to a new buyer who often refinances.
2. Commercial mortgage loan: The opposite of a home or residential mortgage loan in which a loan is granted to help develop a business project, such as building a shopping center, office building, apartment complex, etc. Commercial mortgages are usually much larger but also shorter in length than most home (residential) mortgage loans. About 80% of all mortgage loans in the U.S. finance new dwellings; the rest of the mortgage market is devoted largely to commercial projects.
3. Equity: The accumulated residual value of a home, consisting of the difference between the current market value of a home minus the outstanding balance of any liens against the home (including the first mortgage loan and any home improvement or home equity loans outstanding); equity represents a form of “forced savings” for the homeowner since in most cases it tends to grow over time as a home increases in value and can often be used to borrow against if a homeowner needs extra cash.
4. Home equity loan: A homeowner borrows against the accumulated residual value (equity) in his or her home, which consists of the difference between the current market value of the home and the outstanding balance still owed on any loans for which the home is pledged as collateral; most lenders are willing to loan only a portion of the residual value (equity) in a home (often 70-80%, though recently some aggressive lenders have gone to a much higher percentage of the home’s equity). Most cautious lenders like to leave a margin of protection in case home prices begin falling, reducing the value of the loan’s collateral.
5. Escrow: Funds or documents (such as a home mortgage agreement) held by a third party until all the terms of a contract are fulfilled; in most home mortgage loans, the home buyer must contribute funds each year into an escrow account managed by a financial institution and out of which payments associated with the purchase of the home (such as tax and insurance payments) are drawn.
6. Points: An amount of money paid by a home buyer or seller up front, depending upon the terms of the home purchase agreement, and collected by the lender (usually at the time a home mortgage loan is closed or settled); the term “points” is used because this one-time charge is usually expressed as a percentage of the face value of the home mortgage loan (such as “one” percentage “point” of the mortgage loan’s face amount). For example, one point on a $100,000 mortgage loan would be one percent of that loan amount or $1,000.
7. Title search: An inquiry into public records (often kept at a local county courthouse) regarding a particular piece of property in order to make sure a buyer can acquire clear title to the property without defects that might allow someone else later on to claim ownership; most lenders insist that home buyers purchase title insurance to cover the possibility of loss should an undisclosed claim to ownership of a piece of property subsequently appear.
8. Mortgage lender: A financial institution that grants long-term credit to make possible the purchase of homes or other property; among the most prominent home mortgage lenders today are commercial banks, savings and loans and savings banks, finance companies, credit unions, mortgage companies, discount mortgage brokers, insurance companies, and pension funds.
9. Fixed-rate mortgage: A loan for a home or other property whose interest rate remains fixed at a specified level throughout the life of the loan.
10. Variable-rate mortgage: A loan for a home or other property whose interest rate varies over time with changing credit market conditions; usually the loan rate varies as a reference interest rate changes (such as the bank prime rate or the prevailing market rate on U.S. Government bonds); variable-rate mortgage loans are sometimes called "adjustable mortgage instruments," which are loans whose interest rate or perhaps other terms (such as the loan’s maturity) change with changing market conditions.
11. Reverse mortgage: Drawing upon the equity value in a home (often by a retired owner who mostly owns the home with little debt remaining) as the basis for paying out a stream of income payments (known as an annuity) to give the homeowner additional income; when the home is sold, the lender paying the annuity is reimbursed for any funds paid out.
12. Second mortgage: A claim against the property or other assets of an individual or business evidenced by a loan that comes second in priority to the first mortgage loan; thus, if a house has a second mortgage and must be sold to pay off the loans outstanding, the holder of the first mortgage will be paid off first and any remaining funds will be applied to the second mortgage.

III. STEPS IN BUYING A HOME.

1. Is your present dwelling adequate or do you need a new place to live? Sample questions to ask yourself: Why do I need a new place to live? Is it in my budget or would it throw me over budget? Will I be around this area long enough to make getting a new home pay off (often at least 3 to 4 years)? Do I have a stable enough income to handle a very long-term debt? Is my credit rating strong enough to get a loan at reasonable cost?
2. How can I choose the right kind of new living space for me? Sample questions to ask yourself: How far will my budget stretch to upgrade my living space? What, at most, can I afford? Do I have enough savings for a down payment? What about covering the closing costs? Can I describe what kind of living space I would like to have? Where should I look to find the location and home that would interest me? Have I checked both local print sources, such as the newspaper and chamber of commerce publications, and the Internet, which now offers tremendous search facilities through such sites as www.realtor.com and others? Do you know that many of these sites allow you to use key words such as city, state, price range, desired home size, distance from city center, handicap access, etc. in narrowing down the search for an ideal home for you?
3. What should I look at if I decide to check out an existing home or other dwelling rather that go after a new one? Are there any apparent problems with the plumbing? The windows and shutters? How about the walls and fences? Is the house in a flood plain? Does it need repainting? What is the condition of the appliances in the kitchen? The water heater? The air conditioning system? The interior walls and ceilings? Can I get a professional inspection? Will the seller stipulate the known problems with the house and agree to be financially responsible for them?
4. What is the area where I might live really like? Sample questions to ask: Is this area on the way up or on the way down? What is the condition of the streets and the appearance of neighboring dwellings? When I walk around the area, is there evidence of pollution and vandalism? Do the neighbors seem friendly and helpful? How close are the important places I need to go, such as to work, shopping, schools, and medical care? Is there alternate transportation? What prices or rents have other dwellings in the area gone for recently? Is my proposed home the most or least expensive in the area or somewhere in between? Have I checked out the town and the area on the Internet?
5. How should I carry out negotiations for a new home? Sample questions to ask: What is the asking price? How does this compare with what I said above that I could afford? What else is available in the same neighborhood? Is there room for negotiation on both sides? Should I hire or contact a lawyer, a real estate broker, or anyone else if I plan to make an offer? Am I rushing into this deal too fast? Will the new dwelling be available for access at a time that fits my schedule (which includes selling and/or moving out of my old dwelling)? What does the lender and the seller need to know from me to help close the deal? Am I sure a good title search and a good inspection of the property has been carried out? What did they find?
6. How can I obtain an affordable loan to finance my new living space? Sample questions to ask: Have I checked into my credit report to make sure it is accurate before asking for a loan? Can I estimate the value of all my assets – property, automobile, stocks, bonds, etc.? Where are the best mortgage loans to be found? Have I checked newspaper ads, asked real estate people, or gone out on the Internet to look for favorable mortgage loan deals (such as from a discount broker)? What is my take-home pay and gross salary? Do I have enough savings to cover closing and moving costs and make down payment that is adequate in size? Should I seek a lock-in of current mortgage rates because they seem low (and, therefore, very favorable) right now? Or, should I wait because mortgage interest rates seem to be falling or might soon fall?
7. Am I ready to proceed close the deal on my new home? Sample questions to ask: Am I prepared to pay all the costs needed at closing? Will the lender and the seller as well as the real estate agent accept my personal check? Do I need a lawyer or do I feel comfortable with the people I am dealing with? Are all the dates worked out for those who are moving out and for me moving in? Do I need to bring certain documents to complete the closing?
8. Am I ready for the transition from my old home to my new one? Sample questions to ask: If I was renting before this new move, have I given my landlord adequate notice that I am leaving? What about getting my furniture and appliances moved? Who will do the packing? What approximately will I have to pay the movers? Am I telling my friends, employer, creditors, etc. what my new location will be? How about the post office? Is both the old and new dwelling satisfactorily clean? Have I made arrangements for turning on utilities in the new living space and turning them off in the old one?

IV. QUESTIONS AND FACTORS LENDERS CONSIDER IN GRANTING OR DENYING HOME MORTGAGE LOANS.

1. Types of information a lender may ask for: While home mortgage lenders often differ in the kinds of information they request to help them make a decision to approve or deny a loan, the following items are most commonly asked for: 1. A copy of the Purchase Agreement if you are buying a home which shows all the terms agreed to between the buyer and the seller; 2. Your W-2 income tax statements for at least the past two years or, if your are in business for yourself, your tax returns for at least the past two years; 3. Your take-home pay as reflected in your most recent pay-stub or payroll slip , showing your gross income, deductions, and take-home pay; 4. Your mortgage receipts or rental receipts over the past year or canceled checks which show the amount you paid to live in your present home or apartment; 5. Your bank statements and other investment accounts (including checking, savings, mutual funds and other investment asset holdings) for at least the last quarter; 6. The names, addresses and account numbers of all creditors to whom you currently owe money; and 7. If you qualify as a veteran for veteran’s housing benefits, your VA Certificate of Eligibility.
2. Factors the lender will consider in making a decision: While lending money is often as much an art as a science and, therefore, different lenders consider different factors, the following factors or borrower characteristics are among the most common things that many lenders consider in granting home mortgage loans: 1. Stability of income (evidence of relatively stable monthly cash flows so that you will not be short of income in meeting your obligations at some time) 2. Stability and length of employment (many lenders will not make a significant loan until you have been at a particular job for a specific time period (such as six months or a year); 3. Stability of residence (often at least six months to a year at one location is required, but this varies from lender to lender); 4. Ownership of your home versus renting (with homeowners assumed to represent a more stable alternative); 5. Strong to adequate credit record (repaying previous bills on time); 6. An acceptable debt burden that is manageable given the borrower’s current and prospective income; 7. Evidence of good money management skills (as reflected in bank accounts without significant overdrafts, the presence of security investments and other property, lack of debt pyramiding where new loans are repeatedly taken out to repay existing loans, absence of high outstanding balances on several credit cards that are not paid off quickly, etc.).
3. Credit scoring systems: Frequently factors like those listed above are quantified and made into predictor variables, each worth a certain number of points. (For example, if you have a bank account, you may earn one point; and, if you do not have a bank account, you may earn zero points). These variables are entered into predictive equations that add up your total point score across several variables. If your total score is higher than the lender’s cutoff level, you may get your loan. If your total score (points) fall below the designated cutoff level, you are unlikely to receive credit in the absence of other mitigating factors. These so-called "credit-scoring models" are widely used today by credit card companies and other lending institutions and by some insurance companies in an effort to determine the probability that the customer will represent an acceptable loan or insurance client and be likely to pay on time. True, they are impersonal loan-evaluation devices that do not often take into account character or other personal circumstances, but they do allow lenders and other financial service providers to speedily evaluate thousands of loan applications and give buyers a quick response to their credit requests in a non-discriminatory manner.

V. THE RIGHTS OF HOME MORTGAGE BUYERS UNDER FEDERAL AND STATE LAW AND REGULATION.

1. A final area that a prospective new homebuyer on renter should keep in mind is that both federal and state laws today afford a considerable measure of protection to those seeking new places to live. For example: 1. The Equal Credit Opportunity Act forbids discrimination against prospective borrowers on the basis of their age, sex, religion, ethnic or national origins, color, marital status, race, or receipt of public assistance; 2. The Community Reinvestment Act forbids depository institutions that are among the nations’ major mortgage lenders from “redlining” (which means marking out certain areas or neighborhoods in which they refuse to make their services available); 3. The Truth in Lending and the Truth in Leasing Acts require full disclosure of the terms of a loan or lease and give the home buyer a rate quotation using the same formula as other lenders, called the APR or annual percentage rate, so the buyer can shop around and compare loans in order to decide what the best deal might be; 4. The Fair Housing and Home Mortgage Disclosure Acts require fairness in advertising of housing opportunities and require mortgage lenders to disclose characteristics of borrowers who seek their loans so the regulatory authorities can determine if a lender is discriminating on the basis of race, geographic location, or other irrelevant factors; and, 5. The Real Estate Settlement Procedures Act mandates that disclosure be made to a homebuyer about which services and what fees will be assessed at the time home buyers, sellers, and other parties to these transactions meet to complete a sale and change home ownership.
2. These extensive pieces of legislation and supporting regulations ask the homebuyer or renter, if he or she believes they have been treated unfairly, to first discuss the matter with the seller, real estate agent, or lending institution involved, and if that doesn’t resolve the matter, to contact the Attorney General’s Office or Office of Consumer Protection in his or her home state. If a federally regulated lending institution is involved, it is often helpful to contact the lender’s principal regulatory supervisor (such as the Federal Deposit Insurance Corporation or the Federal Reserve Board). Among the key sources of information about alleged housing discrimination are the Equal Opportunity Commission, 1400 L Street, NW, Suite 200, Washington, DC 20005 (800-669-4000) and the Discrimination Office of the U.S. Department of Housing and Urban Development, Washington, DC 20410 (800-669-9777) In short, plenty of help is available if you need it when you have reason to believe you have not been treated fairly under the law as you search to find the place you want to live.