Radian
Radian Homeownership Study Guide
Homeownership
Study Guide
Acknowledgments
Radian Guaranty Homeownership Counseling Program Study Guide was written with
the help and guidance of Fannie Mae. Other organizations who provided information
and support include Commonwealth Relocation Services, the U.S. Department of
Housing and Urban Development, the American Society of Appraisers, the Mortgage
Insurance Companies of America, Consumer Counseling Credit Services and the
Mortgage Bankers Association of America.
Note: The purpose of this Study Guide is to assist potential borrowers in understanding
and obtaining residential real estate financing. The information contained herein should
not be construed as legal advice or opinion. Under no circumstances should this information
be considered a substitute for the advice of borrower’s counsel, a real estate professional
or other representative.
The Radian Guaranty Homeownership Counseling Program Study Guide, or any part thereof, may not be reproduced or transmitted
in any form or by any means, electronic or mechanical, including photocopying, recording, storage in any information retrieval system,
or otherwise, except as set forth herein, without written permission of Radian Guaranty. ©2008 Radian Guaranty Inc. 1/08
Radian
About Radian Guaranty
Homeownership
Study Guide
For many families, the most common hurdle to homeownership is saving enough money
for the downpayment; the traditional 20% cash payment is a hardship for many, and an
impossibility for many others.
For the past four decades, mortgage insurance companies like Radian Guaranty have
helped protect lenders against mortgage loss, providing the security they need to approve
low-down-payment mortgages. Today, two out of five homebuyers use mortgage
insurance to buy the home of their dreams with as little as 3% down.
Radian, the nation’s second-largest mortgage insurer, is headquartered in Philadelphia.
Through its national Service Center network, Radian provides private mortgage
insurance and related services to lenders large and small, including lender training,
loss mitigation and loan workouts, secondary marketing assistance, contract
underwriting, economic reports, and homeownership counseling.
What can Radian do for you? Our experience in homeownership and home financing
can help you realize your homeownership dream. The Radian Counseling Program will
help you better understand the homebuying and homeownership process: what to expect
before, during and after you purchase your home.
3
Study Guide | Introduction
Radian
Welcome
Homeownership
Study Guide
We’re excited that you are part of Radian Guaranty’s
Homeownership Counseling Program
The most important reason we’ve built
our counseling/educational program is to
make homebuying the best experience it
can be for you. Along the way, you’ll see
that buying a home takes a lot of thought,
hard work and sacrifice. But in the end,
we think you’ll find it worthwhile.
Radian Guaranty created this Study Guide
to help steer you through the sometimes
complicated, often confusing homebuying
process. The information in this booklet
covers a range of topics: shopping for a
neighborhood and a house, getting a
mortgage, ways to maintain your home,
basic money management, and ways to
get help, should you get into financial
trouble once you’ve already purchased
your home.
Whether you are a single person or have a
family, you need to decide whether or not
owning a house is right for you. There are
many things to consider, including where
you want to live, how much you can
reasonably afford, and what you will
do to make sure your new home
maintains its value.
For the first-time buyer, homebuying
can be an especially frightening
experience. The best way to handle what
we’ll call “homebuyer’s fright” is through
education. No matter who homebuyers are
and how much they earn, they share the
same fears, concerns and anxieties.
4
Study Guide | Welcome
Radian Guaranty wants to help you reduce
those fears and anxieties, and help you
accomplish the goal of homeownership.
Radian Guaranty understands that earning
a living and raising a family has become a
very delicate balancing act in the 1990s.
So we’ve created our Homeownership
Counseling Program, which works with
affordable housing programs to give you
the best possible chance to achieve the
American Dream of homeownership.
The Radian Homeownership Counseling
Program certainly can’t cover every
potential aspect of the homebuying
process. But we hope our study guide
will cut through the clutter, and allow
you to understand how the basics of the
homebuying process work, what will be
expected of you, and what you can expect
from others along the way. Equally as
important, we will provide solutions for
what to do if you get into financial
difficulty after you’ve purchased
your home.
Radian
Formats
Homeownership
Study Guide
Two Alternatives
What you will need
You’re going to receive many pieces of
information during the Radian Guaranty
Homeownership Counseling Program.
We suggest you keep your information
clearly marked, maybe even use an
“accordion”-type folder to maintain
the information you gather in the
workshop, as well as any information
you gather while shopping for a home
and a mortgage.
A good place to start is by filling in Data
Sheet #1, “About You,” in Appendix B of
this Study Guide.
Self-Study/Telecounseling
If you can’t attend the classroom
workshop, a second way to complete
the Radian Guaranty Homeownership
Counseling Program is through self-study
at home. In our Self-Study/Telecounseling
version, we ask that you read through
the Study Guide and complete the
accompanying Radian Guaranty
Workbook before completing
the program.
For more details on the Radian Guaranty
Self-Study/Telecounseling program,
please see page 7, “Self-Study/
Telecounseling Instructions.”
Formats
Classroom
There are two ways you can successfully
complete this workshop. One is in a
classroom setting. If you are enrolled by
your mortgage lender in the Radian
Guaranty Homeownership Counseling
Program’s classroom format, all you need
to do is schedule yourself to attend the
four-hour workshop and bring along
this Study Guide and accompanying
Workbook. Once you’ve completed
the Radian Guaranty Homeownership
Counseling Program, contact your
mortgage lender.
Prior to taking the Radian Guaranty
Homeownership Counseling Program,
whether in the classroom or the self-study/
telecounseling format, you are encouraged
to familiarize yourself with the material as
soon as you receive this Study Guide.
You’re going to meet many new people
during the mortgage and homebuying
process. We’ve provided Data Sheet #2,
“People You’ll Meet,” in Appendix B
of this Study Guide, so you can keep
track of how to reach these people if
you have questions.
We want to make sure things are
explained as clearly as possible by
your instructor/counselor.
5
Study Guide | Formats
Radian
Homeownership
Study Guide
If you are enrolled in either Radian
Guaranty’s Self-Study/Telecounseling or
Classroom Programs, we encourage you
to ask questions. But remember to try to
restrict your questions to issues that are
especially difficult for you, or don’t seem
to be answered in this Study Guide.
Any personal information you share
in the Classroom or the Self-Study/
Telecounseling Program is strictly
confidential. You don’t have to share any
of your personal financial information.
Whatever you are comfortable with is the
only guideline. It’s your choice.
6
Study Guide | Formats
Of course, feel free to use the Radian
Guaranty Study Guide as an information
source during the homebuying process.
Remember: You are not expected to know
everything associated with buying a home
and financing the purchase. In fact, the
vast majority of people don’t know half of
what is contained in our course. The idea
is to gain a basic understanding of the
material. Along the way, everyone from
your lender to the real estate professional
can help answer your questions. So take
advantage of their expertise.
Radian
Instructions
Homeownership
Study Guide
Follow these rules
Self-Study/Telecounseling Instructions
If you are enrolled in the Radian Guaranty
Homeownership Counseling Program’s
Self-Study/Telecounseling version, there
are some basic instructions you must
follow to complete the program.
1. Read through the Radian Guaranty
Homeownership Counseling Program
Study Guide. Pay special attention
to the modules that deal with
financial issues.
2. Once you’ve read through the material,
complete Worksheets 1, 2, 3, 4, 5, 6 and
7 in the Radian Guaranty Workbook.
Also make sure to completely fill in
page 5, which asks for your personal
information. (This also needs to be
returned with your worksheets to
Radian Guaranty.)
3. If you have questions with any of the
worksheets, call Radian Guaranty’s
Homeownership Counseling Center at
877-723-4261
4. Once you have completed worksheets
1–7 and the basic information sheet,
mail them in the provided postage-paid
envelope to Radian Guaranty, or fax
the worksheets and the basic information
sheet to 1-800-564-7284 to expedite
the process.
7
Study Guide | Instructions
If you mail the information to Radian
Guaranty, be sure to keep a copy of your
basic information sheet and worksheets
for your own records. If you don’t have
access to a copier, ask your loan officer
to make a set for you. You can also
deliver your basic information sheet and
worksheets 1–7 to your loan officer for
return to Radian Guaranty.
5. Radian Guaranty will review your
worksheets, and if you have completed
them successfully, you will receive a
telephone call from one of Radian
Guaranty’s counselors, reviewing the
materials to make sure you don’t have
any questions. After that telecounseling
session (5–15 minutes) is completed,
you will have completed the program.
6. If, after Radian Guaranty has reviewed
your worksheets, it is determined that
you have not successfully completed all
of the worksheets, you will receive a
phone call from a Radian Guaranty
counselor. The counselor will work
with you over the phone to make sure
you understand the problem area(s).
Once the counselor is satisfied that
you understand the material, you have
completed the program.
Radian
Table of Contents
Homeownership
Study Guide
About Radian Guaranty ..........................3
Welcome................................................4
Formats ................................................5
Instructions ..........................................7
Module I.
Thinking About Buying a House? ......13
Pros and Cons
Owning vs. Renting ..............................14
On the Positive Side ............................14
A Home Can Be a Good Investment....14
Tax Benefits ......................................14
Accomplishment ................................14
Fixed Costs ........................................14
On the Negative Side ............................15
No Guarantees ..................................15
Less Mobility ....................................15
It Can Be Expensive ..........................15
Financial Hardship ..........................15
Module II.
Your Legal Rights as a Homebuyer ....17
You Have Legal Rights
Fair Treatment ......................................18
Down Payment ..................................22
Closing Costs ....................................22
Reserves ............................................22
Module IV.
Buying a House: The Sales Process......23
Home Shopping Tips
Getting the Right Price in
the Right Neighborhood ....................24
Some House Shopping
Suggestions ....................................24
Ask the Right Questions ....................25
Selecting a Real Estate Agent ................25
Going It Alone ......................................26
Using a Real Estate Broker....................26
Prequalifying ........................................27
Serious House Shopping ......................27
Using a Checklist ..............................27
Mum’s the Word ................................27
Be Open-minded................................28
Narrowing the Field ..........................28
Making an Offer ..................................28
What You Can Afford ........................28
Financing Terms ................................29
Negotiating the Purchase ....................29
Module III.
Turning a House Into a Home:
The Bottom Line..............................19
Financial Factors
The Early Financial Factors
in Buying a Home ..............................20
How Much Can You Afford? ..................20
Mortgage: You (Probably) Can’t
Get a Home Without One! ..................21
Primary Types of Mortgages ............21
Who Can Provide a Mortgage? ........21
Major Money Factors ............................21
Cash and Other Assets ......................21
Gross Income ....................................22
Debts..................................................22
9
Study Guide | Table of Contents
How Much to Offer?..........................29
Market Value of the House ................29
Condition of the House ....................29
Negotiating the Final
Purchase Price................................29
Submitting the Offer ..........................30
Earnest Money ..................................30
What the Offer Includes ....................30
Terms of the Contract ..........................30
Financing Contingency ....................31
Inspection Contingencies ..................31
Professional Home Inspections..........31
Termites ............................................31
Radon ................................................31
Lead Paint ........................................31
Radian
Homeownership
Study Guide
Asbestos ............................................32
Hazardous Waste Sites ......................32
Appraisal Contingency ......................32
Other Provisions ..................................32
Repair Work ......................................32
Personal Property..............................32
Closing and Occupancy Date ..........32
Clear Title..........................................33
The Home Inspection............................33
Finding a Qualified Inspector ..........33
What the Inspection Includes ............33
Using the Inspection Report..............34
Module V.
Shopping for a Mortgage ................35
Mortgage Basics
Be Aware of Abusive Lending Practices....36
Mortgages and “Truth-In-Lending”........36
A Good-Faith Estimate......................37
Disclosure of Settlement Costs..........37
Other Key Federal Laws ........................37
Module VI.
Key Factors in Getting a Mortgage......45
What Lenders Want to Know
Qualifying Ratios ..................................46
Ratio Differences ..............................46
Housing Expense Ratio ....................46
Total Debts Ratio ..............................46
Estimating Your Allowable Ratio ......47
Equal Credit Opportunity Act ..........37
Fair Credit Reporting Act..................37
Credit History ......................................47
Factors in Choosing a
Mortgage Lender ................................37
Mortgage Basics ..................................38
Credit Problems ................................47
Building a Record of Credit ..............48
Your Credit Report ............................48
Down Payment ..................................38
Points ................................................38
Interest: Fixed-Rate and
Adjustable-Rate Mortgages ............38
Annual Percentage Rate (APR)..........40
Principal and Interest (P&I) ............40
Amortization ......................................41
Buy-downs ........................................41
Other Things a Lender Needs to Know....50
Mortgage Insurance ..............................41
Private Mortgage Insurance..............41
Government Insured/
Guaranteed Loans ..........................42
State and Local Loan Programs ........42
Escrow ..............................................42
Options................................................43
Assumable Mortgage ........................43
10
Lease-Purchase ................................43
Graduated Payment
Mortgage (GPM) ............................43
Balloon Payment Option ..................43
Prepayment Penalty Clause ..............43
Term ..................................................43
Ownership ........................................44
Tenancy by the Entirety ....................44
Joint Tenancy with Right
of Survivorship................................44
Tenancy in Common ..........................44
Lien....................................................44
Foreclosure ........................................44
Study Guide | Table of Contents
Source of Down Payment ..................50
Employment Record ..........................50
Rental Payment History ....................50
Module VII.
The Mortgage Application Process ......51
Applying For a Loan
Loan Interview......................................52
Required Documentation ..................52
Qualification ....................................52
The Loan Application ............................53
The “Four C’s” of Credit ..................53
Additional Considerations ....................53
Lock-In vs. Float ..............................54
Estimate of Closing Costs ................54
Radian
Homeownership
Study Guide
How to Quicken the
Approval Process ............................54
Loan Processing ..................................54
Property Appraisal ............................55
Credit Report ....................................55
Verification ........................................55
Approval by Private Mortgage Insurer......55
Commitment Letter............................55
Module VIII.
The Closing Process ........................57
The Big Day Has Arrived
Preparing For Your Big Day....................58
Setting the Closing Day ....................58
Selecting a Settlement Agent ............58
Title Insurance ..................................59
Survey ................................................59
Termite Certificate ............................59
Homeowner’s Insurance ....................59
Walk-Through ....................................60
Final Estimate of Closing Costs........60
Closing: The Big Day! ......................60
Buried in Paper: Explanation, Signing
of Closing Documents ........................61
Affidavits ..........................................61
The Deed ..........................................61
HUD-1 Settlement Statement ............61
Truth-In-Lending Statement ..............61
The Mortgage Note............................61
The Mortgage ....................................61
Title Charges ....................................63
Recording and Transfer Fees ............63
Real Estate Taxes ..............................63
Additional Charges ..........................63
Adjustments ......................................63
It All Comes Together ............................63
Getting the Keys ................................64
Understanding Your Obligations
As a Borrower ................................64
Understanding the Terms of
Your Loan........................................64
Payment Terms ..................................64
Transfer of Servicing ........................64
Module IX.
Maintaining Your Home and
Building Its Value............................65
Key Considerations
Maintenance and Repairs ....................66
Seasonal Inspection Checklist ............66
Cost-effective Energy
Conservation Measures ..................66
Do-It-Yourself Repairs ......................66
Major Repairs/Home Improvements ......67
Hiring a Contractor ..........................67
Financing Home Improvements ........67
Other Considerations............................67
Home Security ..................................67
Fire Protection ..................................68
Emergency Phone Numbers ..............68
Who Gets What at Closing ....................62
Loan Origination Fee........................62
Loan Discount Points ........................62
Appraisal Fee ....................................62
Credit Report Fee ..............................62
Assumption Fee ................................62
Advance Payments ............................62
Interest ..............................................62
Private Mortgage Insurance Premium....63
Homeowner’s Insurance Premium......63
Escrow Accounts or Reserves............63
11
Study Guide | Table of Contents
Module X.
Budgeting ......................................69
Budgets Make $ense!
Ten Basic Rules of
Money Management ..........................70
Two Basic Ways to Budget ....................71
The “Envelope” Method....................71
The “Yellow Sheet” Method ..............73
Budgeting is Very Important! ................73
Final Budgeting Tips ........................74
Radian
Homeownership
Study Guide
Module XI.
Handling Financial Emergencies ......75
Financial Problems: What to Do
Early Warning Signs..............................76
Help Is All Around ................................76
Credit Control ......................................77
The Three C’s: Communication,
Cooperation, and Commitment ......77
Other Major Issues ..............................78
Mortgage Foreclosure ......................78
Possible Unfavorable
Credit Rating ..................................78
Possible Personal Liability ................79
Wolves in Sheep’s Clothing................79
Other Types of Credit Problems ............80
How to Contact Creditors ................81
Creditors to Pay First........................82
Additional Information for
Dealing with Various Creditors............82
Utility Companies..............................82
Car and Other Vehicle Payments ......82
Credit Card Bills ..............................83
Insurance Premium Payments ..........83
Your Rights Under the Fair Debt
Collection Practices Act ......................83
Wrap-Up ..............................................84
Glossary
Real Estate Terms ................................86
12
Study Guide | Table of Contents
Appendix A.
Charts
1. Calculate Your Mortgage Payment ....94
2. Are Your Debts Excessive? ..............95
3. How Large a Mortgage
Do You Qualify For? ........................96
4. A Sample Amortization Schedule......97
5. Monthly Expenses and Debt ..........98
6. Home Mortgage Qualifying:
Single Borrower..............................99
7. Home Mortgage Qualifying:
Joint Borrowers ............................100
8. Beyond the Original Term ..............101
Appendix B.
Data Sheets
1. About You ....................................104
2. People You’ll Meet ........................105
3. Rent or Buy? ................................106
4. Your Housing Priorities ..................107
5. The Buyer’s Checklist ....................108
6. Mortgage Terms Checklist..............109
7. Pre-application Form......................111
8. Settlement Costs............................113
9. Seasonal Home Maintenance
Schedule ......................................114
10. Borrower Acknowledgment
and Authorization..........................116
11. A Sample Letter to Creditors ..........117
Radian
Module I
Homeownership
Study Guide
Thinking About Buying a House?
Module Goal
This first module considers the most basic question in the homebuying process:
Is buying a home the right choice for You? Once you’ve answered that question with
a firm “Yes,” we can more into the most important pieces of information you’ll need
to turn your dream into reality, to turn a “house into your home.”
13
Study Guide | Module I
Radian
Pros and Cons
Homeownership
Study Guide
Owning vs. Renting
A wise man once said that “Home is
the most popular, and will be the most
enduring, of all earthly establishments.”
When people talk about the American
Dream, owning a home is high on the
list. Yet, many people continue to rent.
Why? Well, maybe they prefer not to deal
with the responsibility of owning a home.
They like it when the worries are someone
else’s. Some people also rent because they
believe they can’t afford to buy a house
(something we’ll get to in later modules).
Let’s look at the pros and cons of buying
a house.
On the positive side…
There are several solid reasons for owning
your own home:
A Home Can Be a Good Investment
By buying a home and paying your
mortgage, you build what is called equity.
In short, that means you generate an
amount of money that in some ways
could act like a savings account. Your
home might appreciate in value, which
means that when you sell it to buy
another house, you can use your “profit”
as down payment on a new home.
Tax Benefits
If you itemize deductions, as a homeowner
you can deduct on your federal income
tax form the amount of mortgage interest
you pay each year. In the first year, you
may be able to deduct any points that
you pay a lender. As it stands, the home
mortgage interest deduction can make
a positive difference in your tax bill,
depending on other factors. You also can
deduct your local real estate taxes.
Accomplishment
Owning and maintaining your home gives
you a sense of accomplishment, which
is good for your self-esteem and your
family’s as well. By owning, you control
your own destiny in many ways, including
the ability to do whatever you choose with
your home. Of course, when you own a
home, you can fix it up any way you like.
You can paint, wallpaper, put in new light
fixtures — whatever. It all belongs to you!
Fixed Costs
Buying a house, especially with a fixedrate mortgage, ensures you’ll know the
cost of housing for the future.
14
Study Guide | Module I
Radian
Homeownership
Study Guide
On the negative side…
Of course, there also can be a downside
to homeownership:
No Guarantees
Even if you work hard and maintain your
home, value can be dependent on the
neighborhood in which you live. That’s
why it’s a good idea to make sure the
house and neighborhood you choose
appear to be headed in a positive
direction. There are no guarantees that
a home will appreciate in value.
Less Mobility
If you move frequently because of your
job, owning a home may be more of a
burden than you want. You can’t just
leave, as you can when you rent
(assuming you can lawfully buy out
of your lease).
It Can Be Expensive
Aside from insurance, utilities and general
maintenance, you might be hit with major
costs such as a new roof or heating
system. And when unexpected costs hit,
it can become a tough situation. As an
owner, you must pay for all repairs,
maintenance and other costs associated
with homeownership. Obviously, that’s
why a family budget, and a savings
strategy, are important.
15
Study Guide | Module I
Financial Hardship
Finally, say you suffer a financial setback
such as the loss of a job. If you own a
home and don’t keep up with your
mortgage payments, the mortgage lender
could foreclose on your mortgage. That
means you could lose your home and
any equity you’ve built up. When you
rent, you can always move to a cheaper
apartment to reduce your expenses.
Once you consider the pros and cons,
only you can honestly decide whether or
not buying a house makes sense for your
specific situation.
Take the time to fill in Data Sheet #3,
“Rent or Buy?” in Appendix B of this
Study Guide to get a better idea of where
you stand on the issue.
Radian
Module II
Homeownership
Study Guide
Your Legal Rights as a Homebuyer
Module Goal
This module details your basic rights as a potential homebuyer in America. Radian
Guaranty believes the information in this chapter is very important, because people
need to know their rights early in the process, before potential problems arise.
17
Study Guide | Module II
Radian
You Have Legal Rights
Homeownership
Study Guide
Fair Treatment
By law, you have a right to be treated
honestly and fairly in the process of
shopping for and buying a home. The
Fair Housing Act prohibits discrimination
in housing because of race, color,
national origin, religion, sex, handicap
or family status; i.e., (including children
under the age of 18 living with parents or
legal custodians; pregnant women and
people securing custody of children
under 18).
Practically speaking, what does the
law mean? It means a person selling or
renting a dwelling cannot take any of the
following actions based on race, color,
national origin, religion, sex, family status
or handicap (disability):
•
•
•
•
•
Refuse to rent or sell housing
Refuse to negotiate for housing
Make housing unavailable
Deny a dwelling
Set different terms, conditions or
privileges for the sale or rental of
a dwelling
• Provide different housing services
or facilities
• Falsely deny that housing is available
for inspection, sale or rental
• For profit, persuade owners to sell or
rent (block busting)
• Deny anyone access to or membership
in a facility or service (such as a
multiple listing service) related to
the sale or rental of housing
18
Study Guide | Module II
You also have a right to fair mortgage
lending. No lender may take any of the
following actions based on race, color,
national origin, religion, sex, family status
or handicap:
• Refuse to make a mortgage loan
• Refuse to provide information
regarding loans
• Impose different terms or conditions
on a loan, such as different interest
rates, points or fees.
• Discriminate in appraising property
• Refuse to purchase a loan
• Set different terms or conditions for
purchasing a loan
In addition, it is illegal for anyone to:
• Threaten, coerce, intimidate or interfere
with anyone exercising a fair housing
right or assisting others who exercise
that right
• Advertise or make any statement that
indicates a limitation or preference
based on race, color, national origin,
religion, sex, family status or handicap
For more information on all of your
housing rights, you can contact the U.S.
Department of Housing and Urban
Development (HUD) and request the
brochure, “Fair Housing: It’s Your Right.”
Check the government listing in your
telephone book for the HUD office
nearest you.
Radian
Module III
Homeownership
Study Guide
Turning a House Into a Home: The Bottom Line
Module Goal
In this module, you’ll learn about the specific information regarding basic income and
assets needed to purchase a home. We’ll discuss things like cash and other assets, monthly
income, expenses, debt obligations, down payment and closing costs. This module begins
to define the fundamental financial aspects of the mortgage/homebuying process.
19
Study Guide | Module III
Radian
Financial Factors
Homeownership
Study Guide
The Early Financial Factors In Buying
a Home
Once you’ve decided to buy a house, the
next issue is how much can you afford. It’s
a smart idea not to become “house poor,”
which means you spend every dime of
monthly income on debts, including your
mortgage, so you can’t even go out to a
movie or dinner on occasion. In the
extreme, you surely want to avoid being
strapped with so much debt that your
mortgage payments become difficult
to meet.
Many first-time homeowners discover that
when they add up their total housing costs
— monthly mortgage payment, moving
costs, early repairs, taxes, insurance,
maintenance, etc. — the overall costs are
more than they paid as renters. If you fit
the bill here, it’s a good idea to set up a
strict budget, if you haven’t done so
already. In fact, a budget is something
most Americans should have, no matter
what their income level. We’ll talk about
budgeting in an upcoming module.
For now, if planning a monthly budget has
never been on your list of things to do,
you probably have no idea where your
money goes. That can be very dangerous
after you purchase a house. So try to get
your spending situation straightened out
before you think about getting a mortgage
or buying a house.
To get an early idea of what you spend
each month, complete Worksheet #1,
“Your Current Monthly Expenses,” in
the Radian Guaranty Workbook.
20
Study Guide | Module III
On that worksheet, some of your
expenses are “fixed,” (car payment,
personal property taxes, day care), while
others are “discretionary” — meaning you
can control those spending habits to a
large extent. For example, you can adjust
how much new clothing you buy, or how
many dinners at your favorite restaurant
you can eliminate. Those controllable
expenses can have a major impact on
how much you have left to pay your fixed
bills — but only if you are willing to
sacrifice for the joys of owning your
own home.
Before you buy, give homeownership a
dry run by immediately starting to save
each month (or from each paycheck)
whatever amount you decide you would
be able to save above your current housing
costs. If you can do this, homeownership
might be right for you.
How Much Can You Afford?
Many experts use a basic, easy formula to
determine how much someone can afford
in a house. The rule says that you multiply
your pre-tax, or gross, yearly income by
two and a half. For example, if you have a
household income of $30,000, you should
be able to buy a house worth $75,000.
Household income means either one
income (if you are a sole breadwinner
or single), or two incomes (if you have a
two-income relationship). Just remember,
if you have two incomes, both of those
wage earners will be scrutinized for
debts and financial issues during the
mortgage process.
Radian
Homeownership
Study Guide
While this “2.5 Rule” is hardly written in
stone, it does give you a “ballpark” figure
of the approximate amount you may be
able to pay for a home. On the other hand,
ultimately your purchasing power depends
on the size of your down payment, and
how much a mortgage lender will agree
to lend you. Again, that “2.5 Rule” is a
guideline, nothing more.
Mortgage: You (Probably) Can’t Get a Home
Without One!
Unless you happen to be a professional
athlete, a stock market genius or a lottery
winner, you must have a mortgage to buy
a house. Simply, a mortgage is a large
amount of money that a homebuyer
borrows to buy a home. How does a
mortgage work?
A mortgage note, also called a promissory
note, contains the promise to repay the
mortgage loan. It spells out the terms
(length of time, interest rate) and the
conditions of your loan (fixed rate vs.
adjustable rate) and how it will be repaid.
It also details your monthly payment,
when it is due, and how many payments
are ahead.
The mortgage itself is a different piece of
paper, which you sign your name to at
closing. The mortgage pledges your home
as security for the loan. Some states call
this the deed of trust instead of a mortgage. But they are basically the same.
Primary Types of Mortgages
There are two primary classifications
of mortgages: Conventional (private
mortgage either with or without private
mortgage insurance) and Government
Insured/Guaranteed (FHA/VA).
21
Study Guide | Module III
Who Can Provide a Mortgage?
• Banks and Savings and Loans
• Mortgage Banks and Mortgage
Companies, which specialize in
mortgage loans
• Credit Unions, which are private
banking organizations for special
groups (usually employee groups)
• The Seller: in some home purchases,
the person selling the home will
provide the financing
Major Money Factors
There are several major areas regarding
money that you need to examine to start
the homebuying process. Basically, these
areas will determine exactly how much
you can afford to pay each month for your
mortgage principal, interest, taxes and
insurance (PITI). You’ve already filled
in your “Current Monthly Expenses”
worksheet, so you have an idea how
much you spend each month. Below are
several areas that need to be determined
before moving into the home and
mortgage shopping phases.
Cash and Other Assets
The money you have in bank accounts,
savings clubs, stocks, bonds, any life
insurance policies with cash value, cash
gifts from family, or any other assets.
This is apart from gross monthly or
annual income that you receive in
paychecks or from other sources.
Now’s the time to fill in Worksheet #2,
“Your Available Cash and Assets,” in the
Radian Guaranty Workbook.
Radian
Homeownership
Study Guide
Gross Income
Aside from cash and other assets, mortgage
lenders need to know your gross income.
This can come from a number of sources,
including monthly pay (before any taxes or
other deductions are taken out), overtime
pay, second jobs, bonuses, tips, commissions, interest or dividend income, pension,
social security benefits or child support.
To determine your (and your co-borrower’s)
gross income, complete Worksheet #3,
“Your Gross Monthly Income,” in the
Radian Guaranty Workbook.
Debts
This is your total debt. It includes all
“fixed” payments, including car payments,
credit card balances or other installment
loans, student loans, alimony/child support
and other types of debt. For a complete
picture of your debt, fill in worksheet #4,
“Your Monthly Debt Payments,” in the
Radian Guaranty Workbook.
Buying a home makes your debt grow
considerably. So, naturally, mortgage
lenders are very concerned about your
other debts, especially those that will take
longer than 10–12 months to pay off.
If you’ve got too much debt for your
income, the lender will adjust the amount
of money they choose to loan you. As a
result, high debt levels or a high debt ratio
severely restrict the chances of obtaining
a mortgage.
Down Payment
A down payment is vital in obtaining a
mortgage. The amount varies, but mortgage
lenders require that a buyer invest a
percentage of the overall purchase price
from their own funds as part of the
down payment.
22
Study Guide | Module III
Why? Because a lender feels more
confident lending you money if they
know you’ve invested some of your own
cash. That way, you are more likely to
try and save your house if you have
financial problems later. We’ll discuss
down payments in more detail in
Module V.
Closing Costs
Your down payment is just one of the
up-front fees you will pay during the
homebuying process. Homebuyers also
usually pay other closing costs, which on
average are between 4 and 10% of the
mortgage amount. Geography plays a
major role in what closing costs will be,
as rural areas tend to have lower closing
costs than urban areas.
Example: You want to buy a house that costs
$50,000 with a 5% down payment. That
means you will need a mortgage of
$47,500. Based on a 4 to 10% range, closing
costs would amount to somewhere between
$1,900 and $4,750 — quite a difference!
(In Module VIII, we will feature a much
more detailed discussion of closing costs.)
Reserves
Aside from closing costs, mortgage
lenders also usually require homebuyers
to have two months of their mortgage
payments, taxes and insurance in reserve
after closing. This is sometimes called
PITI (principal, interest, taxes and
insurance) for short. Some lenders don’t
require the two months at all, or at least
reduce it to one month.
Radian
Module IV
Homeownership
Study Guide
Buying a House: The Sales Process
Module Goal
This module’s goal is to provide some of the basic information you’ll need before and
during the time when you do any serious shopping for a house. When you complete this
module, you’ll know more about choosing a real estate professional and getting the most
out of that relationship, you’ll understand what it means to prequalify for a mortgage,
and you’ll be better prepared to make an offer for a house. You’ll also know more about
the sales contract.
23
Study Guide | Module IV
Radian
Home Shopping Tips
Homeownership
Study Guide
Getting the Right Price in the Right
Neighborhood
Most people use the services of a real
estate agent or broker when shopping for
a home, especially their first home. It’s a
good idea, because real estate brokers can
quickly locate homes in the neighborhoods
and price ranges that are right for you.
But at this early stage in the process, you
can do a little tire kicking on your own.
Once you’ve determined that you’re
shopping, you can attend “open houses”
to see what’s available.
Some House Shopping Suggestions
Before anything else, determine exactly
what type of home you want with a realistic
attitude. (We all want a palace, but we all
settle for less.) How many bedrooms?
Do you need a yard for that pet? How
about gas heat or electric? Is a basement
a requirement? What about a garage or
driveway? All these and much more go
into deciding on the house you want.
To get a better idea, use Data Sheet #4,
“Your Housing Priorities,” in Appendix
B of this Study Guide.
Key things like playgrounds, people
biking or jogging, children playing —
are all good indicators of the health of
a neighborhood. Plus, you may not want
a neighborhood with lots of kids. That’s
a personal preference.
Now, it’s time to check out the newspaper,
jump in the car, and get started. Why the
car? Well, by cruising through neighborhoods, you can get a good sense of
whether you might want to live there.
The newspaper, usually the Sunday paper,
will list open houses. Here’s the chance to
do some real window shopping. Open
houses are a great way to see what you
can get in your area for the money. Like
most buyers, you should check out a
variety of homes in different neighborhoods, especially in all price ranges.
24
Study Guide | Module IV
Are the homes and lawns nicely cared for,
or is there trash or broken glass strewn
around the block? If the entire block is
cleaned and spiffy looking, it’s a good bet
the people who live there are proud of
their neighborhood.
If some of the homes seem great, but
others look a mess, find out if the
neighborhood is getting better or worse.
Of course, you want a home in a
neighborhood that’s improving.
If you see “Sale by Owner” signs, you
could get a bargain. Or you could get an
overpriced home. Tread carefully, but
don’t dismiss this type of sale out of hand.
Naturally, shopping centers, access to
local mass transit, and recreation centers
like a community recreation center or
other gym are important. The critical issue
on transportation is how easy is it to get
to work, shopping or school? What you
don’t want to do is buy a house and then
find out that the nearest grocery store is
45 minutes away.
Radian
Homeownership
Study Guide
Ask the Right Questions
Buying a house is more than just purchasing
a piece of real estate. You’re also buying a
neighborhood. To get the home you want,
you have to balance the physical house
with the people who live around you.
Are there many houses for sale in the
neighborhoods you check out? That
could indicate a problem. Are public
transportation lines easy to reach? What
about shopping centers or at least a
corner store? And do the public schools
in the neighborhood have a good
reputation? These are some of the
questions you have to ask yourself, and
others. Talk to neighbors if you happen
to see a house you like when shopping.
Bottom line, do your homework, because
once you buy your house, it’s too late
if you find there are problems with the
neighborhood.
Selecting a Real Estate Agent
When you have an idea of what you want
in a house, you will probably want to
contact a real estate professional. Real
estate agents or brokers can help the
homebuyer navigate the complexities
of buying a home.
Most agencies have access to the Multiple
Listing Service (MLS), a computerized
way to generate a list of houses that match
your requirements. Real estate agents are
required to use reasonable skill and care
in performing their duties. They also
must deal with clients honestly, and fairly
disclose all facts which are known to the
agent (or may be reasonably discovered)
that affect the value or desirability of
the property.
25
Study Guide | Module IV
A Good Real Estate Agent Can:
• Help you define and clarify your priorities
• Determine how much house you can afford
• Facilitate the negotiation process of
offers and counteroffers
• Advise you about local lending
institutions and help you estimate
your loan qualifications
• Facilitate financial/legal aspects of closing
Real estate professionals use several titles.
Real Estate Brokers are licensed to carry
out real estate transactions, and receive a
fee for their work. Real estate sales agents
or professionals are also trained and licensed
to conduct real estate transactions. They
must operate under the supervision of a
Broker. Their training is not as advanced
as that of a Broker.
Other Considerations
It’s important to understand your
relationship with the real estate agent.
Traditionally, the seller hired the real
estate professional. The seller then paid
a commission to the agent from the
proceeds of the sale. The buyers never
paid the agent. Of course, the agent
worked only for the seller. In the last
few years, that has changed a bit.
Real estate agents now can work for the
seller, the buyer or both. The relationship
is outlined in the following general terms:
A seller’s agent is loyal to the seller and
pledges confidentiality to the seller only.
A buyer’s agent is loyal to the buyer and
pledges confidentiality to the buyer only.
Radian
Homeownership
Study Guide
Some agents are “dual” agents. That
means they can work for both the seller
and the buyer. In this case, it takes the
informed written consent of both the
buyer and seller. Also, the “dual” agent
can’t provide the full range of duties
to both the seller and the buyer, and
can’t reveal to the seller and buyer any
confidential information obtained from
either party.
Going It Alone
Of course, you can buy a home without
a real estate professional. But be warned,
it’s like driving through a major city
without a map or directions. It’s possible,
but it could result in costly and timewasting detours. And you do so at
your own risk.
Often, a sale has a single real estate
agent. The agent listing the house, and
who represents the seller, shows the
house to you. You buy it without
involving another agent. Other times,
two real estate agents are involved —
the listing agent and the agent with whom
you are working with to find a house.
Using a Real Estate Broker
Real estate brokers can help you find the
right home, but only if you are prepared
to use their services wisely.
26
• Let the brokers know what you want in
a house. Tell them what you can afford.
Let them know what’s important to you
in a house and neighborhood. Be as
clear as possible to save time.
• Get all the information. Ask to see
the listing printout. Make copies of
the information for the houses in your
price range. Visit as many houses as
necessary.
• When visiting a house, ask questions.
Honest brokers will tell you about the
faults of a house as well as its good
points, but you’ll have to ask the right
questions. If the broker doesn’t know
the answers, make sure he or she gets
the information for you. Don’t overlook
important details the broker may have
forgotten or omitted to mention to you.
Check the broker’s information with the
owner of the house (if possible).
• Don’t be pressured into buying the first
house you see. Watch out for statements
like, “You’d better make an offer today,
another family wants this house.” It may
be true, but resist. There are always
other houses.
You don’t pay the broker anything for
showing you houses.
• Check the broker’s reputation.
Is he or she licensed to sell real estate?
(Ask to see the license.) Is he or she
a member of a reputable professional
organization?
Remember, the broker typically gets paid
a percentage of the sales price. It is his or
her job to negotiate for the highest price
that you will pay and the lowest price the
owner will accept.
• Visit several brokers to find out what’s
available in your price range.
The broker works for himself and the seller
(not for you). That is, unless you have
hired a buyer’s broker.
Study Guide | Module IV
Radian
Homeownership
Study Guide
Prequalifying
Once you have a pretty good idea of
what you want in a home, you will need
to determine how much you can afford
to spend. Prequalifying for a mortgage
before you begin to shop can save you time
and help guard against disappointment.
Most reputable lenders will assist you in
the prequalification process without any
obligation, and most can provide this
service over the telephone. That means
you would have to provide, to the best of
your ability, all your accurate financial
information so he or she can work up a
“ballpark” figure on the most you’ll be
able to mortgage in the purchase of
your home.
It’s important to know that when it comes
to mortgages, there are no guarantees. But
with prequalifying, you can get close to a
mortgage amount short of a commitment
by a lender.
We’ve included Worksheet #5A and #5B,
“Prequalifying,” in the Radian Guaranty
Workbook as a guide through this process.
We’ve also included a monthly mortgage
payment table (Appendix A, Chart #1), to
use in conjunction with Worksheets #5.
Serious House Shopping
Now that you have a good idea of what
you want in a home and what you can
afford to pay, you are ready to do some
serious shopping. At the end of a day
of house hunting, it can be tough to
remember what you saw where. To
avoid that nightmare, create a system
for viewing and evaluating houses:
27
Study Guide | Module IV
• Write down what you feel is important,
and take along a camera for photos of
the houses you really like.
• Use broker-provided specification
sheets which give details about each
house. For example, total square feet,
heating/cooling system, area schools,
number of bedrooms, taxes, how many
rooms overall, and other key features.
Using a Checklist
You can transfer your notes and broker
sheet data for homes that you are seriously
considering to Data Sheet #5, “The Buyer’s
Checklist,” in Appendix B of this Study
Guide. We have included this datasheet
for you to use to keep track of some
favorite houses. Make several copies of
this checklist, which was prepared by the
National Association of Realtors.
Mum’s the Word
House hunting is like playing poker.
If you tip your hand, you’ll be at a
competitive disadvantage. A critical
mistake is telling the broker/agent how
excited you are about the house and how
high you are willing to go to get it. Just be
businesslike, and take notes and photos.
By all means, contain that excitement
(at least until you get home).
Radian
Homeownership
Study Guide
Be Open-minded
Some houses are good deals, despite
a potential problem. The challenge is
to find a way around that problem.
Finding the “perfect” home typically
only happens in the movies. Go back to
your checklist when narrowing your
decision. And, most of all, choose a
home that best fits your needs.
Narrowing the Field
Plan to spend enough time looking at
houses so that you have a good idea of the
market. After you’ve looked at a number
of houses, you will begin to get a feel for
what is available in various neighborhoods
and which areas you prefer. The more
houses you look at, the more knowledgeable you will become, and the better you
will be able to tell whether the asking
price is high or low.
Making an Offer
Okay, you’ve found the home you want.
After using the “2.5 Rule” (Module III)
and the prequalifying worksheet (or being
prequalified by a real estate broker or
mortgage lender), you’re pretty sure you
can afford it. Now, it’s time to make an
offer to buy the house.
In deciding how much to offer, try to
determine how anxious the owners are to
sell. For example, if the sellers already are
in the process of buying another home,
and it is dependent on the sale of their
current house, you may be in a good
bargaining position. Find out how much
the seller paid for the house originally,
how long it’s been for sale, and how many
times, if at all, the price has been cut.
Also, find out how much equity the
seller has in the property.
What You Can Afford
When you find a house that you like that
is in your price range, you will still want
to proceed carefully and calmly. No
matter how “perfect” the house may seem,
don’t make a decision without going back
at least once to take a closer, more critical
look at it. Avoid the temptation to jump
into a deal for fear that another buyer
will grab it while you’re investigating.
Certainly, you should never sign any
papers or put any money down on a
house without careful consideration.
28
Study Guide | Module IV
Before making an offer on a house, you
need to know what your monthly housing
costs would be should you get the house
at the price you plan to offer. This requires
knowing the annual cost of utilities,
local taxes, homeowner’s insurance,
condominium fee (if applicable), and
any special assessments, as well as the
current rate for whatever mortgage loan
program you are considering. Also find
out whether the tax assessment on the
house will increase based on the sales
price of the house. Make sure that the
amount of your down payment is adequate
and that you will have enough to cover
the closing costs as well.
Note: Do not be tempted to offer more
than you are sure you can afford.
Radian
Homeownership
Study Guide
Financing Terms
Condition of the House
Remember that there are two aspects to an
offer: the price and the financing terms.
The terms may actually be more important
to you than the price. For example, if
the seller is willing to offer attractive
financing terms, including paying for the
title search, the home inspection, and
other settlement costs, you may not want
to haggle over the price.
Before making an offer, you should be
fairly confident that you are aware of any
major problem areas in the house. You
should have inspected the house to the
best of your ability, as well as asked the
sales agent and the owner about the
structural issues and condition of the
basic systems. (Both sellers and real
estate sales professionals can be held
liable if they fail to tell the buyer of any
defects they know of in the house.) You
should also have a clear idea of what it
will cost to fix any major problems of
which you are aware.
The real estate sales professional will be
able to advise you as to how much you
should offer. However, the decision is
yours alone. (Remember, the agent more
than likely is acting on behalf of the
seller.) Most prospective buyers do not
offer the full asking price, at least not
initially. For example, you may want to
offer less than the asking price if you
feel that the condition of the house is
less than great.
In fact, if you are buying an existing
house rather than a new house, it might be
a good idea to have the house inspected
by a professional before your purchase
contract is finalized.
Negotiating the Final Purchase Price
Negotiating the Purchase
How Much to Offer?
In deciding how much you should offer,
there are a number of things to consider:
Market Value of the House
How does the asking price compare with
the market value of the house, based on
recent sales of comparable houses in the
area? To find out, ask whether the listing
agent prepared a “comparative market
analysis” (CMA) on the property. This
is a written report that reviews prices
of comparable homes that are currently
on the market, that are currently under
contract, and that have sold in the past
several months.
29
Study Guide | Module IV
Okay, so you’ve made your offer. Now, the
seller may respond to your offer in one of
three ways: accept it, reject it (in which
case you must decide whether to make
another offer); or make a counteroffer.
Always take your time in considering a
counteroffer.
Typically the real estate sales professional
will present your offer to the seller and
will relay the seller’s response back to
you. Negotiating the final purchase price
is usually accomplished in much the same
way. You may be expected to put a larger
deposit down (again to be held in escrow)
once the seller has signed your offer to
buy. You need not, however, tie up the
entire amount of your down payment at
this point.
Radian
Homeownership
Study Guide
Submitting the Offer
You make an offer by submitting to the
real estate sales professional a signed
offer to purchase the house for a given
price under specified terms. This
document is called a “purchase or sales
agreement.” You may want to explain in
detail to the agent how you arrived at
your price; for example, it may reflect
certain flaws that you noted during your
inspection of the house. The agent is
required by law to deliver your offer
to the seller.
The Offer to Purchase Should Include at Least
the Following:
• The property’s address
• The amount of earnest money
accompanying the offer
• The price you are offering
• The size of your down payment and
how the remainder of the purchase will
be financed (including the maximum
interest rate you are willing to pay)
Earnest Money
Your deposit, known as “earnest money,”
a “good faith” payment, “hand money” or
any number of terms depending on the
location, is an offer to show the seller that
you are serious. There is no set amount
required; what is customary differs by
location. Don’t make the check out to
the seller. It should be made out to the
brokerage company, the real estate sales
professional or the escrow company —
again, depending on the location. Earnest
money should be deposited in an escrow
account to be returned to you if the seller
does not accept the offer within a set
number of days. You usually forfeit the
money if the contract is accepted by the
seller and then you back out of the deal
for a reason not outlined in the contract.
What the Offer Includes
If the seller agrees by signing it, your
purchase offer becomes the basis for the
legally binding sales contract. This is why
it is so important that you read the offer
carefully and make sure you understand
everything in it before you sign it.
30
Study Guide | Module IV
• Any items of personal property the
owner has said will stay with the house
or that you want to be included
• Proposed closing and occupancy dates
• Length of time the offer is valid (usually
three to five days)
• The stipulation that your obligation to
buy is dependent on the negotiation of
a satisfactory contract
Terms of the Contract
Once the seller has signed the agreement,
the detailed negotiations that will
produce the formal sales contract begin.
Remember that your offer to buy the
property is dependent on the negotiation
of a satisfactory contract. In addition to
the basic terms of the sale that were
already included in your offer to buy,
certain “contingencies” may be included
in the contract. These are conditions that
must be met for the contract to take effect.
Some contingencies and other provisions
that are commonly written in a contract
are summarized here.
Radian
Homeownership
Study Guide
Financing Contingency
Termites
The contract should state the purchase
price, the amount of down payment, the
total loan amount, maximum interest rate,
and the exact financing terms you will
accept — as well as how long you have
to find the agreed-upon financing. It also
will state the amount of deposit being
held in escrow, and which closing costs
are to be paid by the buyer and which are
to be paid by the seller.
It is standard practice to require the
seller to pay for a termite inspection
and to provide a written certification
stating that the property is free of termite
infestation and that any damage from
past infestation has been repaired.
This contingency makes clear that if
you do not get the money you need at the
terms you have specified, the deal is off
and your deposit will be refunded. The
seller in turn may insist that a clause
be included requiring you to make a
“good-faith effort” to obtain the
mortgage.
Inspection Contingencies
As we noted earlier, unless you are buying
a new home, it is essential to have the
house inspected by a professional. You
may also want to specify that certain
inspections are completed before the sales
contract takes effect.
Professional Home Inspections
Your contract should be contingent on
a satisfactory report by a professional
home inspector. If any major problems
with the structure or systems of the
house are uncovered, you have the right
not to go ahead with the purchase or to
renegotiate the terms of the purchase.
31
Study Guide | Module IV
Radon
Many homebuyers today insist that the
house be tested for the presence of radon.
Radon is a naturally occurring, odorless
gas that can seep into houses and cause
major health problems. For more
information about radon in your area,
you can call your state or county public
health department.
Lead Paint
The presence of lead paint should be
investigated, because even low levels
of lead exposure can have very serious
health consequences, especially for
infants, young children and pregnant
women. Children do not have to eat lead
paint chips to be poisoned. Contaminated
dust from children’s hands and toys can
pass into their mouths.
Buyers must be notified of any known
lead-based paint hazards by sellers of
any home built before 1978. Buyers must
also receive a Lead Hazard Information
Pamphlet developed by the federal
government.
If the house was built before 1950, you
can be almost certain that lead-based paint
was used. For houses built after 1950, but
before 1978, there is a fair chance that
lead-based paint is present.
Radian
Homeownership
Study Guide
Renovation projects on older homes can
disturb lead paint and be very dangerous.
Try to find an inspector who has taken
Environmental Protection Agency (EPA)
training courses to inspect for lead-based
paint. For further information, available
in both English and Spanish, contact
the federal information hotline:
800 LEADFYI.
Asbestos
According to the EPA, many homes
constructed during the past 20 years
probably do not contain asbestos products.
You may hire a qualified professional who
is trained and experienced in working
with asbestos to inspect the home. A
professional knows where to look for
asbestos, how to take samples properly,
and what corrective actions will be
most effective.
Appraisal Contingency
When you apply for a loan, the lender
will require a professional appraisal of
the market value of the property. The
appraised value of the house determines
how large a mortgage the lender will be
willing to give you. If the appraised value
is lower than the agreed-upon purchase
price, this contingency gives you the right
to withdraw your offer.
Other Provisions
You also may want to include certain other
provisions in the terms of the contract so
that nothing is left to chance.
Repair Work
You may want to stipulate that the
sellers are responsible for ensuring that
the plumbing, heating, mechanical and
electrical systems are in working order at
closing. Without this clause, you agree to
accept the house “as is.” You also should
provide for a walk-through inspection of
the house on the day of settlement or
several days before to determine if all
conditions in the contract have been
satisfied.
Personal Property
Hazardous Waste Sites
Generally, testing for hazardous waste
involves skills and technology not
available to the average homeowner
or home inspector. The EPA has
identified more than 30,000 potentially
contaminated waste sites nationwide.
Contact the nearest regional office of the
EPA for information of the location and
status of local hazardous waste sites.
32
Study Guide | Module IV
Do not rely on the seller’s verbal agreement
that specific fixtures, appliances and personal property are included in the sale. To
avoid any misunderstandings or surprises,
list in the contract everything that the
owner is supposed to leave behind.
Closing and Occupancy Date
You may also want to include a provision
that the sellers must pay you rent on a
daily basis in the event they haven’t
moved out by the agreed-upon date
(usually the closing date).
Radian
Homeownership
Study Guide
Clear Title
What the Inspection Includes
The contract should state that the
purchase is subject to you receiving
clear title to the property. The title
search and title insurance are outlined
in Module VIII.
The home inspection is not the same as
an appraisal. The inspection is meant to
evaluate the structural and mechanical
condition (not the market value) of the
property. The inspector’s findings will
be based on observable, unconcealed
structural conditions. The inspector
will not normally guarantee or warrant
the condition of the home, or determine
whether a house is in compliance with
local building codes.
When you and the sellers have agreed on
all the provisions of the contract, you are
ready to shop for the loan you need to
make the purchase. The lender will want
to see a copy of the signed contract when
you apply for the mortgage. Shopping for
a mortgage will be covered in Module V.
The Home Inspection
As we noted previously, one of the
contingencies in your contract should
be that you obtain a satisfactory home
inspection report. You will, of course,
have examined the house to the best of
your ability before making an offer on
it. But before you go through with the
purchase, you will want an expert to take
a critical look at the property. Although
you will pay for this inspection, it is well
worth the cost in peace of mind.
Finding a Qualified Inspector
Try to get a referral from a satisfied
customer. You can always look in the
“Yellow Pages” under “Building
Inspection Service.” Ask for and check
references of three recent clients. The
American Society of Home Inspectors has
set standards for home inspection services,
so finding someone who is a member of
this group may be useful. You can expect
to pay $100 to $200 or more for an
inspection, including a written report (not
just a checklist) within one or two days.
33
Study Guide | Module IV
It is strongly recommended that you
go with the inspector on his or her
rounds, which normally takes around
two hours. You also can pick up valuable
maintenance tips along the way, get a
chance to ask questions, and learn more
about the extent of possible problems.
You will also be able to better understand
the written report.
Every inspection should include an
evaluation of at least the following:
•
•
•
•
•
•
•
•
•
Foundations, doors and windows
Roof
Plumbing and electrical systems
Heating and air conditioning systems
Ceilings, walls and floors
Insulation
Ventilation
Septic tanks, wells or sewer lines
Common areas (condominiums or
cooperatives)
Radian
Homeownership
Study Guide
Using the Inspection Report
The inspector’s report will not include a
recommendation as to whether or not you
should buy the house, nor will it evaluate
the purchase price. If major flaws are
uncovered, it should give you some idea
of what it will cost to repair or replace the
problem. A reputable home inspector will
never offer to perform needed repairs, and
should not refer you to a contractor to
perform such repairs.
An Inspection Report may serve the
following purposes:
• to identify problems before you
purchase a home to prevent unpleasant
surprises later
• to enable you to get out of a purchase
agreement (and get your deposit
refunded) if serious problems
are identified
• to help you negotiate an adjustment in
the purchase price if you want to buy
the house in spite of the problems
• to get the seller to agree to pay for
needed repairs, either before the sale
or after the sale using escrowed funds
• to make you feel confident about going
ahead with the purchase
34
Study Guide | Module IV
Radian
Module V
Homeownership
Study Guide
Shopping for a Mortgage
Module Goal
Now that you’ve saved for your down payment, found the house of your dreams (or at
least one you are happy with), and made an offer that’s been accepted and have a signed
contract, it’s time to go out and get a mortgage. This module’s goal is to detail the
important aspects of shopping for a mortgage loan. We’ll cover who makes mortgage
loans, different types of mortgages, different ways to calculate interest rates, and other
important mortgage-related issues.
35
Study Guide | Module V
Radian
Mortgage Basics
Homeownership
Study Guide
Be Aware of Abusive Lending Practices
A significant problem in today’s mortgage
market is the steering of potential
homebuyers and refinancing homeowners
into what are known as “B and C” loan
programs. These programs target the
elderly, minorities and borrowers with
significant credit issues. They are typically
very costly when compared to traditional
loan products. Abusive lending practices
range from equity stripping and loan
flipping to hiding loan terms and packing
a loan with extra charges. Be aware of
these practices to avoid losing your home.
If you choose a B or C loan program, you
may be required to sign a Homeownership
and Equity Protection Act of 1994 (HOEPA)
disclosure. The disclosure advises:
1) “You are not required to complete this
agreement merely because you have
received these disclosures or signed
a loan application.”
2) “If you obtain this loan, the lender
will have a mortgage on your home.
You could lose your home and any
money you have put into it, if you
do not meet your obligations under
the loan.”
B and C programs charge higher fees,
and have much higher interest rates
than traditional loan programs. Some
borrowers might avoid these programs
altogether if they remedy their credit
issues through appropriate credit
counseling, but they are not always
given that opportunity.
36
Study Guide | Module V
If you have prior credit issues when
you meet with a mortgage lender, you
should be prepared to discuss several
topics, including:
• Credit repair and counseling programs
designed to remedy outstanding
credit issues
• B and C loan programs
• Comparison of fees for B and C loan
programs with traditional loan programs
• Comparison of interest rates and
corresponding annual percentage rates
(APRs) charged for B and C loan
programs and traditional loan programs
• Availability of special programs designed
to reward timely mortgage payments
Once you have discussed these issues with
a mortgage lender, you will be better able to
make the decision as to which loan program
works for you. If you are unsatisfied with
the lender’s answers, find another lender.
For more information, please call Radian’s
Homeownership Counseling Center, at
1-800-281-4856.
Mortgages and “Truth-In-Lending”
When anyone applies for a mortgage loan,
the lender is required to provide a “Good
Faith Estimate of the Costs of Settlement
Services” and a copy of “A HUD Guide
for Homebuyers Settlement Costs.”
Those two documents fall under the
“Truth-In-Lending” laws.
Radian
Homeownership
Study Guide
A Good-Faith Estimate
This is a lender’s best estimate of the
settlement (or closing) costs of your loan,
based on the best information available to
the lender when you apply for the loan.
By law, the form used for this estimate
must be clear, and the estimates must bear
a reasonable relationship to the costs you
will likely have to pay at closing.
The Truth-In-Lending Statement Also Shows
These Items:
•
•
•
•
Finance charges
Payment schedule
Late payment charges
Pre-payment penalty (if any)
Other Key Federal Laws that Apply to the
Mortgage Application Process Include:
Disclosure of Settlement Costs
One business day before closing, buyers
have the right to inspect the settlement
form (the HUD-1 Settlement Statement).
The settlement form itemizes all the
services provided and fees charged in
connection with your loan. Even if not all
the costs are available the day before the
closing, the closing agent is required to
show a buyer, upon request, what costs are
available. The HUD Settlement Statement
must be delivered or mailed to the buyer
and seller at or before the closing.
Usually, within three days of receiving
a buyer’s loan application, the lender
must give you or mail to you a Truth-InLending Statement that shows the annual
percentage rate (APR). The APR reflects
the cost of your mortgage loan as a
yearly rate.
This rate may be higher than the rate
stated in your mortgage or deed of trust
note because the APR includes (in
addition to interest and loan discount
points) fees and other credit costs. The
APR is intended to give you an accurate
picture of the true cost of your loan.
(More on APR later in this module).
37
Study Guide | Module V
Equal Credit Opportunity Act (ECOA):
This act prohibits discrimination in lending
based on race, creed, religion, national
origin, sex, marital status, or age. When
a loan application is rejected, the ECOA
requires the lender to send the applicant
a written explanation (within 30 days)
stating the reasons for the rejection of
the application.
Fair Credit Reporting Act
Among other rules regarding credit
reporting, this act guarantees you access
to your credit report. If you are turned
down for credit anywhere, you are entitled
to receive a free copy of your credit history.
(More in a later chapter.)
Factors in Choosing a Mortgage Lender
Choosing the right mortgage lender is a
critical part of the homebuying process.
Key factors in choosing a mortgage
lender include the company’s history and
financial strength, how many up-front
interest “points” they charge, whether
they can provide a loan through a special
government program (FHA or VA), the
types of mortgages they offer (adjustable
rate or fixed), and other factors.
Radian
Homeownership
Study Guide
Once you have chosen a mortgage lender,
then you must apply for a mortgage. The
mortgage application process is the most
grueling, toughest part of buying a home.
Why? Because you must provide timely,
important, accurate documentation so the
lender can determine whether or not to
loan you the money you need. Then you
must wait for what seems like an eternity
until the lender makes its decision.
Once you’ve read through this module,
we’ve included Data Sheet #6 “Mortgage
Terms Checklist,” in Appendix B of this
Study Guide. Use this Data Sheet as you
shop for a mortgage.
Mortgage Basics
Here is a primer on some of the basic
terms you’ll encounter in the mortgage
shopping process:
Down Payment
How much of a mortgage you need
depends on the cost of the house and
how much you’re “putting down.” As we
discussed earlier, mortgage lenders want
to see the borrower invest some of their
cash as part of the process. How much of
a down payment is required, however,
depends on the type of mortgage.
In today’s would, the number one factor
keeping people from buying a first home
is the inability to save a down payment.
In the 1950s and 1960s, most people were
required to make at least a 20 percent
down payment. But today, with certain
government programs, people who qualify
can get loans with down payments as low
as 3 to 5 percent. One of the conditions
that goes with low-down-payment
38
Study Guide | Module V
mortgages is usually the purchase of
private mortgage insurance (PMI).
For example, Fannie Mae’s Fannie97SM
allows a 3% down payment for qualified
buyers. Federal Housing Administration
(FHA) loans require as little as 3% down,
while Veterans Administration (VA) loans
don’t require any down payment at all.
Make sure to check with your lender for
the current requirements in these types
of programs.
Points
Two of the first things you notice about
a loan are interest rate and “points.”
Lenders typically charge points, formally
called a loan origination fee, as a onetime expense at closing. The word “point”
comes from the fact that each point is a
percentage point of the mortgage. For
example, one point on a $60,000
mortgage is $600.
Why do lenders charge points? Because
it increases the profit earned on the loan.
There is a direct relationship between
number of points and interest rate. For
example, if you pay four points, your rate
might be 8%. But if you agree to pay only
one, the interest rate might be 8.75%. The
general rule is the more you pay up-front,
the lower your rate.
Interest: Fixed-Rate and
Adjustable-Rate Mortgages
Interest rates you pay on a loan come
in two flavors: fixed or adjustable. Each
has its pluses and minuses. For low- to
moderate-income, first-time homebuyers,
a fixed-rate mortgage is often the safest
path to follow.
Radian
Homeownership
Study Guide
Fixed-Rate Mortgage
A fixed interest rate may be set when
you apply. In any given week, it’s difficult
to predict exactly what the interest rate
will be, because rates go up and down
depending on certain economic factors.
A fixed-rate loan, however, allows you to
“lock in” the interest rate when you apply
for specific periods, say 60 or 90 days.
With any mortgage (or almost any
installment loan, for that matter), most
of your mortgage payment is applied to
interest in the beginning. That means a
small percentage of your payment is
applied to the principal. Toward the
end, the reverse is true, as most of
your payment goes toward principal.
Fixed-rate mortgages guarantee that your
monthly mortgage payments will remain
the same for the life of the loan — no
matter how long the loan is for. If rates
are high and they drop, you can always
refinance your home. Basically, that
means you pay off your first mortgage
with another mortgage — at a lower rate.
But you’re safe if rates go up. Mortgage
rates can have a major impact on your
monthly costs. (See Chart 1 in Appendix A.)
Adjustable-Rate Mortgage (ARM)
Here, the interest rate you pay changes
as national interest rates (usually a
specific “index”) move up and down.
An adjustable-rate mortgage, called an
ARM, can be great if interest rates or
indexes drop. On the other hand, it’s bad
news if rates go up. No one can predict or
control what interest rates will do over a
30-year term — therefore, an adjustablerate mortgage could be a risky choice for
39
Study Guide | Module V
many borrowers. Watch out especially for
“teaser” rates, which seem too good to be
true and often are just that. These rates
may go up substantially after the first
adjustment interval.
Many ARMs have special provisions.
For example, an ARM may have a rate
cap that limits how much the interest rate
or mortgage payments can increase in a
given time period. An ARM also may have
a lifetime cap that limits the maximum
amount the interest rate can go up over
the lifetime of the mortgage. ARMs may
have a financial index and margin. The
former is the specific financial index that
determines an ARM’s total interest rate.
For example, most ARMs are tied to the
price of Treasury notes. Because T-notes
are published in the paper, they are easy
to track. But some ARMs may be tied to
more difficult indexes. Also, it’s important
to know what margin the lender charges
(the difference between the index and
the ARM’s rate).
“Convertible” ARMs have a conversion
clause. This means the adjustable rate can
be converted to a fixed-rate loan under
certain conditions. The new fixed rate is
generally set at the prevailing interest rate
for fixed-rate mortgages. Having this
conversion option may cost extra, but
could be worth it.
Mortgages with an adjustable rate include
a provision for the adjustment period —
the time between interest rate changes on
an ARM. Example: A “one-year” ARM is
a loan with an adjustment period of one
year. That means the interest rate can only
change once a year!
Radian
Homeownership
Study Guide
For unsophisticated buyers, ARMs can
present some risk. On the plus side, they
typically offer a lower up-front interest
rate than fixed-rate mortgages. If you
probably will be selling your home in a
few years (to buy another one), or if you
can predict — with reasonable certainty
— that your income will increase considerably, an ARM might be a good bet.
Annual Percentage Rate (APR)
In any mortgage situation, you’ll hear
about the annual percentage rate, or APR.
The APR is the total finance charge. It
includes interest, loan fees, mortgage
insurance, and points. When shopping for a
mortgage, use the APR. Why? It’s a more
complete figure for comparing mortgage
options because it includes all fees. With
the APR, there will be no surprises.
Don’t be fooled by the difference between
interest rate and APR. Make sure the lender
is talking about the APR, not the interest
rate. The rule of thumb is the APR is
higher, at 7.5% vs. 7.2%, make sure the
lender is quoting the APR.
Principal and Interest (P&I)
Mortgage payments are divided into
principal and interest.
Principal is the amount of dollars you
borrow. For example, if you borrow
$40,000 for a mortgage, that’s the
principal. Interest, a term well known by
most Americans, is a percentage of the
principal charged by a lender for lending
you money. In the mortgage business,
principal and interest is called P&I.
40
Study Guide | Module V
Principal almost never changes. (Negative
amortization loans are the exception.) It’s
the same from day one to year 30. Yet,
the way a mortgage loan works, you pay
much more interest than principal in the
early years of the loan.
Interest is another story. As we saw above,
it can change constantly, depending on
market conditions. Once you’ve obtained
a mortgage, interest rate changes depend
on your type of mortgage.
Fixed or adjustable, different lenders
charge different interest rates. This is an
important part of shopping for a mortgage.
Comparison shop for interest rates, by all
means. One bank may be charging 7%
(APR) with four points, while a bank across
town may be charging 7.25% (APR), also
with four points. Remember, compare loans
based on APR, points and other factors.
How much can interest rates change?
Well, according to the Mortgage Bankers
Association, the fixed-interest rate has
fluctuated since the end of World War II
(when it was 5 percent) to a record high
of 15 percent in the early 1980s. The basic
rule of thumb is mortgage interest rates go
up and down depending on national and
international economic factors.
Even a tiny difference in the interest
rate can dramatically change the cost of
housing. For an illustration of that, see
Appendix A, Chart 1.
Radian
Homeownership
Study Guide
Amortization
Amortizing is a fancy way of saying
paying off your loan. Any mortgage
contract requires a borrower to make
uniform monthly payments that pay off, or
amortize, the loan by the end of the term.
You track your payments and diminishing
debt on an amortization schedule —
a timetable that shows how each payment
is applied to principal and interest, and the
remaining balance on the loan.
Look at the amortization schedule in
Appendix A, Chart 4. Later, when you shop
for a mortgage, analyze the amortization
schedules of various loan options.
Private mortgage insurance protects a
lender if a homeowner defaults on a
loan. In effect, the mortgage insurance
company shares the risk of foreclosure
with the lender.
The homebuyer and the mortgage insurer
share a common interest in the mortgage
financing transaction because they each
stand to lose in the event of default. The
borrower will lose the home and the equity
invested in it, and the mortgage insurer
will have to pay the lender’s claim on the
defaulted loan. Thus, both the insurer and
the borrower are concerned that the home
is affordable not only at the time of
purchase, but throughout the years of
homeownership.
Buy-downs
A buy-down mortgage is one with a
below-market interest rate made by a
lender in return for an interest rate subsidy
in the form of additional discount points
paid by a builder, seller or buyer.
The basic idea is that by paying more
interest points up-front, a lender may be
willing to negotiate a lower interest rate.
Mortgage Insurance
Private Mortgage Insurance
Traditionally, lenders have required a
down payment of at least 20 percent of a
house’s purchase price. Today, lenders will
approve a mortgage with a much smaller
down payment if the mortgage is covered
by private mortgage insurance. Radian
Guaranty, as we said in the beginning of
this Study Guide, is a private mortgage
insurance company.
41
Study Guide | Module V
Private mortgage insurance is the privatesector alternative to non-conventional,
government-backed home loans.
(See next section.)
Generally, homebuyers must make a
down payment of at least 3 to 5 percent
of a home’s value to be considered for
private mortgage insurance. Private
mortgage insurance is available on a
wide variety of conventional mortgages,
including most fixed- and adjustable-rate
home loans, giving borrowers the freedom
to choose the type of loan that best suits
their needs.
Note: Private mortgage insurance should
not be confused with mortgage life
insurance, which pays the outstanding
mortgage debt if the borrower holding
the insurance policy dies.
Radian
Homeownership
Study Guide
Government-Insured/Guaranteed Loans
State and Local Loan Programs
The federal government also provides
several mortgage insurance programs:
A number of states sponsor programs
to help first-time homebuyers qualify for
mortgages. Local housing agencies also
offer loans to eligible homebuyers in
some areas. These programs typically
offer very attractive loan terms (low down
payment or low interest rate) to first-time
homebuyers that meet specified income
guidelines. (Check with your state housing
finance authority. The phone numbers
usually can be found in the government
“blue pages” of the phone book.)
• Federal Housing Administration (FHA)
• Veterans Administration (VA)
• Rural Development (RD)
To obtain either an FHA or VA loan,
you must apply through a lender that
is approved to handle FHA/VA loans.
Both the FHA and VA require that the
properties being purchased meet certain
minimum standards.
Escrow
FHA Loans
With FHA insurance, you can purchase
a home with a very low down payment
(from 3 to 5 percent of the FHA appraisal
value or the purchase price, whichever is
lower). FHA mortgages have a maximum
loan limit that varies depending on the
average cost of housing in a given region.
Many lenders arrange monthly payments
to include your entire principal, interest,
taxes and insurance (PITI). They will
open an “escrow” account to allow you to
pay an estimated percentage of taxes and
insurance monthly. Money deposited in
escrow can be used only for the purpose
written into a legal agreement — in this
case, the payment of taxes and insurance.
VA Loans
The VA guaranty allows qualified veterans
to buy a house with no down payment.
The qualification guidelines for VA loans
are less strict than for either FHA or
conventional loans. If you are a qualified
veteran, this can be an attractive mortgage
option. To check for eligibility, call your
nearest VA regional office.
Rural Development Loans
The Rural Development, a branch of the
U.S. Department of Agriculture, offers
low-interest-rate homeownership loans to
low- and moderate-income persons who
live in rural areas or small towns. Check
with your local Rural Development office or
a local lender for eligibility requirements.
42
Study Guide | Module V
The lender is legally bound to pay your
taxes and insurance at the right time,
adjusting the estimate to the actual
amount paid. If the escrow is too large,
you may receive a refund. If the escrow
is too small, you will have to pay an
additional amount.
If your lender does not require an escrow
account, it’s a smart idea to create your
own way to pay taxes and insurance
monthly. Just estimate what you will owe
in taxes and insurance. Then find out
when those payments are due. Each
month, transfer the monthly payment
to a special savings account.
Radian
Homeownership
Study Guide
Options
Sometimes, there are special situations
that arise when shopping for a mortgage.
A conventional mortgage has no special
options, while a non-conventional
mortgage does.
Balloon Payment Option
A balloon payment option is one in which
the monthly payments are fairly low, but
there is a scheduled early payoff of the
entire loan within a set period of time.
At that point, the buyer usually needs
to seek out a new mortgage.
Below are examples of a few options,
which can change as market conditions
change.
Assumable Mortgage
Basically, an assumable mortgage means
taking over the payments for someone
else. Despite the fact that someone new
is making the payments, the original
borrower of this mortgage remains liable
for the loan balance, unless the lender
agrees to release them.
Prepayment Penalty Clause
Lease-Purchase
A lease-purchase is a way to buy property
through gradual payments under which a
lease is substituted for a mortgage. Also
called a lease with option to buy. In a
lease-purchase, there usually is a specified
time when the purchase and financing
must be completed. This is a good
alternative if you don’t have enough
money for a down payment. Be careful,
however, to have an attorney look over
any lease-purchase agreement before
signing it.
Graduated Payment Mortgage (GPM)
A graduated payment mortgage is a
flexible-payment mortgage where the
payments increase for a specified period
of time and then level off. Be careful —
this usually results in negative
amortization. (See Glossary.)
43
Study Guide | Module V
A fee charged to a borrower who pays off
a loan before the due date. This is an issue
if you decide to pay off your mortgage
early, or if you sold your house and paid
off your mortgage as a result of the sale.
Before you enter into these kinds of
agreements, make sure they will benefit
you. If you have questions, ask your
lender for an explanation of any special
options in obtaining a mortgage.
Term
Lenders give mortgage loans for a set time
period. This is called the term. The most
common “term” for a mortgage is 30 years,
but today many programs offer 25-, 20- and
even 15-year mortgages. Of course, the
longer the term, the lower the monthly
payments (given the same interest rate).
On the flip side, the shorter the term, the
faster you build “equity” in a house.
Radian
Homeownership
Study Guide
Ownership
Lien
Mortgages are available not only to single
purchasers and married couples, but also
to “significant others” or co-borrowers. It
will take an attorney to help ensure that
ownership is set up properly for you when
you buy a house, especially in the event
that one of the owners dies. Be sure to
seek the advice of an attorney about this
or any legal questions regarding the
purchase of your home.
When someone has a lien on your property,
they have a legal claim against the property.
This claim must be paid when the property
is sold. When the home is sold, the
mortgage lender usually is the first in
line to collect any cash from the sale.
Tenancy by the Entirety
Co-ownership available only to a husband
and wife. Both owners must agree before
the house can be sold or refinanced.
When one spouse dies, the house goes
to the surviving spouse automatically.
Joint Tenancy with Right of Survivorship
An equal, undivided ownership of property
by two or more people. During their
lifetimes, any of the owners may sell their
interest to whomever they choose. If one
owner dies, the surviving owner (or owners)
automatically gets the deceased owner’s
share of the property.
Tenancy in Common
A type of co-ownership without right of
survivorship. The property is owned jointly,
but if one owner dies, the deceased
owner’s share goes to his or her heir rather
than to the surviving owner or owners.
When lenders provide a mortgage, they
obtain a lien on the property. What if you
fail to make payments? The lender can
foreclose on the loan. In short, that means
you can lose your home. Foreclosure is
one word you hope to never hear in the
process of owning a home.
44
Study Guide | Module V
If you borrow through what is known as
a second mortgage or a home equity loan,
that lender also places a lien on your
property. Before you buy or sell a home,
the buyer will arrange for a title search to
make sure the title is clear — that there
are no existing liens on the property.
(More on that later.)
Foreclosure
After a homebuyer has purchased a home
with a mortgage, monthly payments must be
made to the mortgage lender for the interest
and outstanding principal due. Mortgage
loans contain a provision, called an acceleration clause, that gives the lender the right to
demand payment of the entire outstanding
balance if a monthly payment is missed.
If monthly payments are not made, the loan
can be foreclosed. Through foreclosure,
the lender can sell the house and land to
pay off the loan. In some states, a lender
also can sue you for the balance.
Radian Guaranty wants you to avoid foreclosure. Remember, mortgage lenders make
money on long-term performing mortgage
loans. They didn’t loan you a house, they
loaned you money to buy one. So in order
to keep cash flow going, they typically will
try to help you avoid foreclosure. For a
more in-depth discussion of avoiding
foreclosure, see Module XI,
“Handling Financial
Emergencies.”
Radian
Module VI
Homeownership
Study Guide
Key Factors in Getting a Mortgage
Module Goal
In this module, we’ll take a look at the major factors used by a mortgage lender to decide
whether or not they will lend you the money you need to buy a house. Things like how
long you’ve held a job, whether you pay your rent on time, your bill-paying history,
qualifying ratios and other factors are taken into account by a lender.
45
Study Guide | Module VI
Radian
What Lenders Want to Know
Homeownership
Study Guide
Right from the start, you can avoid
many of the hassles associated with the
mortgage process by being clear and
honest in response to a lender’s requests
in order to approve a mortgage. Two
major factors hold sway:
• Down payment
• Your available income for paying
monthly housing expenses
While having a one-time income boost,
say a bonus at work, is in your favor, it’s
quite different from the steady stream of
income necessary to make your monthly
mortgage and other payments.
Qualifying Ratios
Qualifying ratios are basic mathematical
formulas that lenders use in the loan
approval process. When we did the
prequalifying worksheet (#5a & #5b),
you learned about qualifying ratios.
Qualifying ratios can vary from lender
to lender, so check with your lender at
the beginning to find out what their
qualifying ratios are.
As we said earlier, your monthly income
and how it compares to your housing
costs is a major factor in how comfortable
a lender feels about lending you a large
amount of money.
You’re more likely to have problems if
your mortgage payment is a large percentage of your monthly income. On the other
hand, the lender will be very happy if your
mortgage payment is a small percentage
of your total monthly income.
46
Study Guide | Module VI
Qualifying ratios include the “Housing
Expense Ratio” and “Total Debts Ratio.”
Of all the factors that determine whether
or not a person gets a mortgage loan, these
two ratios are among the most critical.
With qualifying ratios, a lender divides
the PITI (remember that?), and the
PITI plus existing debt, by your gross
monthly income to see if you meet the
qualifying ratio.
Ratio Differences
For some loans, lenders want your
monthly PITI to be 25% of your gross
monthly income, and your PITI plus
existing debt to be 33% of your gross
monthly income. That qualifying ratio is
written as 25/33. Some lenders use the
ratio 28/33 as the qualifying ratio.
Special programs, like the Fannie Mae
Community Homebuyer’s Program, allow
even more lenient ratios.
Housing Expense Ratio
The “rule of thumb” places this at
28 percent, although some lending
program guidelines allow this ratio to
go up to 33 percent and higher.
Total Debts Ratio
The “rule of thumb” places this around
36 percent, although some special
lending programs allow for up to
38 percent and higher.
Radian
Homeownership
Study Guide
Note: If you have ratios that fall below
these guidelines, it doesn’t mean you
will automatically be approved. On the
flip side, if your ratios are above what
the lender allows, it doesn’t mean you
won’t get a mortgage. Lenders look at
debt payment history and other factors
too. But keep in mind that existing debt
is a major part of the mortgage process.
For a good example of how ratios work,
see Charts #5, #6 and #7 in Appendix A
of this study guide.
Estimating Your Allowable Ratio
If you multiply your gross monthly
income by the qualifying ratio used by
your lender, you come up with the dollar
amount that a lender would consider
acceptable for you to spend on PITI alone
and on PITI with your other debts.
For example, using the 25/33 ratios,
a couple with a combined gross yearly
income of $72,000 would have a gross
monthly income of $6,000 and should
spend no more than $1,500 for PITI
and more than $1,980 for both PITI
and debt payments.
You’ve already estimated your qualifying
ratios on worksheet #5a and #5b in
Module IV. If you’ve already done the
worksheet, you can go back to see
what your ratios are. Use several
different combinations to ratios —
25/33, 33/38, 33/41 — to see what
differences they make.
47
Study Guide | Module VI
Credit History
When a lender considers lending you the
money for a mortgage, he or she wants to
know how well you’ve responded to debt
and credit in the past. It only makes sense,
because a mortgage is a considerable
amount of money.
Many personal financial planners and
experts have a basic rule about using credit:
Only use credit to buy items that have
lasting value. For example, it’s perfectly
normal to buy a car with credit. Or a
dishwasher, stove or other “big-ticket”
items you need to live.
On the flip side, avoid credit spending
for things like food and vacations,
because their long-term value is zilch.
They may bring pleasure, but the minute
you’ve paid for them with credit, they’re
worth nothing. Use cash for those types of
expenses, and allow for them in a family
budget. (More on that in Module X.)
All those things considered, the major
concern of anyone lending you mortgage
money is how well you’ve paid your
debts. Have payments been on time? Have
you ignored payments completely? Those
are the types of questions lenders are most
interested in answering.
Credit Problems
Credit problems come in two flavors:
Poor Credit History and No Credit
History. We’ll look at the lack of credit
history first.
Radian
Homeownership
Study Guide
Building a Record of Credit
A Note on Credit Cards
Many of our grandparents and parents
refused to buy on credit. For them, “cash
only” was the way to go. Sadly, while that
attitude is admirable, in today’s world, it
can cause problems for people who want
to borrow, especially for a large loan
like a mortgage.
Some traditional credit cards can sound
great, but beware. Some charge the highest
interest allowed by law, 21.9% in some
states. Stay away from credit cards that
promise low monthly payments — they
usually mean high interest rates.
Lenders want to see how you’ve
responded to borrowing money,
and without a credit history, that’s
impossible. So before you apply for a
mortgage, there are two options: One is
called a non-traditional credit history,
which can help you obtain a mortgage
even if you don’t have a credit history.
If you can, stick with store charges that
require a higher monthly payment, but
lower interest. Always ask what the annual
percentage rate (APR) is on a charge card
before you get one.
Finally, if while building a credit history
you get into trouble, contact a local
non-profit credit counseling service or
agency for help.
A Non-Traditional Credit History can be
built with things like utility bill payments,
rent, telephone bills and personal tax
payments — anything that is not going
to appear on a credit report.
The second option, if time is on your side,
is to apply for a standard credit card or
store charge.
If you choose this option, be careful.
The idea is not to build debt. The idea
is just to use the cards as if they were
cash, paying them off every month by
budgeting your spending. You can do this
very easily by only using the charge cards
for small ticket items, such as minor
furniture, clothing or appliances.
48
Study Guide | Module VI
Your Credit Report
Credit reports are a snapshot of your
personal credit history. Usually, if you are
rejected for a loan or other form of credit,
your credit history could be the culprit.
The first thing to know is that anyone who
denies you credit must tell you why, in
written form. That denial letter includes
the name and address of the credit bureau
that gave them your credit history. Here,
you can call the credit bureau and ask for
a copy of your credit report. This way, you
can see exactly what the problem is.
Radian
Homeownership
Study Guide
A smarter move might be to have a copy
of your credit report in hand before you
shop for a mortgage. Why? Because that
way, if there are problems with your credit
history, or mistakes on the credit report,
you can get things right before you go
through the home shopping and mortgage
application processes.
Credit Report Errors
A good rule of thumb is to obtain a
credit report annually. In other words,
stay informed.
For starters, once you’ve obtained your
credit report by contacting a local credit
reporting bureau and requesting a copy
(for a small fee), go over it with a fine-tooth
comb. If you have trouble understanding
it, contact a local non-profit credit
counseling agency for help. Don’t be
embarrassed to ask for help at any point.
A Basic Credit Report
A basic credit report is a history of your
credit payments. It contains codes that can
be a bit confusing. A credit report usually
contains the following:
• Your place of work
• The credit reporting agency’s nearest
branch office
• A list of your credit accounts with
reporting creditors. That list will
include:
– Name of account
– Comment on the account, including
whether it’s current or delinquent
(over 120 days past due)
– Account status:
• Positive or negative
• Date account opened
• Monthly payment amount
• Date of last payment
• Type, terms of account
• Payment history for past 12 months
• Original loan amount, credit limit,
historical high balance
• Balance owing, balance date, and
amount past due (if applicable)
49
Study Guide | Module VI
Credit reports don’t always accurately
reflect a person’s situation. So it makes
sense to thoroughly check your credit
report for mistakes before you go to
a lender for a mortgage. If there are
mistakes, this is a great chance to get
them corrected.
If you catch one or several mistakes,
call the billing department for the credit
account and have them fix the mistake
immediately. Keep written records of any
letters you send to the creditor, and if you
call on the phone, keep notes of your call,
especially the names of any people you
talk with, the date you talked to them,
and the outcome of each phone call.
Once you’ve corrected mistakes on your
credit report, it’s a good idea to attach a
letter to your credit report explaining the
mistakes, and how they’ve been corrected.
Radian
Other Things a Lender Needs to Know
Homeownership
Source of Down Payment
Study Guide
As we said earlier, lenders want to see that
you are investing in your new home. So
they expect that the bulk of your down
payment and closing costs (if any) will
come from your savings. You also are
allowed to receive a gift from a family
member, provided you obtain a gift letter
stating that the funds are not borrowed.
Employment Record
Having a regular employment history is
important to a lender deciding to loan you
a large sum of money. No matter what
type of work you do, a record of doing the
same type of job with the same employer
is the best possible situation.
On the other hand, a short employment
history does not automatically disqualify
you from getting a loan.
In addition, a lender will contact your
employer to verify that your employment
history is accurate. Typically, your
employer responds in the form of a letter
stating that the facts of your employment
(length of service, salary, etc.) are as you
stated them to the lender.
If you are self-employed or have been at
your job less than two years, be prepared
to give the lender more information, such
as your federal income tax forms or profit
and loss statements.
50
Study Guide | Module VI
Rental Payment History
Finally, a lender wants to make sure that
you’ve paid your rent on time and in full.
Again, a letter from your landlord will
suffice. If you’ve ever withheld rent for
any reason (no heat, poor maintenance,
etc.), be prepared to explain the facts of
the situation to the lender.
Radian
Module VII
Homeownership
Study Guide
The Mortgage Application Process
Module goal
You’ve learned about some basic mortgage facts, Now, it’s time to apply for a loan.
51
Study Guide | Module VII
Radian
Applying for a Loan
Homeownership
Study Guide
You’ve begun to build your potential
lenders list. But you notice one lender is
offering the lowest interest rate. Another
lender charges less in up-front costs
payable at closing. Perhaps yet another
lender has the most liberal “lock-in” policy.
That’s why you need to go with what’s
most important to you. If you need help,
your real estate sales professional should
help you sort out your options.
Required Documentation
When you have decided which lender
offers the kind of mortgage you want with
the best terms for your situation, you’re
ready to make an appointment to apply for
a loan. Request that the lender mail you a
loan application, so you can study it
beforehand. Also ask what documentation
you should bring with you to an interview.
• Pay stubs, W-2 forms (past two years) or
other proof of employment and salary
Loan Interview
As the Boy Scouts say, “Be Prepared” when
it comes to a loan interview. Do your best
to anticipate what you’ll need. And have
all of the necessary information (including
names, addresses with zip codes, phone
numbers, dates of employment, credit
account information, etc.) ready to go.
Before you meet with a loan officer,
complete Data Sheet #7, “Pre-Application
Form” in Appendix B of this Study Guide.
If you and your co-purchaser will both be
signing the mortgage, both of you should
go to the loan interview.
52
Study Guide | Module VII
You will speed up the loan processing if
you bring the following documents with
you to the loan interview:
• Purchase contract for the house
• Bank account numbers, latest bank
statements (two months), address of
your bank branch
• If you are self-employed, bring balance
sheets, tax returns for the past two
years, and year-to-date profit and loss
statement, if you have one
• Information about debts, including loan
and credit card numbers, creditors’
names and addresses
• Evidence of mortgage or rental
payments (canceled checks or money
order receipts)
Qualification
Normally, you already will have been
prequalified by the lender or real estate
professional. But even so, the loan officer
will first want to make sure you qualify
for the loan you want. As we discussed in
Module VI, lenders typically require that
monthly mortgage payment (including
taxes, insurance and condominium fee,
if any) not exceed 28 percent of your
gross monthly income, and that monthly
mortgage payment plus existing debt
payments not exceed 36 percent of your
gross monthly income.
Radian
Homeownership
Study Guide
If you participate in the Fannie Mae
Community Homebuyer’s Program, these
ratios will be 33 percent and 38 percent
(or higher), respectively. The use of these
higher ratios allows you to increase your
buying power (so you need less income
to qualify for a mortgage).
Capital
Do you have enough cash for the down
payment and closing costs? Do you need
a gift from a relative? Will you have a
cushion left after your home purchase, or
will you spend your last dime at closing?
Collateral
The Loan Application
The lender can help you fill out the
loan application. You also may ask a
representative from a local nonprofit
housing assistance group to help. The
application form provides the information
the lender needs to evaluate the risk
involved in lending you money — the
likelihood that you will or will not
repay the loan.
Lenders Talk About the “Four C’s”
of Credit:
Capacity, Credit history, Capital, and
Collateral.
Capacity
Can you repay the debt? Lenders ask for
employment information, such as your
occupation, how long have you worked,
and how much you earn. They also want
to know about your expenses, such as
number of dependents, if you pay alimony
or child support, and the amount of your
other obligations.
Will the lender be fully protected if you
fail to repay the loan? Lenders must be
sure the property you are buying is worth
enough to back up your loan.
Additional Considerations
You’ve heard the phrase, “Honesty is the
best policy.” When it comes to mortgage
applications, that is never more on target.
It is illegal to be untruthful in a loan
application. Do not cover up past credit
problems, hoping they’ll go unnoticed.
Instead, be completely truthful. The key
is to show that those problems are in the
past. Here again, it may be a good idea
to ask for help from a nonprofit group,
especially if you want to build a
nontraditional credit history.
(See Module VI.)
Once you have signed the loan application,
you may be bound to accept the loan if it’s
offered, or to pay the lender’s processing
costs if your application is rejected. Be
sure the application states amounts and
terms that you want.
Credit History
Will you repay the debt? Here, lenders
look at your credit history. How much you
owe, how often you borrow, whether you
pay bills on time, and whether you live
within your means. They also look at signs
of stability. For example, how long you’ve
lived at your present address, and how
long you have worked at your current job.
53
Study Guide | Module VII
You may be required to pay an application
fee. The fee should cover the appraisal
and credit report costs only.
Radian
Homeownership
Study Guide
Lock-In vs. Float
One way to hedge against rising interest
rates is to “lock in” the rate during the
loan processing period. The lender may
agree to lock in the current rate (and
number of points) for a set period. Find
out when the lock-in takes effect and how
long it remains in effect. By all means,
get the lock-in agreement in writing. And
a short lock-in period is not as valuable as
a longer one, say 60 to 90 days.
If you gamble, you can let the interest rate
“float,” which means you take a chance
that the rates may rise before you receive
a commitment from the lender. On the
other hand, rates can go down. Again, it’s
a gamble. And it takes some research and
an informed buyer to know which way
interest rates are going.
Estimate of Closing Costs
Within three days after you have submitted
your application for a home loan, the lender
is required by law to provide you with an
itemized estimate of the costs to settle (or
close) the loan. This report is referred to
as a “good-faith estimate.” As we said
earlier, the lender must also give you a
copy of the government publication,
“A Homebuyer’s Guide to Settlement
Costs.” Make sure to read it! It’s loaded
with important information. We’ll discuss
closing costs more in the next module.
54
Study Guide | Module VII
How to Quicken the Approval Process
The faster you respond to a lender’s
requests for information, the faster you
can get your loan approved. Don’t be
afraid to phone the lender occasionally
to check on the status of your mortgage.
Contact your employer or others who need
to provide documents or other information
for your loan, if they have not yet done so.
Loan Processing
In processing your loan application,
the lender will be interested primarily
in two things:
• The property you plan to buy
(the collateral for the loan)
• Your financial situation and your
credit history (your ability and desire
to repay the loan)
The lender will request an appraisal of the
property, request a credit report on you
and any co-borrowers, and verify the
information in your loan application.
Radian
Homeownership
Study Guide
Property Appraisal
Verification
The lender will arrange to have the
property appraised, a service for which
you may be charged. A professional
appraiser will estimate the market value
of the house. This information is required
because the lender will not lend you more
than a given percentage of the value of the
property (loan-to-value ratio). If the
appraised value is less than the purchase
price you have agreed on, the amount of
your mortgage may be smaller than you
anticipated, and you will have to come up
with a larger down payment. However,
if you have included an appraisal
contingency in your contract, you may
be able to renegotiate the purchase
price in the event of an unexpectedly
low appraisal.
The lender also will verify the information
provided on the loan application as to
your income and employment history,
your assets (checking and savings accounts,
etc.), and your rent payment history.
Credit Report
The lender also will order a credit report
on you and your spouse or any other
co-purchasers. Return to Module VI for a
thorough discussion of your credit report.
It is not unusual for the lender to ask you
for a written explanation of any problems
that appear on your credit report. As we
discussed in Module VI, you may have
already cleared them up prior to applying
for your mortgage. Even one late payment
on one account usually requires an
explanation. Don’t be alarmed by this
request. Respond quickly and truthfully
about whatever caused late payment.
55
Study Guide | Module VII
Approval by Private Mortgage Insurer
If your down payment is less than 20
percent, private mortgage insurance will
be required. Your loan application will
have to be reviewed and approved by the
private mortgage insurer chosen by your
lender. If you are obtaining an FHA
or VA loan, the loan must also meet
FHA/VA standards.
Commitment Letter
When your loan is approved, you will
receive a commitment letter from the
lender. This is the formal loan offer. It
will state the loan amount (the purchase
price less the down payment), the term of
the loan (number of years you have to
repay the loan), the loan origination fee
(a percentage of the loan amount), the
points, the annual percentage rate (APR),
and the monthly charges (principal and
interest, taxes and insurance, or PITI).
In a specific time period, you must accept
the loan offer and agree to close the loan.
Read the commitment letter thoroughly
before you sign it. Be certain that you
understand and can meet any conditions
set by the lender. By signing the
commitment letter, you accept the term
and conditions of the loan offer.
Radian
Module VIII
Homeownership
Study Guide
The Closing Process
Module Goal
Now, it all comes together! All the hard work, attention to detail, and anxiety. It’s time
for the closing. The day you finally turn that house into your home. In this module, we’ll
detail what happens at the closing — who will be there and how things will go. For the
most part, the closing is an exciting, positive time. Things can go wrong, but if you’ve
done your part, you shouldn’t have any problems. Once the closing is completed, it’s
time to start moving in.
57
Study Guide | Module VIII
Radian
The Big Day Has Arrived
Homeownership
Study Guide
The mortgage loan closing (or “settlement,”
as it is also called) is the meeting where
your loan is finalized, mortgage issued,
and you, hopefully, walk away with the
keys to your new home in your pocket.
Note: Make sure the closing takes place
before the lender’s commitment expires
and while you’re still locked in (if you
are) at the interest rate. Also, now’s the
time to make those moving plans.
In this module, we’ll tell you what needs
to happen in the final weeks before
closing —such as the title search, survey
of the property and your final walkthrough inspection. Next, you’ll find
out what happens on the closing day,
including the signing of documents and
the payment of closing costs. We also
outline the costs the buyer normally pays
at closing. Although there is no standard
closing process followed in all localities,
our description of the closing process will
give you a good idea of what’s ahead.
Selecting a Settlement Agent
Preparing for Your Big Day
Both buyer and seller go through some
anxious moments as closing draws near.
For the buyer, it’s very normal to have
doubts. After all, you’re about to take on a
huge debt. But stay calm. At least the debt
is secured by your home. Then there’s the
fear that the sale will fall through. It can
happen, but it isn’t the norm.
On the other hand, by signing a sales contract and loan commitment letter, buyer
and seller are obligated to complete the
deal. If you don’t, you’ll forfeit your
deposit. Even worse, you could be sued.
Depending on where you live, closings
can be conducted by lending institutions,
title insurers, escrow companies, real
estate sales professionals, or attorneys for
the buyer or seller — or a combination of
the above. You might be able to save some
money by shopping around for a settlement
agent. Use Data Sheet #8, “Settlement
Costs,” in Appendix B of this Study
Guide to see exactly what your closing
costs will be.
Aside from a certified check and a paid
up homeowners’ insurance policy, your
closing agent or attorney handles
everything else, including:
•
•
•
•
•
•
•
•
•
Setting the Closing Day
Once the loan is approved and the mortgage accepted, it’s time to schedule the
closing date. More often than not, the
real estate sales professionals do it.
58
Study Guide | Module VIII
•
Date and time for the closing
Title search
Title insurance
Obtaining the loan package from
the lender
Verifying completion of all inspections
Verifying the completion of all
contingencies
Making sure all required documents
are included
Reviewing all documents
Filing signed documents with the
proper agencies
Disbursing funds
Radian
Homeownership
Study Guide
Real estate attorney fees and services
vary. Check on fees for:
• Reviewing documents and giving
advice on them
• Attending the closing
• Conducting the title search
Title Insurance
A lender’s title insurance policy protects
the lender in the event a flaw in the title
is detected after the property has been
bought. The owner’s title insurance policy
protects you.
Generally, the buyer pays for both.
Getting a combined lender’s/owner’s
policy can save you some money. Check
to see if you can get a “reissue” premium
rate from the company that previously
insured the title. It might save you
some money.
Survey
On occasion, a lender requires a survey
of the property before closing. Why? To
confirm that the property’s boundaries are
as described in the purchase and sales
agreement. This is another charge that is
normally paid by the buyer.
Termite Certificate
Most localities require a home to be
inspected for termites prior to a sale. The
seller typically pays this fee. Make sure
the certificate is from a termite inspection
firm that states that the property is free of
visible termite infestation.
59
Study Guide | Module VIII
Homeowner’s Insurance
A closing requirement is homeowner’s or
“hazard” insurance. You pay the premium,
and you and the lender are protected from
loss if a fire or storm destroys your home.
A homeowner’s insurance policy should
include:
• Personal liability insurance. This is to
protect you if someone sues you after
being injured on your property or by a
member of your family. Auto accidents
don’t count.
• Property coverage, which covers you
against fire, theft and specific weatherrelated hazards.
Again, shop around for homeowners
insurance. You can purchase coverage
either directly from a company (called a
“direct writer”), or you can go to a local
independent insurance agent, who typically
represents several insurers. With the latter,
you can get price quotes from the companies the agent represents.
An agent should help you decide how
much coverage you need. Lenders usually
require only minimal coverage up to the
“replacement value” of the house. When
you compare quotes from different
companies, make sure you are comparing
apples to apples — rates for exactly the
same coverage types and amounts. The
lender may recommend a particular
policy. Or, you may want to use an
insurer who already provides you with
personal auto insurance. That often can
get you a discount.
Radian
Homeownership
Study Guide
Another way to save money is to ask for a
higher deductible, which is the threshold
above which the insurer pays claims. This
way, you have protection for major losses,
but pay for minor damage yourself — and
save on your premiums. Be certain that
the higher deductible figure is one you are
comfortable with.
You lender will probably want you to pay
the first year’s premium before closing.
Again, the lender may collect subsequent
homeowner’s insurance premiums as part
of your monthly PITI payment. This way,
the lender is sure the policy remains in
effect for the life of the loan. The lender
will keep this part of your payment in the
escrow account. If you obtain coverage on
your own, bring the policy and receipt to
the closing.
Walk-Through
As we said earlier, your sales contract
should contain a clause allowing you to
check out the home within 24 hours of
closing. This is your last chance to make
sure the seller is out of the house, and
didn’t take whatever property was agreed
upon to be left behind (like the stove or
refrigerator). The real estate agent will
come with you.
This can be a crucial process. Make sure
everything will be in working order at the
time of the settlement. Write down any
problems. If they can’t be fixed before
settlement, your settlement agent or
attorney may withhold funds from the
seller to pay for the agreed-upon repairs.
If you see major problems or violations of
the purchase contract, exercise your right to
hold up settlement until they are corrected.
60
Study Guide | Module VIII
Final Estimate of Closing Costs
The lender must provide an estimate of
closing costs soon after you have filed
your application for a loan. Because these
estimates are subject to change, you have
the right to inspect the settlement form
(called the HUD-1 Settlement Statement)
one business day before settlement. It is
useful to do so, because you probably will
be required to pay the remainder of the
down payment (minus the amount of your
deposit) and closing costs with a certified
or cashier’s check. A personal check will
probably not be accepted.
Closing: The Big Day!
On closing day, everyone comes together.
Buyer, seller, listing and selling real estate
agents, and representatives of the lender
and the title company meet for the final
closing. In some parts of the country, an
escrow agent processes all the paperwork
and collects and disburses the required
funds. It’s a good idea to have your attorney
at your side to go over all the documents
along with you. Your attorney’s advice and
representation at the closing is important.
You’ll sign many documents and affidavits.
You will pay the closing costs assigned to
you. But most importantly, you get the
keys to your new house!
Radian
Homeownership
Study Guide
Buried in Paper: Explanation, Signing
of Closing Documents
At closing, as we said, you’ll be
signing many things. Here is a list of
what to expect:
Affidavits
You may be asked to sign numerous
affidavits; for example, that it is your
intention to occupy the property. These
may be required by federal or state law,
by the lender, or by the secondary mortgage
market agencies. Do not provide false
information on any affidavits. If you
do, you can face criminal penalties and
you can run the risk the lender will
call your loan.
The Deed
The seller must bring the deed to the
closing, properly signed and notarized.
The deed is the document that transfers
ownership from the seller to you. Buyers
should have decided what name or names
are to appear on the new deed.
HUD-1 Settlement Statement
Required by federal law, this itemizes the
services provided and lists the charges to
the buyer and the seller. The settlement
agent conducting the closing fills it out.
Buyer and seller must sign it.
Truth-In-Lending (TIL) Statement
Another document required by federal law,
this says mortgage lenders are required to
give a copy to all loan applicants within
three days of receiving their initial
application and a final copy at closing.
It spells out the annual percentage rate
(APR), which reflects the cost of your
mortgage at a yearly rate.
61
Study Guide | Module VIII
Should the actual APR differ by more
than a small amount from the lender’s
original estimate, the lender must give you
a corrected TIL statement no later than at
closing. The lender doesn’t have to give
you a new TIL statement if the estimated
APR proves correct, even if other
disclosures have changed. So, it’s smart
to check with the lender immediately
before closing to make sure all the TIL
disclosures remain accurate.
The Mortgage Note
The mortgage note represents your
promise to pay the lender according to the
agreed terms. Again, all terms of the loan
are explained, including the day of the
month when your payments must be made
and where to send them.
The note also details the penalties for
default should you fall behind in paying
the loan, and warns you that the lender
can “call” the loan (require full repayment
before the end of the loan term) if you
don’t make the required payments, or sell
the house without the lender’s written
consent, or if you otherwise violate the
terms of your note or mortgage.
The Mortgage
The mortgage (or “deed of trust”) is the
legal document that secures the note and
gives the lender a legal claim against your
house if you default on the note’s terms.
In effect, you have possession of the
property, but the lender has a partial
ownership interest until the loan has
been fully repaid.
Radian
Homeownership
Study Guide
The mortgage restates the basic information
contained in the note as well as the date of
the final scheduled payment. It states the
responsibilities of the borrower to pay
principal and interest, taxes and insurance
in a timely manner; to maintain hazard
insurance on the property without lapse;
and to adequately maintain the property
and not allow it to deteriorate.
In some states, a “deed of trust” is used
instead of a mortgage. Under a deed of
trust, you (the buyer/borrower) receive
title to the property but you convey title to
a third party called a trustee by signing a
deed of trust. You keep the original recorded
deed from the seller. The trustee holds
title until the entire loan balance is paid.
Loan Discount Points
“Points” charged by a lender to adjust the
yield on the loan to market conditions.
Each point equals 1 percent of the
mortgage amount.
Appraisal Fee
Pays the appraiser. Usually paid by you
when you apply for the mortgage, and
may show on the settlement sheet as
“POC,” or “paid outside closing.”
Credit Report Fee
Covers the cost of the credit report.
Much like the appraisal fee, you probably
paid this fee when you applied for
the mortgage.
Assumption Fee
Who Gets What at Closing
At the closing, everybody gets something.
You get a new home. Most everyone else
gets money. Below are the costs the seller
typically pays. But understand that local
laws and customs vary. In addition, the
buyer and seller often negotiate who pays
what costs. For example, by agreement,
the buyer may pay all closing costs or,
on the flip side, the seller might pay all
closing costs.
What the Lender Gets
Certain fees must be paid to the lender at
closing, including:
Loan Origination Fee
Covers loan processing administrative
costs. It can be a percentage of the loan
(1 percent of the mortgage amount,
for example).
62
Study Guide | Module VIII
You only pay this processing fee if you
take over the payments on the seller’s
existing loan.
Advance Payments
Sometimes, a lender may require you to
prepay some or all of the following items
at closing:
Interest
Typically, you will pay the interest on the
mortgage from the date of settlement to
the beginning of the period covered by
the first monthly payment. For example,
suppose you settle on March 10. Your first
monthly payment begins to accrue on
April 1 and will be payable at the beginning
of May. At closing, you may be required
to prepay the interest for the period from
March 10 through the end of March. By
settling later in the month, closing costs
will be less than if you settle early.
Radian
Homeownership
Study Guide
Private Mortgage Insurance Premium
Additional Charges
The lender may require you to pay the
first-year premium, a lump-sum premium,
or an amount equal to several months’
premium if you have a monthly premium
plan, at closing.
These include surveyor’s fees, charges
for termite and other pest infestation
inspections, and any other inspections
required by the lender.
Adjustments
Homeowner’s (Hazard) Insurance Premium
You may be required to pay the first year’s
premium at settlement. If you have already
paid for the policy, you will be expected
to bring proof of payment.
Escrow Accounts or Reserves
Reserves are required if the lender will
be paying your property taxes, private
mortgage insurance and hazard insurance.
Again, state and local law and lenders’
policies vary.
Title Charges
These are primarily charges payable
to companies or persons other than the
lender. This includes the settlement (or
closing) fee, title search/title insurance
premium (lender’s and owner’s coverage),
and attorney fees (for legal services
provided to the lender).
Note: Fees you pay for your own attorney
are not part of the settlement process.
Recording and Transfer Fees
Many states tax the transfer of real estate
property and require payment of a fee for
recording the purchase documents.
Real Estate Taxes
In some locations, lenders will require
the buyer to pay the balance of real estate
taxes owed at closing, as well as two
months of real estate taxes to deposit in
your escrow account.
63
Study Guide | Module VIII
Another part of the closing involves
looking at items paid by the seller in
advance and items yet to be paid for
which the seller is responsible. The most
common expense to be prorated between
the buyer and seller is property taxes,
which are split so that you take
responsibility for them beginning at
settlement. If the seller already has paid
taxes beyond that date, you reimburse
the seller; if taxes for the current period
have not yet been paid, the amount
owed is deducted from the buyer’s
settlement payment.
It All Comes Together
In calculating the total amount that the
borrower must pay, the settlement statement
begins with the sales price and adds in the
total closing costs for which you are
responsible. Any prorated adjustments
payable by you are then added in.
From this total is deducted your deposit
(in escrow since the seller signed your
purchase offer) and the principal amount
of your mortgage (or of any existing loan
being assumed). Then, any adjustments
payable by the seller are deducted. The
resulting figure is the amount you must
pay at closing.
Radian
Homeownership
Study Guide
Getting the Keys to Your New Home!
Real estate sales professionals say that
the house keys are the one item that
sellers most commonly forget to bring to
settlement. You will want to make sure
you get the keys for all the doors
(basement, garage, etc.).
Understanding Your Obligations As a
Borrower
Now that you have a new home, the most
important thing to remember is to make
your monthly mortgage payment on time.
Making late payments can damage your
credit rating and result in late payment
charges owed to the lender. Failing to
make your mortgage payment will set in
motion a lender’s action to foreclose on
your mortgage and sell your house.
Understanding the Terms of Your Loan
If you have any problems understanding
the terms of the loan, get the answers you
need from your lender. Right away!
Payment Terms
Make sure you know when your payments
are due each month, where to send them,
and what the penalty will be if your
payment is late. (It should all be in your
monthly payment book.)
64
Study Guide | Module VIII
If you can afford it, a smart idea is to
apply a little more than your monthly
payment each time you send in your
check or money order. Most lenders have
a spot on the payment coupon that says
“additional principal payments.” Making
just one extra monthly payment each year
would pay off your mortgage years ahead
of schedule, and save substantial interest.
Some lenders even offer a biweekly
payment schedule, which means a payment
every other week, or 26 payments a year.
Again, this can save you loads of interest.
How much? Check out Chart #8 in
Appendix A to find out.
Transfer of Servicing
At closing, the lender must provide a
statement to you showing how frequently
they transfer (or “sell”) servicing on
mortgage loans to a third party. Transfer
of Servicing simply means that someone
other than the lender who originated and
approved your loan will collect and
process your monthly payments. The
terms of your mortgage remain unchanged
by such a transfer.
Note: Never forward your mortgage
payment to a different party unless you
are officially notified of the transfer by
your current servicer. If in doubt, don’t
hesitate to contact your current servicer.
They usually have a toll-free number on
your monthly payment book.
Radian
Module IX
Homeownership
Study Guide
Maintaining Your Home and Building Its Value
Module Goal
Now that you’ve shopped for a home, made an offer, obtained a mortgage and closed on
your home, it’s time to think about the future. In this module, we’ll discuss some of the
key issues involving the care and maintenance of your new home. Your home is by far
your most valuable asset, so it’s critical that you give it the attention it deserves.
65
Study Guide | Module IX
Radian
Key Considerations
Homeownership
Study Guide
Maintenance and Repairs
It’s your home now. When something
breaks, you can’t just call the building
superintendent. You have to fix it or pay
someone else to fix it. Attention to regular
maintenance can often help you avoid
repairs, and prompt repairs can help you
avoid more costly disasters.
You should use Data Sheet #9, “Seasonal
Home Maintenance Schedule,” in
Appendix B of this Study Guide, to
schedule regular maintenance of
your home.
Even with the most careful maintenance,
your home will need periodic repairs.
Whether you make repairs yourself or hire
someone to do the work, make sure that
the work is done with an eye to keeping
and increasing the value of your home.
Seasonal Inspection Checklist
Put together a seasonal checklist, and mark
your calendar so you’ll remember to use it.
Once you get the routine down, it won’t take
long and it will be well worth the trouble. You
should tailor the checklist to reflect your
own home’s systems and needs.
Cost-effective Energy
Conservation Measures
It comes as a shock to many first-time
homeowners to discover the high cost
of utilities. After the heating and/or air
conditioning bills start coming in, you
may be eager to evaluate where you can
start to conserve energy. There are many
low-cost ways to improve the energy
efficiency of a home that don’t require
specialized skills.
66
Study Guide | Module IX
Some of the areas you might check are:
•
•
•
•
Does your home need more insulation?
Are there storm windows all around?
Is weather stripping and caulking needed?
Is the attic properly ventilated?
Contact your local utility or state agencies
for energy-saving tips specific to your
geographical area. Again, this is not a
one-time effort. Your spring and fall
inspection tours should include home
maintenance procedures aimed at cutting
your energy bills.
Do-It-Yourself Repairs
You won’t need many tools or much
experience to do many basic home repairs
yourself — and you’ll find you can save
literally hundreds of dollars a year! You
may want to take advantage of a home
repair course at your local community
college. Or get hold of a basic home maintenance book such as the reader’s digest
Do-It-Yourself Manual. You’ll be pleased
to discover that you don’t need to hire a
carpenter to replace a broken window pane
or a plumber to fix a leaky faucet. And
you can do a lot with just a few basic tools.
(Here’s a list to get you started.):
• Hammer
• Straight-blade and Phillips screwdriver
(or a combination screwdriver with
interchangeable tips)
• Slip-joint pliers
• Handsaw
• Wall scraper
• Tape measure
• Flashlight
• Plunger (one for both sinks and toilets)
Radian
Homeownership
Study Guide
Major Repairs/Home Improvements
The do-it-yourself approach is good as
far as it goes, but sooner or later, you’ll
undoubtedly need to hire an expert.
Perhaps you are ready for that new
kitchen (or bathroom) you promised
yourself when you moved in.
Hiring a Contractor
4. To protect yourself, especially for a
larger job, be sure you have a contract
that specifies exactly what work is to
be performed, when payments are due,
and so on. Always hold back part of the
payment until after the job is finished.
Does the job require building permits?
If so, who is responsible for obtaining
them? Will the work need to be inspected?
The following guidelines can help you get
such a project done right for a fair price.
Financing Home Improvements
1. Interview several contractors. Find one
that listens to you and with whom you
feel comfortable working.
2. Ask for references and check them.
You might begin by asking friends and
neighbors to recommend companies or
individuals that have provided them
with good service. Many counties and
cities have a licensing process for home
improvement contractors. If the repair
job is relatively small or you’re on a
budget, you may get better service from
an individual than from a large firm.
3. Get cost estimates, and find out
whether these are estimates or firm
bids. Often, especially on older houses,
contractors will not give a firm bid
because it’s impossible to know until
they start the work what they’ll find
and how hard it will be to fix.
67
Study Guide | Module IX
Inquire about obtaining a home improvement loan or a personal loan from a local
financial institution. Sometimes contractors
will provide financing for a major project.
Or, you may want to consider some type
of home equity loan. In any case, be sure
you understand the terms of the loan and
how it is to be repaid. Shop around for the
most attractive interest rate. Are monthly
payments required, or is the loan repayable
in one lump sum? Unfortunately, neither
improvements nor repairs to your home
are tax deductible.
Other Considerations
Here are some other important
considerations once you’ve moved into
your new home:
Home Security
Before moving yourself or your possessions
into your new home, inspect all door and
window locks. Add deadbolt locks and
window locks wherever necessary.
(Insurance companies often give discounts
to homeowners with security systems or
deadbolts. Check with your insurer.)
Have a locksmith change your door locks.
The previous owner may have given keys
to people over a period of time, and you
want to control all access to your home.
Radian
Homeownership
Study Guide
As added protection, install outdoor lighting where it is needed. You can get lights
that turn on automatically every evening
or lights that are activated by motion. If
there are any dark, vulnerable areas on
your property, consider these lights. Not
only will they make your home more
secure, they can make it more attractive.
When you are away from home, use lights
and radios on automatic timers to give the
appearance of activity at home. Arrange to
have your mail and newspapers picked up
or discontinued so that you don’t leave
any telltale welcoming signs for burglars.
Fire Protection
Smoke Detectors
Smoke detectors save lives. So buy them
(if your house doesn’t have them already),
and install them so they can be activated
from any part of the house. Cover
hallways, stairs, out-of-the-way areas,
kitchens, children’s rooms, etc.
Most smoke detectors require batteries, so
create a system for replacing the batteries
regularly. A basic rule of thumb is to put
fresh batteries in your smoke detectors
every six months, or schedule it when you
change the clocks for daylight-saving time.
Exits
Make sure that you, and anyone who stays
at your home, know how to exit the house
from each room in case of fire. Make special
provisions for any second-story windows.
Check to make sure that windows have
not been painted shut.
Doors and windows should be securely
locked, but you have to be able to open
them in an emergency.
68
Study Guide | Module IX
Fire Extinguishers
Purchase enough fire extinguishers for the
house so that you can get to one quickly
in an emergency. For example, if you have
a two-story house, make sure you have
fire extinguishers on both floors. And,
make sure you learn how to use the fire
extinguishers and what kinds of fires they
should and should not be used for.
You will need a fire extinguisher near the
kitchen and any other room than may be
more vulnerable to fire. For example, if
you have a home workshop, be sure to
include a fire extinguisher.
Emergency Phone Numbers
Keep a list of emergency phone numbers
taped to or beside each telephone in your
home. Include phone numbers for all
services in your area:
•
•
•
•
Police or Sheriff’s Department
Fire Department
Poison Control Center
Emergency Medical Service (EMS)
Radian
Module X
Homeownership
Study Guide
Budgeting
Module Goal
This module will provide some budgeting tips, as well as a couple of very basic budgeting
methods. Why is a budget important? Because by keeping track of where your money
goes, you will be better able to keep up with the commitment of owning a house. Even
if you remain a renter, budgeting is something most Americans don’t do, but everyone
should. When you complete this module, you’ll understand better why a family budget
is critical to your financial well-being.
69
Study Guide | Module X
Radian
Budgets Make $en$e!
Homeownership
Study Guide
The key to financial comfort is budgeting.
In only a few months of careful budgeting,
you can reduce overspending and begin
to build cash reserves for savings and
emergencies. Many financial planning
experts suggest the following percentages
in spending your after-tax monthly income:
Once you establish a workable budget,
update it at least once a year to make it
more responsive to your needs. And
remember, a prime reason to budget is
to generate extra cash at the end of each
month — to use for emergencies or savings
for the future.
• Housing
(including PITI) ................25 to 30%
Ten Basic Rules of Money Management
• Food ..................................12 to 14%
• Life insurance
(depending on number of kids)
..............................................5 to 7%
• Medical ..................................variable
• Transportation........................5 to 7%
• Installment debt
....should not exceed 10% of income
• Utilities ..................................variable
• Recreation..............................4 to 6%
• Clothing
(depends on climate) ......6% or more
• Savings ................................5 to 25%
Naturally, these percentages are not
carved in stone. If you are single, you
might spend more on entertainment and
less on life insurance, for example.
70
Study Guide | Module X
1. Plan — Plan for the future, especially
major purchases and occasional
expenses like car insurance or taxes.
2. Set financial goals — Determine short-,
mid- and long-range financial goals.
3. Know your financial situation —
Determine monthly living expenses,
occasional expenses and monthly debt
repayments. Compare outgo to monthly net income. Be aware of your total
indebtedness.
4. Develop a realistic spending plan —
Follow your plan as closely as possible. Evaluate your plan by comparing
actual expenses with planned expenses.
5. Don’t allow expenses to exceed income —
Don’t charge more every month than
you are repaying to your creditors.
Avoid paying only the minimum of
your charge cards.
Radian
Homeownership
Study Guide
6. Save — Save for expenses which occur
infrequently, such as car and home
maintenance. Save 5 to 10% of your
net income. accumulate 3 to 6 months
salary in an emergency fund.
7. Pay your bills on time — Maintain a
good credit rating. If you are unable to
pay your bills as agreed, contact your
creditors and explain your situation.
(See Module XI.)
8. Recognize the difference between necessities and things you desire — Take care
of necessities like housing and food
first. Money should be spent for
“wants” only after basic needs have
been met.
9. Use credit wisely — Use credit for
safety, convenience and planned
purchases. Determine the total you
can comfortably afford to purchase
on credit. Don’t allow your credit
payments to exceed 10% of your net
income. Avoid borrowing from one
creditor to pay another.
10. Keep a record of daily expenditures —
Be aware of where your money is
going. Use a spending diary to assist
you in identifying areas where
adjustments need to be made.
Two Very Basic Ways to Budget
The “Envelope” Method
This method of planning your spending is
convenient for those who are uncomfortable
with numbers. It allows you to set aside
money each week for your various
expenses, rather than keep paper-andpencil records of what you spend.
On a regular basis, money is divided and
put into envelopes for each category.
Envelopes are labeled with specific
purposes and amounts, such as groceries,
lunch money, payments due, clothing,
utilities, etc.
• Amounts for each envelope are
determined by estimating the expenses
in that category and dividing your
income into the appropriate amounts.
With experience, it is easier to anticipate
expenses and more accurately set aside
amounts for each envelope.
• Avoid shifting money from envelope
to envelope.
• Determine in advance your own rules
for borrowing from other envelopes if
the money in one runs out before the
end of the period. If possible, try to
limit your spending to the amount in the
envelope for that expense. Borrowing
from “Savings” or “Emergency” will
draw down your reserves.
• Pay bills right away so you won’t be
tempted to spend the money for
something else.
71
Study Guide | Module X
Radian
Homeownership
Study Guide
• Record amounts in each envelope on the
outside so you know how much to put
in for each pay period. Make changes as
necessary based on past experience and
upcoming expenses.
•. Transfer any money left in envelopes at
the end of the pay period into a savings
and/or emergency bank account.
Advantages of Envelope Method:
Modifications to the Envelope Method:
• Income is conveniently divided to cover
all anticipated expenses.
• The envelope system can be used in
combination with checks and/or
specially designated savings accounts.
You might want to use the envelope
system for such things as food,
household expenses, transportation
and incidentals.
• Money is always where it is supposed to
be, and it is easy to see how much is in
each envelope.
• This is a very simple system which
works best for fairly small incomes.
• Requires little paper-and-pencil
recording.
Disadvantages of Envelope Method:
• You may be uncomfortable keeping cash
in the house.
• Although cash is conveniently available
for spending, it may encourage careless
or unplanned spending.
• When a shortage develops in one
envelope, it is tempting to “borrow”
from another envelope. If this happens,
control is lost.
72
Study Guide | Module X
• For larger, more regular expenses such
as rent or house payments, utilities or
time payments for which you receive a
monthly bill, you may wish to pay by
check. The check for these expenses
can be put in the appropriate envelope
until the payment is due. Of course, the
money to cover the checks needs to be
deposited in your checking account.
• For your regular annual or semi-annual
expenses like car, life and health
insurance, property taxes or other
special expenses, you may want to
establish special savings accounts for
those specific purposes.
Radian
Homeownership
Study Guide
The “Yellow Sheet” Method
This planning method takes its name
from the suggested form used to track
expenditures — a yellow sheet of paper.
• The first step is to determine at which
two times during each month you are
going to pay bills. Usually, the 15th and
30th, or 1st and 15th works best.
• Next, determine your income for each
half-month period. Remember, don’t
count the 4 extra paychecks if paid
weekly, or the 2 extra if paid every other
week. Save them! Build your savings to
3-6 months of earnings. This is your
emergency fund should something
happen to your income.
• On or before the dates you’ve chosen
above, make a list of all bills that need
to be paid by date due. Don’t forget
mail time. Also, remember to include all
budget items including expenses which
occur only occasionally. This amount
should be deposited into a “working
savings” account. These items can help
to balance your outgo against your
income so that you have enough income
to cover anticipated budget expenses.
This yellow sheet method can also help
save food dollars by forcing you to shop
for food on a regular schedule, such as
only once a week.
73
Study Guide | Module X
You will find a checking account an
invaluable aid in making this type of
system work to its potential.
The remainder can be used for fulfilling
some immediate “wants” and saving for
future goals.
Budgeting is Very Important!
For some people, just the idea of a budget
is like a bad case of poison ivy. They
think a budget will stop them from having
fun, but in truth, that simply isn’t the case.
A budget tracks your expenses so you
have a choice in spending money on
what’s really important, and not waste
your hard-earned cash on things you don’t
really want anyway.
Setting up a budget should be a family
event. Couples should track expenses as
one, and agree on the goals they set and
the fat they trim. If you can’t agree on
these issues, a budget is doomed. Of
course, make your kids understand what a
budget is all about. While they won’t like
the idea of giving up some new toy, they
should begin to understand that, as our
mothers told us, “Money doesn’t grow
on trees!”
Radian
Homeownership
Study Guide
Final Budgeting Tips
Use a notebook to maintain your family’s
budget. Keep it simple, so you don’t get
confused. And most of all, understand that
to get that new home, you’ll no doubt
have to give up something. Budgets,
which include savings, are also a way to
save for larger expenditures, such as a
new car, furniture, a vacation, etc.
A newspaper article that recently
appeared in the Philadelphia Inquirer
outlined some local mortgage programs
for low-income people. As one of the
people who got a mortgage and a new
house told the reporter, “There was a lot
of sacrifice. We like to eat in fast-food
restaurants. We stopped. We used to shop
at the mall. We stopped. My older
children didn’t understand. They kept
asking why they couldn’t have this or that.
I told them it was be-cause I’m trying to
buy a home we can call our own.”
74
Study Guide | Module X
That, in a few words, sums up why
budgeting is invaluable in buying,
and keeping, a home. We’ve included
Worksheet #6, “A Simple Budget For
Your New Home” in the Radian Guaranty
Workbook. Use it, and make sure to start
a budget right away.
Radian
Module XI
Homeownership
Study Guide
Handling Financial Emergencies
Module Goal
It can happen to anyone. Even when a family has the best intentions, financial hardship
can spring up unexpectedly. This module focuses on how to handle financial emergencies
that may affect your ability to make mortgage payments.
The following information will show you how to avoid some problems and how to get
help before it’s too late. In addition, the process and consequences of mortgage foreclosure
are explained in general terms. Finally, we’ve included some general advice on dealing
with creditors other than your mortgage lender.
75
Study Guide | Module XI
Radian
Financial Problems: What to Do
Homeownership
Study Guide
During the course of homeownership,
borrowers sometimes experience financial
difficulties beyond their control. And
those difficulties may affect their ability
to make mortgage payments on time.
In this case, it’s very important to take
action early — even before a payment is
sent in late or missed entirely. Because of
stress brought on by mounting problems,
borrowers often take the wrong initial
steps. The result: correctable problems
worsen and, in the worst case, become
unsolvable.
Radian Guaranty offers this list of early
warning signs, any one of which should
cause a homeowner to call the mortgage
lender or (servicer) to discuss the situation
before it gets out of hand.
Early Warning Signs
• Are you making your mortgage
payments after the late charge attaches;
usually after the 15th of the month?
• Are you making your mortgage
payments from savings or other sources
besides your normal income?
• Have you or your co-borrower been
notified that you will be laid off
sometime in the future? Or, is there a
strong possibility you’ll be laid off?
• Do your total monthly payments to
creditors often exceed your net
monthly income?
76
Study Guide | Module XI
• Do you have to borrow money to make
minimum monthly payments to your
creditors?
• Are you unable to make minimum
monthly payments to your creditors?
• Are you finding it difficult to sell your
home for enough money to pay off
your mortgage?
If, during the course of owning your
home, you answered “yes” to any of those
questions, you should call your mortgage
servicer or lender, because it may not be
too late to resolve the situation.
Help Is All Around
One of the best ways to get help is to
contact a credit counseling agency in
your area. These organizations employ
counselors who will help homeowners
develop a recovery plan to deal with all
of your creditors. They may even provide
services of financial assistance or help
with food and other basic needs that may
be available in your community. Many of
these agencies are non-profit organizations
that do not charge you a fee.
While there is no hard-and-fast rule, it is
generally advisable to contact one of these
agencies if you need an extended relief
program as opposed to a short-term (one
to three months) remedy that your servicer
may allow.
Whatever route you take, the idea is to be
proactive. Don’t sit around worrying or
waiting in attempts to solve your
mortgage payment problems.
Radian
Homeownership
Study Guide
Credit Control
Once you become a homeowner and your
mortgage is recorded as part of the public
record, you may be aggressively solicited
to borrow on the home’s equity for reasons
ranging from home improvement loans to
education or vacations. While these are
some of the many legitimate reasons to
borrow on the equity in your home, be
very careful not to overextend on credit,
both secured and unsecured. Rapid credit
buildup is a major reason why some homeowners experience financial difficulties
soon after purchasing a home.
In fact, you will be required to sign
a “Borrower Acknowledgment and
Authorization” form at closing. That
form certifies that you’ve successfully
completed the required homebuyer
education counseling. It also authorizes
your mortgage servicer to refer you to a
third-party counseling agency or private
mortgage insurer for early delinquency
intervention counseling, if necessary.
See Data Sheet #10, “Borrower
Acknowledgment and Authorization
Form,” in Appendix B of the Radian
Guaranty Study Guide.
When prioritizing the payment of bills,
the mortgage should always be paid first.
Later on in this module, some guidance is
offered on how to handle other creditors
— including utilities and credit card
issuers. This section focuses on what to
do when making the mortgage payment
becomes difficult.
Communication
When you speak with your mortgage
lender, servicer and/or insurer, keep in mind
the three rules that will help you avoid
mortgage foreclosure and its consequences
as explained later in this module.
It’s important to respond quickly and
accurately to questions posed by these
counselors (and/or mortgage servicers) so
an appropriate solution can be put together.
• Always return their phone calls
The Three C’s: Communication, Cooperation
and Commitment
If you get into financial trouble, take the
initiative and call your mortgage servicer.
Under many loan programs, particularly
the Fannie Mae Community Homebuyer’s
Program, lenders, servicers and/or private
mortgage insurers will provide special
counseling services entitled “Early
Delinquency Intervention Programs” to
assist you. Included with your welcome
letter from the lender will be a list of
counselors with toll-free phone numbers.
77
Study Guide | Module XI
• Give the complete reason(s) for the
delinquency, or why you anticipate a
problem in the near future
• Explain completely any ideas you have
to resolve the problem
• Agree to a face-to-face interview with
a counselor if one is required
Radian
Homeownership
Study Guide
Cooperation
Try to comply with requests for additional
information that will help the counselor
develop a workout plan.
• Accurately complete any financial
disclosure forms and return them in a
timely manner
• Provide additional information such
as payment stubs, W-2 forms or tax
returns, if requested
It is also a sign of commitment when
borrowers respond to questions from loan
counselors, and follow their directions so
a realistic alternative to foreclosure can
be created if at all possible.
But the best evidence of commitment is
when a borrower lives up to repayment
plans or other types of workout plans
agreed to with their lenders.
Other Major Issues
Mortgage Foreclosure
• Write a hardship letter that clearly
lays out the extent and cause of your
financial problems
• Provide the name and phone number of
the Realtor with whom your property is
listed (if this is the case)
• If you have moved out of the property,
give your new address and phone
number or that of your co-borrower, if
you are no longer living together. Do
the same if you have changed jobs
Commitment
Just as the decision to buy a home
is more than just dollars and cents,
considering a foreclosure alternative is
not just a numbers game, either. While
it’s important to analyze income and
expenses as well as liabilities and assets,
a borrower’s commitment to retaining
homeownership is critical.
You can see this commitment when a
homeowner maintains the condition of
the property with proper care and
maintenance — even in tough
economic times.
78
Study Guide | Module XI
Remember, mortgage lenders are not in
business to own real estate. On the other
hand, if the mortgage is not being paid
and a loan workout cannot be arranged,
the property will be taken by the lender or
(servicer) by a process called mortgage
foreclosure. The actual steps in the process
may differ in each state, but the result is
the same. The borrower eventually loses
his or her home.
Possible Unfavorable Credit Rating
Mortgage loan delinquency (when the
payment hasn’t been received on the due
date, but before the second payment is
due) will, in most cases, be reported to
all major credit repositories in the United
States. Once spotted, this information
becomes a part of one’s permanent credit
file and will remain for seven (7) years.
This information may be disclosed to
anyone authorized to access your
credit file.
Radian
Homeownership
Study Guide
A mortgage foreclosure, when completed,
will be recorded in local courthouse
records. Mortgage loan delinquency and
foreclosures are in most cases received
negatively by credit lenders, insurance
companies and prospective employers.
An adverse credit rating may also impair
one’s ability to obtain or keep a job.
It’s important to note that transferring
title to the property into another person’s
or company’s name will not relieve a
borrower from personal liability (or
liability for a deficiency judgment)
unless the lender and possibly the private
mortgage insurance company sign a legal
release agreement.
Possible Personal Liability
Even in divorce cases, where one spouse
signs a property agreement and takes
responsibility for making mortgage
payments, the other spouse is not released
from personal liability without lender
and/or private mortgage insurance
company approval.
While mortgage foreclosure takes away
the borrowers’ ownership, it may not
relieve them from liability for the debt.
State laws vary with respect to this
concept, which is commonly called a
deficiency right. But it basically works
as follows:
Beware of Wolves in Sheep’s Clothing!
• If the market value of the property
at the time the mortgage foreclosure
concludes (usually through a sheriff ’s
sale or auction) is less than the debt
(unpaid principal, delinquent interest,
escrow advances for taxes and
insurance, attorney’s fees and court
costs), the lender may sue the borrower
for the difference.
Many factors are considered before a
deficiency right is pursued. And, as we
stated in the beginning of this section,
the laws of the state where the property is
located will determine the extent to which
a lender (or servicer) or private mortgage
insurer may pursue the deficiency.
The possibility of this may exist, however,
many homeowners do not become aware
of it until it is too late. Or, they are given
poor advice from well-intentioned people
who are not experts in this rather
complicated area.
79
Study Guide | Module XI
Unfortunately, not everyone offering to
assist distressed homeowners who are
behind in their mortgage payments has
the homeowner’s best interests in mind.
Borrowers should be leery of persons or
companies who make promises to help
them avoid the consequences of mortgage
foreclosure in exchange for title to their
property.
• One form of unscrupulous activity
common in some real estate markets is
called “equity skimming.” In this scam,
title to the property is transferred to a
third party or company who then rents it
back to the borrower. The catch is that
the company never makes a mortgage
payment and just collects the rent until
mortgage foreclosure. The borrower still
suffers the consequences of mortgage
foreclosure as allowed by state law.
Radian
Homeownership
Study Guide
• Another type of scheme that takes
advantage of a homeowner’s mortgage
payment difficulties takes a more subtle
approach. We’ll call this activity “the
vulture attack.” It works like this. For a
fee (usually 1% of the sale price), paid
by the homeowner and/or Realtor, the
individual or company guarantees they
can convince the mortgage lender
and/or private mortgage insurer to accept
less than the total amount due to satisfy
or pay off the mortgage debt. They also
claim that since legal title to the property
is transferred to them, the ramifications
of foreclosure will be avoided.
These companies prey on homeowners
who are trying to sell their homes in
markets where values have dropped.
Lenders and private mortgage insurers
usually will not, and are not required
to, approve sales offers from these
companies.
Other Types of Credit Problems
Just as being proactive applies to
mortgage payments, the same holds true
for other debts. When your income
decreases — but the bills don’t, don’t
ignore your situation — contact
creditors NOW.
Don’t ignore bills and past-due notices.
If you don’t contact your creditors about
your financial difficulties and don’t make
scheduled payments, several things can
happen:
• Vital services, such as gas, electric,
water and phone can be shut off
• Late charges and interest can continue
to increase your debt
• Your account may be turned over to an
independent debt collector
Once the account is turned over for
collection, the original creditor loses
almost all control over what would be
an acceptable payment plan. Any good
relationship from personal contact with
the original creditor is lost. Collection
agencies are usually more aggressive and
less willing to compromise.
Borrowers should proceed with extreme
caution with anyone making claims such
as those outlined above. Remember the
helpful hints described earlier in this
module, and the fact that there are loan
counselors, workout specialists and credit
counseling agencies in place to provide
legitimate assistance if at all possible.
80
Study Guide | Module XI
In addition, since they frequently bring
lawsuits against debtors to collect debts and
are more familiar with the legal system,
they are probably more willing to go to
court than the original creditor was.
You have a much better negotiating
position with the original creditor —
don’t wait until the debt is turned over
for collection to discuss your concerns.
Radian
Homeownership
Study Guide
How to Contact Creditors
Contact your creditors in writing. An
example of a letter you can send is
included in Data Sheet #11 in Appendix B
of this Study Guide. A letter is better than
a phone call because:
• You have had a chance to think through
your circumstances and plan your
budget for paying your bills.
• Approximately how long your income
will be reduced. Be realistic; don’t say
you’ll be back to full-time work in a
month if you have no leads at this time.
• You won’t get upset or confused if the
creditor tries verbal intimidation.
• Suggest to the creditor what you think is
a reasonable amount to pay each month
and your plan for repaying the debt.
• You both have a record of your proposal.
After you have written these letters:
Before writing your letters, determine the
following facts:
• Mail a letter to each creditor and keep a
copy for yourself.
• The amount of take-home income you
can count on. Be realistic. Include
unemployment or other benefits,
consistent child support or other
payments, wages for part-time work,
etc. Do not include what you hope to get
from family or any inconsistent sources.
• Write a summary list of your spending
and repayment plans and keep it by the
telephone. Creditors may call with
additional questions. If they do, refer to
your plan and don’t promise increasing
payments you cannot make. Be honest
and courteous.
• Current fixed expenses: Your costs for
housing, vehicle, insurance (if paid
monthly), installment credit, anything
requiring a set monthly payment.
What to Do with Various Creditors
• Current variable expenses: Your costs
for food, clothing, utilities, recreation,
auto gas/repairs, contributions, or any
expense which may vary from month to
month. Again, be realistic. You may be
able to cut down in certain areas, but
cutting your food bill in half or saying
you won’t drive your car or get any
clothes for your children may not
be realistic.
81
• Current periodic expenses: Payments
made semi-annually or annually for
things such as auto registration,
insurance, school tuition, etc.
Study Guide | Module XI
Credit priorities: Not all of your debts
equally impact your family. Below is a
checklist of priorities to establish in
dealing with debts. Your priorities may
differ. Establish your own list, and verify
you have contacted all your creditors.
Remember: Just because a category of
debt is listed as a third priority, that does
not mean it isn’t important. It simply
means you need to contact the higherpriority creditors first.
Radian
Checklist: Creditors to Pay First
Homeownership
Study Guide
First-Level Priority:
•
•
•
•
•
•
Mortgagee or Landlord
Tax Liabilities
Second Mortgages
Auto Loans
Utility Companies
Student Loans
Second-Level Priority:
• Finance Companies (secured)
Third-Level Priority:
•
•
•
•
Credit Cards, Retailers
Doctors and Dentists
Hospitals
Finance Companies (unsecured)
What can happen: The company may
offer budget plans for you to pay off your
bills. There may be emergency funds you
can apply to for help paying past bills.
The company does not want to shut off
your service and is usually willing to
work out a plan to pay your bills.
Car and Other Vehicle Payments
Key point: If you cannot make your car
or other vehicle payments, they can be
repossessed. Repossession means that the
creditor takes the vehicle and it is sold at
a public or private auction. If the vehicle
is sold for less than is still owed on it, as
is often the case, you are still liable for the
remainder that is owed on the vehicle.
Additional Information for Dealing with
Various Creditors
For the following creditors, follow the
basic procedure of notifying them by mail
of your situation as soon as possible and
suggesting partial payments or assistance.
The following information gives advice
on handling each type of debt, and specific
information on how the various creditors
deal with past-due accounts.
Utility Companies
Key point: Each company has its own
procedure to follow before disconnecting
service. The procedure generally includes
notification by mail and/or in person
before the service is turned off.
82
Study Guide | Module XI
What to do: Check with the creditor to see
if the loan can be rewritten for lower
monthly payments. Ask for an extension,
with the extension fee attached to the end
of the loan.
If you do not need the vehicle; e.g., if it is
a second car or a recreational vehicle, ask
the creditor if you could sell the vehicle
and pay the creditor off with what you
receive. Also, find out about the procedure
if you sold the vehicle to someone who
would take over payments for you.
Radian
Homeownership
Study Guide
Credit Card Bills
Key point: Credit card payments are a
major part of your credit report. If you are
late on payments, fail to pay, or if your
accounts are canceled, this will be reported.
If you do not notify these creditors, interest charges will continue to grow, your
accounts could be canceled, and the debt
may be turned over to a collection agency.
Notifying your creditors may not stop
these events; however, creditors are
more likely to assist by waiving interest,
granting extension(s) and reducing
payments.
What to do: Write letters explaining your
situation to all your creditors immediately,
and offer to make a reduced payment. Do
not replace income with credit card cash
advances. Available credit should be used
extremely cautiously to satisfy “needs,”
not wants.
Insurance Premium Payments
Key points: There may be a grace period
in making payments from 10-30 days,
but check with your insurance company.
Also, if you allow insurance to lapse, you
may not be able to renew. Do not let a
short-term situation harm your family’s
well-being.
What to do: Write your insurers immediately and explain your situation. Ask what
payment options are available. Determine
your minimum needs for insurance.
Cancel duplicate policies or non-essential
policies. For basic, essential policies,
consider these options:
83
Study Guide | Module XI
Car Insurance: You must keep liability
coverage; it is generally required by state
law. You may reduce premium costs by
increasing the deductible on collision and
comprehensive, or, if there is no lien,
eliminating the coverage.
Health Insurance: Check to see if the
health insurance provided by your former
employer is continued and for how long.
Find out who is responsible for the premium
and what the amount is. If coverage is not
available or if you can’t afford the premium,
find out if you qualify for Medicaid. Also,
check into policies that would pay for
major hospitalization (with a very high
deductible, these can be less expensive
than the more comprehensive plans), and
find out what community services are
available for routine medical concerns.
Life Insurance: Change your policy to a
less expensive form, if possible. Check
into borrowing money on your policy to
pay premiums.
Your Rights Under the Fair Debt Collection
Practices Act
Debt collectors are prohibited from
harassing, oppressing, abusing you,
threatening to take your property without
the right to do so, or from using false
statements (such as implying that they are
attorneys or work for a credit bureau or
Social Security).
The Fair Debt Collection Practices Act
applies to any personal, family or household debt and covers debt collectors who
regularly collect debts for others; i.e., the
creditors themselves or their lawyers.
Radian
Homeownership
Study Guide
The law further prohibits debt collectors
from contacting you at inconvenient
times (defined at before 8:00 a.m. or
after 9:00 p.m.) or places. The collector
may not contact you at work if your
employer disapproves, and if you notify
the debt collector of this fact in writing.
They also must not tell anyone else that
you are behind on your debts and they
cannot use obscene or abusive language.
Wrap-up
Whether you participated in Radian
Guaranty’s Homeownership Counseling
Program in a classroom or via the SelfStudy/Telecounseling option, we hope that
you’ve learned a lot about the homebuying
and mortgage process.
Remember, you can’t be expected to know
everything. That’s what real estate and
mortgage professionals are for. But we
hope you have a clearer understanding of
the issues. Use this guide as you go
through the process.
And good luck with your new home!
If you have any questions, call your
lender, or Radian Guaranty’s
Homeownership Counseling Center
at 877 723.4261.
84
Study Guide | Module XI
Radian
Glossary
Homeownership
Study Guide
85
Study Guide | Glossary
Radian
Real Estate Terms
Homeownership
Study Guide
Acceptance
An offeree’s consent to enter into a contract
and be bound by the terms of the offer.
Agreement For Sale
A document in which the purchaser
agrees to buy certain real estate (or
personal property) and the seller agrees
to sell under stated terms and conditions.
Also called sales contract, binder or
earnest money contract.
Asset
A property or right owned, tangible or
intangible, that has monetary value and
is capable of providing future benefits
to the owner.
Amortization
Repayment of a mortgage with equal
periodic payments of both principal and
interest, calculated to retire the debt at
the end of a fixed period of time.
Balloon Mortgage
A mortgage with periodic installments
of principal and interest that do not fully
amortize the loan. The balance of the
mortgage is due in a lump sum at a specified date, usually at the end of the term.
Annual Percentage
A term used in the Truth-In-Lending Act
to represent the full cost of a loan,
including interest, discount and loan fees.
Borrower
One who receives funds in the form of a
loan with the obligation of repaying the
loan in full with interest.
Appraisal
An opinion or estimate of the current
market value of a home.
Broker
One who receives a commission or fee
for bringing buyer and seller together and
assisting in the negotiation of contracts
between them. In most states, a license
is required.
Appraiser
A professional who determines the market
value of a home based on its condition
and the selling prices of comparable
homes recently sold in the area. His or
her job is to compute a fair estimate of
market value to help the lender decide on
a reasonable loan amount.
Appreciation
An increase in value for any reason,
except inflation.
86
Assessed Valuation
The value that a taxing authority places
upon personal property for the purposes
of computing taxes.
Study Guide | Glossary
Building Code
Regulations based on safety and health
standards that govern design, construction
and materials used in construction.
Buy-down Mortgage
A mortgage with a below-market interest
rate made by a lender in return for an
interest rate subsidy in the form of any
additional discount points paid by the
builder, seller or buyer.
Radian
Homeownership
Study Guide
Caps
Consumer safeguards on an adjustablerate mortgage that limit the amount
monthly payments may change.
Certificate of Occupancy
Written authorization given by a local
municipality that allows a newly completed
or substantially completed structure to
be inhabited.
Chain of Title
The history of all the documents transferring title to a parcel of real property, starting
with the earliest existing document and
ending with the most recent.
Clear title
Unencumbered title to real property, free
of items or defects. Also, “free and clear.”
Closing
In real estate, the delivery of a deed,
financial adjustments, the signing of notes
and the disbursement of funds necessary
to close the sale or loan transaction.
Closing Agent/Attorney
A closing agent or attorney assures that
all documentation related to the sale of
a house has been completed properly,
including the title search and title insurance.
The closing agent explains all closing
documents to the buyer and the seller,
obtains their signatures where necessary
and records the documents.
Closing Costs
Fees paid to effect the closing of a real
estate transaction, such as origination
fees, discount points, title insurance fees,
survey fees and attorney’s fees.
87
Study Guide | Glossary
Closing Statement
A financial disclosure giving an account
of all funds received and expected at the
closing, including the escrow deposits for
taxes, hazard insurance and mortgage
insurance.
Collateral
Property pledged as security for a debt;
for example, real estate used as security
for a mortgage.
Commission
An agent’s fee for negotiating a real estate
or loan transaction, often expressed as a
percentage of the sales price or mortgage
amount.
Commitment
An agreement, often in writing, between a
lender and a borrower, to loan money at a
future date subject to compliance with
stated conditions.
Co-mortgagor
A second borrower who signs a mortgage
loan with a mortgagor. The co-mortgagor’s
income, debts and assets are combined
with the mortgagor’s for ratio analysis
and underwriting purposes.
Comparables
Properties used for comparative purposes
in the appraisal process that have similar
characteristics to the subject property.
Condominium
A form of ownership of real property. The
purchaser receives title to a particular unit
and a proportionate interest in certain
common areas.
Radian
Homeownership
Study Guide
Condominium Declaration
The basic condominium document
that must be registered by the developer
before the first unit is sold. This
declaration thoroughly describes the
entire condominium project, including
each unit and all common areas.
Contingency
A condition that must be met before a
contract is binding. For example, the sale
of a house might be contingent upon the
seller paying for certain repairs.
Contract of Sale
A contract between a purchaser and a seller
of real property to convey a title after
certain conditions have been met and
payments have been made.
Conventional Loan
A mortgage loan not insured by FHA or
guaranteed by VA or Rural Development
Credit Rating
A rating given to a person to establish
willingness to pay obligations based upon
one’s past history of timely payment.
Credit Report
A report to a prospective lender on the
credit standing of a prospective borrower,
used to help determine creditworthiness.
Earnest Money
A sum of money given to bind a sale of
real estate; a deposit.
Easement
Right or interest in the land of another
entitling the holder to a specific limited
use, privilege or benefit such as laying a
sewer, putting up electric power lines,
or crossing the property.
Equity
The homeowner’s interest in a property;
the difference between fair market value
and the current amount the owner owes on
the property.
Escrow Account
An account set up by the lender into
which the borrower makes periodic
payments, usually monthly, for taxes,
hazard insurance, assessments and
mortgage insurance premiums. The funds
are held in trust by the lender who pays
the sums as they become due.
Fair Market Value
The price at which property is transferred
between a willing buyer and a willing
seller, each of whom has reasonable
knowledge of all pertinent facts and neither
being under any compulsion to buy or sell.
FHA
Debt-To-Income Ratio
Long-term debt expenses as a percentage
of monthly income. Lenders use this ratio
to qualify borrowers for mortgage loans,
typically setting a maximum debt-toincome ratio of 36%.
88
Study Guide | Glossary
Federal Housing Administration
A division of the Department of Housing
and Urban Development (HUD). Its main
activity is the insuring of residential
mortgage loans made by private lenders.
Radian
FHLMC
Homeownership
Federal Home Loan Mortgage Corporation
Study Guide
A private corporation created by Congress
to support the secondary mortgage market.
It sells participation certificates secured
by pools of conventional mortgage loans,
and their principal and interest are
guaranteed by the federal government.
Popularly known as Freddie Mac.
First Mortgage
A real estate loan that creates a primary
lien against real property.
FNMA
Federal National Mortgage Association
A private corporation created by Congress
to support the secondary mortgage market.
FNMA sells mortgage-backed securities
backed by pools of conventional loans.
Payment of principal and interest on these
securities is backed by the US Government.
Popularly know as Fannie Mae.
Hazard Insurance
A contract that pays for loss on a home
from certain hazards, such as fire.
Homeowners Association
An organization of homeowners residing
within a particular development whose
major purpose is to maintain and provide
community facilities and services for the
common enjoyment of the residents.
Homeowner’s Policy
A multiple-peril insurance policy commonly
called “package policy.” It is available to
owners of private dwellings and covers the
dwelling and contents in the case of fire
or wind damage, theft, liability for property
damage, and personal liability.
Housing Expense Ratio
A homeowner’s monthly housing expense
as a percentage of his or her monthly
income.
Inspector
The property/mechanical inspector
who examines a home to evaluate its
plumbing, electrical work, appliances,
heating and cooling systems, roof and
structural stability.
Gross Monthly Income
The amount of consistent and stable
income that an individual receives each
month, averaged over a period of time.
This amount includes overtime pay,
bonuses, and commissions and income
from dividends or interest, provided the
individual can show a consistent history
of receiving income.
89
Study Guide | Glossary
Interest
Money paid for the use of money. That is,
money paid for a loan.
Radian
Homeownership
Study Guide
Loan-To-Value Ratio
The relationship between the amount of
a home loan and the total value of the
property. For example, if you receive a
loan of $95,000 on a home that costs
$100,000, the loan-to-value ratio is 95%.
Lock-In Rate
A commitment from a lender to make
a loan at a pre-set interest rate at some
future date, usually for not more than
60 days. A fee may be charged to
“lock in” a rate.
Market Value
The highest price that a willing buyer
would pay, and the lowest a willing seller
would accept.
Mortgage
An interest in real property given as
security for the payment of an obligation.
Mortgage Insurance
A policy that allows mortgage lenders to
recover part of their financial losses if a
borrower fails to fully repay a loan.
Mortgage insurance makes it possible to
buy a home with as little as 3% down.
Mortgage Investor
Any person or institution that invests in
mortgages. By buying mortgage loans
from lenders, the mortgage investor
gives the lender funds that can be used
for more lending.
90
Study Guide | Glossary
Mortgage Life Insurance
A type of term life insurance. The amount
of coverage decreases as the mortgage
balance declines. In the event that the
borrower dies while the policy is in
force, the debt is automatically paid by
insurance proceeds.
Mortgagee
A lender to whom property is conveyed as
security for a loan.
Mortgagor
One who borrows money, giving as
security a mortgage or deed of trust on
real property.
Negative Amortization
The unpaid interest which is added to the
mortgage principal in a loan where the
principal balance increases rather than
decreases because the mortgage payments
do not cover the full amount of the
interest due.
PITI
Principal, Interest, Taxes and Insurance
are the components of a mortgage payment.
Planned Unit Development (PUD)
A subdivision having lots or areas owned
in common that are reserved for the use of
some or all of the separately owned lots.
Points
A dollar amount paid to a lender for making
a loan. A point is one percent of the loan
amount. Also called discount points.
Radian
Homeownership
Study Guide
Principal
The original balance of money loaned,
excluding interest. Also, the remaining
balance of a loan, excluding interest.
Real Estate Broker/Agent
The seller of the house pays the real estate
broker to attract potential buyers and help
negotiate the contract between the seller
and the buyer. The broker identifies
available properties for buyers and shows
them homes that meet their criteria.
Realtor
A member of the National Association
of Realtors.
Title
The evidence of ownership in property.
In the case of real estate, the documentary
evidence of ownership is the title deed.
Title may be acquired through purchase,
inheritance, gift, or through foreclosure
of a mortgage.
Title Insurance
Insurance which provides for the payment
of a specific amount of funds for loss
caused by defects in the title to real estate.
Unsecured Note
A loan that is not backed by collateral
(property).
RESPA
Real Estate Settlement Procedures Act.
RESPA is a federal law that requires
lenders to provide home mortgage
borrowers with information about known
or estimated settlement costs.
Servicer
After a mortgage loan closes, the loan
servicer collects the payments, manages
escrow accounts, pays escrowed taxes
and insurance, and manages delinquent
payments. Lenders often “release
servicing to another business,” which
means that a homebuyer will not
necessarily send house payments to
the original lender.
Settlement
The closing of a mortgage loan.
91
Study Guide | Glossary
Veterans Administration (VA)
An independent agency of the federal
government created in 1930. The VA
home loan guaranty program is designed
to encourage lenders to offer long-term,
low-down-payment mortgages to eligible
veterans by guaranteeing the lender
against loss.
Radian
Appendix A
Homeownership
Study Guide
93
Charts
Study Guide | Appendix A
Chart 1
Radian
Calculate Your Mortgage Payment
Homeownership
Study Guide
Chart #1, “Calculate Your Mortgage Payment,” shows how the loan amount and the
interest rate affect the monthly payment. As the chart indicates, the bigger the loan
amount and the higher the interest rate, the larger the borrower’s monthly payment.
You may wonder how these monthly payments are calculated. Most mortgages are
fully “amortized.” This means that at the end of the repayment period (after 30 years of
making the same monthly payment), you will have paid the entire amount of principal
and all the interest charged by the lender. The house is then yours, free and clear.
Loan
Amount
6% 6.5%
7%
$20,000 $120
126
133
$25,000
150
158
166
$30,000
180
190
200
$35,000
210
221
233
$40,000
240
253
266
$45,000
270
284
299
$50,000
300
316
333
$55,000
330
348
366
$60,000
360
380
399
$65,000
390
411
432
$70,000
420
442
446
$75,000
450
474
499
$80,000
480
506
532
$85,000
510
537
566
$90,000
540
569
599
$95,000
570
600
632
$100,000
600
632
665
$110,000
660
695
732
$120,000
720
758
798
$130,000
780
822
865
$140,000
840
885
931
$150,000
900
948
998
$160,000
960 1,011 1,064
$170,000 1,020 1,075 1,131
$180,000 1,080 1,138 1,198
$190,000 1,140 1,201 1,264
Interest Rate
7.5%
140
175
210
245
280
315
350
385
420
454
489
524
559
594
629
664
699
769
839
909
979
1,049
1,119
1,189
1,259
1,328
8% 8.5%
147
183
220
257
293
330
367
404
440
477
514
550
587
624
660
697
734
807
880
954
1,027
1,101
1,174
1,247
1,321
1,394
154
192
231
269
308
346
384
423
461
500
538
577
615
654
692
730
769
846
923
1,000
1,076
1,153
1,230
1,307
1,384
1,461
9% 9.5%
161
201
241
282
322
362
402
443
483
523
563
603
644
684
724
764
805
885
966
1,046
1,126
1,207
1,287
1,368
1,448
1,529
168
210
252
294
336
378
420
462
505
547
589
631
673
715
757
799
841
925
1,009
1,093
1,177
1,261
1,345
1,429
1,514
1,598
10% 10.5%
175
219
263
307
351
395
439
483
527
570
614
658
702
746
790
834
878
965
1,053
1,141
1,229
1,316
1,404
1,492
1,580
1,667
183
229
274
320
366
412
457
503
549
595
640
686
732
778
823
869
915
1,006
1,098
1,189
1,281
1,372
1,464
1,555
1,647
1,738
11% 11.5% 12%
190
238
286
333
381
429
476
524
571
619
667
714
762
809
857
905
952
1,048
1,143
1,238
1,333
1,428
1,524
1,619
1,714
1,809
198
248
297
347
396
446
496
545
594
644
693
743
792
842
891
941
990
1,049
1,188
1,287
1,386
1,485
1,584
1,684
1,783
1,882
206
257
309
360
411
463
514
566
617
669
720
771
823
874
926
977
1,069
1,132
1,234
1,337
1,440
1,543
1,646
1,749
1,852
1,954
The amount of your monthly mortgage payment will depend on how much you borrow,
the term (repayment period) of the loan, and the interest rate. If you know how much you
need to borrow (the purchase price minus your down payment), and what the interest rate
will be, you can use this chart to find what your monthly principal and interest payment
will be if you get a standard, 30-year, fixed-rate mortgage. Note that this chart includes
only principal and interest payments, not property taxes, hazard insurance, or private
mortgage insurance.
94
Study Guide | Appendix A
Source: Fannie Mae
Chart 2
Radian
Are Your Debts Excessive?
Homeownership
Study Guide
95
Use this chart to find out how much existing monthly debt most lenders find acceptable
for borrowers at your income level (based on the “36 percent” qualifying test). Then
compare this figure with your actual monthly debt (see Worksheet #4). If your actual debt
exceeds the “allowable” debt, this will reduce the amount of mortgage you qualify for.
Study Guide | Appendix A
Gross Annual Income
Allowable Debt Payments
$20,000
$133
$25,000
$167
$30,000
$200
$35,000
$233
$40,000
$267
$45,000
$300
$50,000
$333
$55,000
$367
$60,000
$400
$65,000
$432
$70,000
$467
Source: Fannie Mae
Chart 3
Radian
How Large a Mortgage Do You Qualify For?
Homeownership
Study Guide
You can use this chart to find out how large a mortgage you will qualify for based on
your annual income and if you know the interest rate currently being quoted for 30-year
fixed-rate mortgages. Note that these figures do not take into consideration your existing
debt, which could reduce the loan amount for which you qualify.
The calculated mortgage amounts here are based on the assumption the principal and
interest portion of your mortgage payment is 25 percent of your gross income, and the
taxes and insurance portion is roughly 3 percent. For standard mortgage programs, most
lenders qualify buyers whose total housing expenses — principal, interest, taxes and
insurance — equal 28 percent of their gross income. So this chart should provide a
fairly accurate indication of how large a mortgage you can afford.
Annual Income
Interest
Rate
$20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50,000 $55,000 $60,000 $65,000 $70,000
5.5% $73,300 91,600 110,000 126,100 146,700 165,000 183,300 201,700 220,000 238,400 256,700
96
6.0%
69,900 86,800 104,100 121,500 138,800 156,200 173,600 190,900 208,300 225,600 243,000
6.5%
65,900 82,400
98,800 115,300 131,800 148,300 164,800 181,300 187,700 214,200 230,700
7.0%
62,600 78,300
93,900 109,600 125,300 140,900 156,600 172,300 187,900 203,600 219,200
7.5%
59,600 74,500
89,400 104,300 119,200 134,100 149,000 163,900 178,800 193,700 208,600
8.0%
56,700 70,900
85,100
99,300 113,500 127,700 141,900 156,100 170,300 184,500 198,700
8.5%
54,100 67,700
81,200
94,800 108,300 121,900 135,400
9.0%
51,700 64,700
77,700
90,600 103,500 116,500 129,400 142,400 155,300 168,200 181,200
9.5%
49,500 61,900
74,300
86,700
99,100 111,400 123,800 136,200 148,600 161,000 173,400
10.0%
47,400 59,300
71,200
83,000
94,900 106,800 118,600 130,500 142,400 154,300 166,100
10.5%
45,500 56,900
68,300
79,700
91,100 104,400 113,800 125,200 136,600 148,000 159,400
11.0%
43,700 54,600
65,600
76,500
87,500
98,400 109,300 120,300 131,200 142,100 153,100
11.5%
42,000 52,500
63,100
73,600
84,100
94,600 105,100 115,700 126,200 136,700 147,200
12.0%
40,500 50,600
60,700
70,800
81,000
91,100 101,200 111,300 121,500 131,600 141,700
12.5%
39,000 48,800
58,500
68,300
78,000
87,800
Study Guide | Appendix A
149,00 162,500 176,100 189,600
97,600 107,300 117,100 126,800 136,600
Source: Fannie Mae
Chart 4
Radian
A Sample Amortization Schedule
Homeownership
Study Guide
This chart shows a portion of an amortization schedule for a $50,000 mortgage with a
10 percent interest rate repayable over 30 years. The monthly payment is $438.79. It
shows how much of each monthly mortgage payment goes to repay principal and how
much goes toward interest. Note how much interest a borrower pays in the early years
compared to the later years.
Assumptions:
10.0% Interest Rate
$50,000.00 Principal Amount
360 Months
Monthly Payments:
$438.79
Month
Beginning
Principal
Balance
Interest
Paid
Principal
Paid
Remaining
Principal
Balance
Total
Interest
Paid
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
$50,000.00
49,977.88
49,955.58
49,933.09
49,910.41
49,887.55
49,864.49
49,841.24
49,817.80
49,749.16
49,770.33
49,746.19
49,722.06
49,697.06
49,672.99
49,648.14
49,623.09
49,597.83
49,572.36
49,546.68
49,520.78
49,494.67
49,468.34
49,441.79
$416.67
416.48
416.30
416.11
415.92
415.73
415.54
415.34
415.15
415.95
414.75
414.55
414.35
414.15
413.94
413.73
413.53
413.32
413.10
412.89
412.67
412.67
412.24
412.01
$22.12
22.30
22.49
22.68
22.87
22.06
22.25
22.44
23.64
23.83
24.03
24.23
24.44
24.64
24.84
25.05
25.26
25.47
25.68
25.90
26.11
26.33
26.55
26.77
$49,977.88
49,955.58
49,933.09
49,910.41
49,887.55
49,864.49
49,841.24
49,817.80
49,794.16
49,770.33
49,746.29
49,722.06
49,697.63
49,672.99
49,648.14
49,623.09
49,597.83
49,572.36
49,546.68
49,520.78
49,494.67
49,468.34
49,441.79
49,415.02
$416.67
833.15
1,249.45
1,665.55
2,081.47
2,497.20
2,912.74
3,328.09
3,743.23
4,158.18
4,572.94
4,987.49
5,401.84
5,815.99
6,229.93
6,643.66
7,057.19
7,470.50
7,883.61
8,296.50
8,708.17
9,121.63
9,533.86
9,945.88
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
9,508.86
9,149.32
8,786.78
8,421.21
8,052.60
7,680.92
7,306.15
6,928.24
6,547.19
6,162.97
5,775.54
5,384.88
4,990.97
4,593.78
4,193.27
3,789.43
3,382.22
2,971.62
2,557.60
2,140.13
1,719.18
1,294.72
866.72
435.16
79.24
76.24
73.22
70.18
67.11
64.01
60.88
57.74
54.56
51.36
48.13
44.87
41.59
38.28
34.94
31.58
28.19
24.76
21.31
17.83
14.38
10.19
7.22
3.63
(Payments #25 through #336 are not reprinted here.)
97
Study Guide | Appendix A
359.55
362.54
365.56
368.61
371.68
374.78
377.90
381.05
384.23
387.43
390.66
393.91
397.19
400.50
403.84
407.21
410.60
414.02
417.47
420.95
424.48
428.46
431.16
435.16
9,149.32
8,786.78
8,421.21
8,052.60
7,680.92
7,306.15
6,928.24
6,547.19
6,162.97
5,775.54
5,384.88
4,990.97
4,593.78
4,193.27
3,789.43
3,382.22
2,971.62
2,557.60
2,140.13
1,719.18
1,294.72
866.72
435.16
(0.00)
107,020.13
107,096.37
107,169.59
107,239.77
107,306.88
107,370.88
107,431.88
107,489.50
107,544.06
107,595.42
107,643.55
107,688.43
107,730.02
107,768.30
107,803.24
107,834.82
107,863.01
107,887.77
107,909.08
107,926.92
107,941.24
107,952.03
107,959.26
107,962.88
Source: Fannie Mae
Chart 5
Radian
Monthly Expenses & Debt
Homeownership
Study Guide
This chart shows about how high your monthly housing expenses and your long-term
monthly debt can be based on your income. “Allowable monthly housing expense”
includes mortgage principal and interest, property taxes, hazard insurance, and, if
applicable, mortgage insurance.
Allowable monthly housing expense and monthly debt based on your income
98
Gross Annual
Income
Allowable Monthly
Housing Expense
Allowable Long-Term
Monthly Debt
$20,000
$467
$600
$25,000
$583
$750
$30,000
$700
$900
$35,000
$817
$1,050
$40,000
$933
$1,200
$45,000
$1,050
$1,350
$50,000
$1,167
$1,500
$55,000
$1,283
$1,650
$60,000
$1,400
$1,800
$65,000
$1,517
$1,950
$70,000
$1,633
$2,010
$75,000
$1,750
$2,250
$80,000
$1,867
$2,400
$85,000
$1,983
$2,550
$90,000
$2,100
$2,700
$95,000
$2,217
$2,850
$100,000
$2,333
$3,000
$130,000
$3,033
$3,900
Study Guide | Appendix A
Source: Fannie Mae
Chart 6
Radian
Home Mortgage Qualifying: Single Borrower
Homeownership
Study Guide
99
The example below illustrates qualifying calculations for a single borrower.
Single borrower’s gross annual salary
$ 28,500
Total monthly income ($28,500 divided by 12)
$ 2,375
Monthly gross income
Multiply by 28%
Allowable monthly housing costs
$ 2,375
x
.28
$
665
Home purchase price
Down payment
Mortgage loan amount
$ 60,000
– 5,000
$ 55,000
30-year loan/8% interest — monthly payment (PI)
Monthly taxes and insurance
Total monthly housing costs
$
+
$
Monthly gross income
Multiply by 36%
Allowable total monthly debt
$ 2,375
x
.36
$
855
Other monthly debts:
Car payment
Credit cards
Total other monthly debts
+
$
220
50
270
Total monthly housing costs
Total other monthly debts
Total monthly costs
$
$
$
541
270
811
Study Guide | Appendix A
404
137
541
Source: Fannie Mae
Chart 7
Radian
Home Mortgage Qualifying: Joint Borrowers
Homeownership
Study Guide
100
The example below illustrates qualifying calculations for joint borrowers.
Husband’s annual salary
Wife’s annual salary
Total gross annual salary
$ 16,000
$ 14,000
$ 30,000
Total monthly income ($30,000 divided by 12)
$
2,500
Monthly gross income
Multiply by 28%
Allowable monthly housing costs
$
x
$
2,500
.28
700
Home purchase price
Down payment
Mortgage loan amount
$ 59,000
– 4,000
$ 55,000
30-year loan/8% interest — monthly (PI)
Monthly taxes and insurance
Total monthly housing costs
$
+
$
404
150
554
Monthly gross income
Multiply by 36%
Allowable total monthly debt
$
x
$
2,500
.36
900
Other monthly debts:
Car payment
Student loan
Credit cards
Total other monthly debts
+
$
200
110
320
630
Total monthly housing costs
Total other monthly debts
Total monthly costs
$
$
$
554
630
1,184
Study Guide | Appendix A
Source: Fannie Mae
Chart 8
Radian
Beyond the Original Term
Homeownership
Study Guide
Pay it off!
In addition to the original term of your mortgage, your payment schedule can affect how
quickly your loan gets repaid. Most loans require you to make one payment a month, or
12 payments a year.
However, you almost always have the option to make additional principal payments that
will shorten the amount of time it takes to fully repay your mortgage loan. In fact, most
lenders have a place on the payment card marked “additional principal payments.” If you
make just one extra monthly payment each year, you would pay off your mortgage years
ahead of schedule and save a considerable amount in interest payments.
Total Interest paid (at 8.25%) over life of $100,000 Loan
$300
$275
$250
$225
$200
$175
$150
$125
$100
$75
$50
$25
$0
15-Year Loan
20-Year Loan
30-Year Loan
$170,000
Interest
$75,000
Interest
$105,000
Interest
$100,000
Principal
$100,000
Principal
$100,000
Principal
$971
$853
$752
Monthly payment
(Principal & Interest)
Total Interest paid over life of loan
Principal Amount: $100,000
If you want to set up a more frequent payment schedule when you apply for a mortgage,
you should know that some lenders offer bi-weekly payment plans that require a payment
every other week, or 26, sometimes 27, payments a year. You may find that making
payments more often is a better match with your paycheck. It will also save you a
considerable amount of interest over the life of the loan and help you pay off your
mortgage much faster.
101
Study Guide | Appendix A
Source: Fannie Mae
Radian
Appendix B
Homeownership
Study Guide
103
Data Sheets
Study Guide | Appendix B
Data Sheet 1
Radian
About You
Homeownership
Study Guide
Of course, it’s important Radian Guaranty counselors know something about you. A
basic data sheet is shown on the right that will be a snapshot of who you are. Please fill
it in completely, so if your Radian Guaranty counselor asks any questions, the answers
will be readily available. The co-borrower should fill in the form only if he or she is
using their income and debt in the mortgage application process.
Basic Information
Borrower name:__________________________________________________________
Social Security number: ___________________________________________________
Co-borrower name: _______________________________________________________
Social Security number: ___________________________________________________
Married
Single
Separated
Divorced
Borrower marital status (circle one):
Co-borrower marital status:
Married
Single
Separated
Divorced
Employment
Borrower’s employment
Are you self-employed? (circle one):
Yes
No
If “no,” current employer name (company name): _______________________________
Your job title:____________________________________________________________
Number of years and months at this job: ______________________________________
Co-borrower’s employment
Are you self-employed? (circle one):
Yes
No
If “no,” current employer name (company name): _______________________________
Your job title:____________________________________________________________
Number of years and months at this job: ______________________________________
Where you live
Borrower
Your street address: _______________________________________________________
Apartment number: _______________________________________________________
City, state, zip code: ______________________________________________________
How long have you lived there? _____________________________________________
Co-borrower
Your street address: _______________________________________________________
Apartment number: _______________________________________________________
City, state, zip code: ______________________________________________________
How long have you lived there? _____________________________________________
104
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 2
Radian
People You’ll Meet
Homeownership
Study Guide
This data sheet is a place where you can store important phone numbers of the people
you’ll meet along the way in buying your home. Keep this sheet handy throughout the
process, so you can have this information at your fingertips.
Include the name and phone number for each:
Real estate agent/Broker: __________________________________________________
Closing agent/Attorney: ___________________________________________________
Mortgage lender: _________________________________________________________
Mortgage insurer: ________________________________________________________
State/Local housing finance agency: _________________________________________
Loan servicing company: __________________________________________________
(who you send your mortgage payment to)
Home inspector: _________________________________________________________
Appraiser: ______________________________________________________________
Local HUD office: _______________________________________________________
Local Fannie Mae Office: __________________________________________________
Local FHA office: ________________________________________________________
Local VA office: _________________________________________________________
Miscellaneous:___________________________________________________________
List below any other names that should be included:
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
105
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 3
Radian
Rent or Buy?
Homeownership
Study Guide
106
This data sheet provides some key questions about whether or not you are ready to buy
a home. If you answer yes to all of these questions, you are probably ready for that first
home purchase.
■ yes
■ no
Are you sure you want to buy a house?
■ yes
■ no
Do you have steady income and stable employment?
■ yes
■ no
Do you anticipate remaining in the same geographic location
for the next couple of years?
■ yes
■ no
Have you created a budget so you know how much more you
can realistically afford to pay for housing?
■ yes
■ no
Do you have an established credit record or can you build
a nontraditional credit history with records of payments to
previous landlords and utility companies? If so, is your credit
profile favorable? Do you pay on time or before the due date?
■ yes
■ no
Do you have enough money saved for a down payment and
closing costs? If not, can you enlist the aid of relatives or
government or nonprofit agencies that might give or loan
you money?
■ yes
■ no
Have you been “prequalified” by a lender so you know
how much you can borrow based on your income and
existing debt?
■ yes
■ no
Is your existing debt low enough that it will not limit your
ability to qualify for a mortgage?
■ yes
■ no
If not, can you pay down your debt before you attempt to
buy a house?
■ yes
■ no
Have you looked into the benefits and requirements of the
numerous financial options that are now available to lowand moderate-income homebuyers?
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 4
Radian
Your Housing Priorities
Homeownership
Study Guide
This questionnaire, which was prepared by the National Association of Realtors®, can
help you (and your real estate sales professional) assess your house-hunting requirements.
Type of Home:
■
■
■
■
■
■
■
■
Construction:
■ Brick
■ Cement
■ Other
■ Wood Siding
■ Cedar Shingles
Lot:
Size _________________
Type ________________
Rooms (No. & Type):
Bedrooms ____________
Dining _______________
Basement ____________
Bath ________________
Family _______________
Other ________________
Extra:
■ Fireplace
■ Porch
■ Garage
■ Air Conditioning
Heat:
■ Forced Air
■ Other
■ Radiators
Fuel:
■ Gas
Existing
Ranch
Two-story
Traditional
■ Oil
New
Split-level
Other
Contemporary
■ Other
Neighborhood:___________________________________________________________
Transportation Requirements: _______________________________________________
School Requirements: _____________________________________________________
Church: ________________________________________________________________
Price Range:
$ __________________ to $ ___________________
Cash Down Payment:
$ __________________
Special Requirements or Preferences: ________________________________________
_______________________________________________________________________
Family Members (how many):
Adults ______________ Children ________________
Name: _________________________________________________________________
Address:________________________________________________________________
Telephone: ______________________________________ Date: _________________
107
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 5
Radian
The Buyer’s Checklist
Homeownership
Study Guide
Use this checklist, also prepared by the National Association of Realtors®, for rating the
homes you have seen.
Be sure to make duplicate copies of this form for each house that you see.
Location: _______________________________________________________________
Price Range:
$ _____________________
$ __________________
Asking
Neighborhood:
■ Ideal
Mortgage
■ Acceptable
■ Poor
Type of Home and Construction: _____________________________________________
Room:
Bedrooms ____________
Dining _______________
Basement ____________
Bath ________________
Family _______________
Other ________________
Heat:
■ Forced Air
■ Other
■ Radiators
Fuel:
■ Gas
Miscellaneous:
Lot Size _____________
Garage ______________
Schools ______________
Transportation ________
■ Oil
■ Other
Taxes ________________
Porch ________________
Stores _______________
Remarks: _______________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
108
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 6
Mortgage Terms Checklist
Radian
Homeownership
Use this checklist to compare terms of mortgages offered by lenders to find the type of
financing most favorable to your situation.
Study Guide
1.
2.
Name of lender
___________________________________
_________________________________
Name of contact
___________________________________
_________________________________
Phone number
___________________________________
_________________________________
Item
1.
2.
Amount of mortgage needed
____________________________
____________________________
Type of mortgage available:
____________________________
____________________________
Interest rate
____________________________
____________________________
Points
____________________________
____________________________
Annual percentage rate (APR)
____________________________
____________________________
Loan term (15, 20, 30 years)
____________________________
____________________________
Minimum down pmt. required:
____________________________
____________________________
Without PMI
____________________________
____________________________
With PMI
____________________________
____________________________
Up-front cost
____________________________
____________________________
Monthly premiums
____________________________
____________________________
How long required?
____________________________
____________________________
Upon application or approval?
____________________________
____________________________
Interest rate and points?
____________________________
____________________________
Written agreement?
____________________________
____________________________
Effective how long?
____________________________
____________________________
Cost of lock-in?
____________________________
____________________________
Lower lock-in if rates drop?
____________________________
____________________________
Is there a penalty?
____________________________
____________________________
Extra payments allowed?
____________________________
____________________________
Assumable?
____________________________
____________________________
(Fixed-rate, ARM, FHA, VA, Other)
If PMI will be required
Lock-ins
Prepayment
(continued)
109
Study Guide | Appendix B
Source: Fannie Mae
Mortgage Terms Checklist (continued)
Radian
Homeownership
Study Guide
Name of lender
2.
___________________________________
_________________________________
1.
2.
For taxes?
____________________________
____________________________
For insurance?
____________________________
____________________________
Loan processing time
____________________________
____________________________
Application/origination fee
____________________________
____________________________
Credit report fee
____________________________
____________________________
Appraisal fee
____________________________
____________________________
Survey fee
____________________________
____________________________
Lender’s attorney fee
____________________________
____________________________
Title search/Title insurance
____________________________
____________________________
Document preparation fee
____________________________
____________________________
Assumption fee
____________________________
____________________________
Total
____________________________
____________________________
Monthly or bi-weekly
____________________________
____________________________
Initial interest rate
____________________________
____________________________
Adjustment interval
____________________________
____________________________
Financial index/margin
____________________________
____________________________
Periodic
____________________________
____________________________
Lifetime
____________________________
____________________________
Payment cap
Can negative amortization occur? ____________________________
____________________________
If convertible
When can you convert?
____________________________
____________________________
Fees
____________________________
____________________________
Index used
____________________________
____________________________
Margin used
____________________________
____________________________
Escrow required
Processing schedule
Closing cost estimates
Payment schedule
Adjustable-rate
mortgages only
Rate caps
110
1.
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 7
Radian
Pre-application Form
Homeownership
Study Guide
Complete this form before your appointment with the loan officer.
Borrower ________________________________________________________________________
Social Security number ___________________________________________________
Co-Borrower ____________________________________________________________
Social Security number ___________________________________________________
Mailing Address _________________________________________________________
_____________________________________________ Phone __________________
______________________________________________________________________
Property Contact Person __________________________ Phone __________________
Real Estate Broker ______________________________ Phone __________________
Attorney ______________________________________ Phone __________________
Employment (past two years) List most recent employment first:
Name of Employer
Address
Dates
Employed
Current or
Ending Salary
Bank Accounts – savings, checking, etc.
Name of Bank
Address
Account
Number
Type of
Account
Estimated
Balance
Landlords (past two years)
Name of Landlord
Address
Dates You Rented
(continued)
111
Study Guide | Appendix B
Source: Fannie Mae
Radian
Pre-application Form (continued)
Homeownership
Study Guide
Credit cards – Department stores, bank, etc.
Name of Creditor
Account
Number
Address
Estimated
Balance Due
Loan information – Car, student, etc.
Name of Bank
Address
Account
Number
Monthly
Payment
Estimated
Balance Due
Type of
Loan
Date
Paid
Previous credit references – Paid-off loans and other credit
Name of Lender
Address
Account
Number
Remember to bring the following with you:
■ Personal check for application fee
■ Purchase and Sale Agreement
■ Copy of real estate listing of home
■ Earnest money check (photocopy)
■ Payroll stub(s) from employer or profit/loss statement if self-employed
■ Stock/bond photocopies
■ Property tax estimate
■ Hazard insurance estimate
■ Homeowner association fee estimate (if applicable)
■ Information on real estate you own
112
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 8
Radian
Settlement Costs
Homeownership
Study Guide
Use this form to compare costs when shopping for a settlement agent to handle the closing.
Paid from borrower’s
funds at settlement
Paid from seller’s
funds at settlement
Settlement or closing fee
___________________
__________________
Abstract or title search
___________________
__________________
Title examination
___________________
__________________
Title insurance binder
___________________
__________________
Document preparation
___________________
__________________
Notary fees
___________________
__________________
Attorney’s fees
___________________
__________________
(includes above item numbers)
___________________
__________________
Title insurance
___________________
__________________
(includes above item numbers)
___________________
__________________
Lender’s coverage
___________________
__________________
Owner’s coverage
___________________
__________________
Title Charges:
113
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 9
Radian
Seasonal Home Maintenance Schedule
Homeownership
Study Guide
Now that you’ve taken all the steps needed to purchase your desired home, here are
a few tips on maintaining your investment for the years to come.
Fall Checklist
Outside
■ Check all weather stripping and caulking around windows and doors.
Replace or repair as needed.
■ Check for cracks and holes in house siding; fill with caulking as necessary.
■ Remove window air conditioners, or put weatherproof covers on them.
■ Take down screens (if removable). Clean and store.
■ Check storm windows and doors; clean and repair as needed.
Put back up (if removable).
■ Drain outside faucets.
■ Clean gutters and drainpipes so leaves won’t clog them.
■ Check roof for leaks; repair as necessary.
■ Check flashing around vents, skylights and chimneys for leaks.
■ Check chimney for damaged chimney caps and loose or missing mortar.
■ Check chimney flue; clean obstructions. Make sure damper closes tightly.
Inside
■ Check insulation wherever possible. Replace or add as necessary.
■ Have heating system and heat pump serviced; have humidifier checked.
Change or clean filters on furnace.
■ Drain hot water heater and remove sediment from bottom of tank;
clean burner surfaces; adjust burners.
■ Check all faucets for leaks; replace washers if necessary.
■ Check and clean humidifier in accordance with manufacturer’s instructions.
■ Clean refrigerator coils.
(continued)
114
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 9
Radian
Seasonal Home Maintenance Schedule (continued)
Homeownership
Study Guide
Spring Checklist
Outside
■ Check all weather stripping and caulking around windows and doors,
especially if you have air conditioning.
■ Check outside house for cracked or peeling paint. Caulk and repaint as necessary.
■ Remove, clean and store storm windows (if removable).
■ Check all door and window screens; patch or replace as needed.
Put screens up (if removable).
Inside
■ Replace filters on air conditioners.
■ Check dryer vent, stove hood and room fans; clean them.
Change or clean filters on furnace.
■ Check seals on refrigerator and freezer; clean refrigerator coils;
clean burner surfaces; adjust burners.
■ Clean fireplace; leave damper open for improved ventilation if home is not
air conditioned.
■ Check basement wall and floors for dampness; if too moist, remedy as appropriate.
■ Clean dehumidifier according to manufacturer’s instructions.
■ Check leaky faucets and replace washers as necessary.
■ Check attic for proper ventilation; open vents.
■ Clean drapes and blinds; repair as needed.
115
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 10
Radian
Borrower Acknowledgment and Authorization
Homeownership
Study Guide
This is a sample of the form you will receive at closing.
For Fannie Mae 97sm Mortgages and
Community Homebuyer’s Start-Up Mortgages
I. Borrower Acknowledgment of Homebuyer Education
I certify that I have successfully completed the homebuyer education counseling
program that was offered by:
______________________________________________________________________.
II. Borrower Authorization for Referral to Counseling
If I fail to make any monthly mortgage payment within thirty (30) days of the due date
for that payment, I understand that the servicer of my mortgage loan may refer me to a
third-party counseling organization or a mortgage insurer, which will advise me about
finding ways to meet my mortgage obligation. I hereby authorize the servicer to release
certain information related to the servicer’s own experience with me to such third-party
counseling organization or mortgage insurer, and request that the counseling party
contact me.
I further hereby authorize the third-party counseling organization or mortgage insurer to
make a recommendation about appropriate action to take with regard to my mortgage
loan, which may assist the servicer in determining whether to restructure my loan or to
offer other extraordinary services that could preserve my long-term homeownership.
E
L
P
SAM
116
Borrower Signature
Date
Borrower Signature
Date
Study Guide | Appendix B
Source: Fannie Mae
Data Sheet 11
Radian
A Sample Letter to Creditors
Homeownership
Study Guide
We’ve included a sample letter that you might use to work with a creditor if financial
hardship should strike.
September 10, 2000
XYZ Credit Corp.
Central City, USA 17171
Dear Creditor:
Due to a layoff, I am temporarily out of work and as a result,
am experiencing financial difficulty. I have analyzed my current
situation, and in order to provide for necessary household
expenses plus credit payments, I am asking each creditor to
accept a reduced payment for the next three months. By then,
I anticipate being back to work.
I would appreciate your cooperation in making the payment plan
work. In place of the regular payment of $50, I request that you
accept payments of $30 per month during this emergency.
You can be sure that I will resume normal payments as soon as
possible. If there are any changes in my situation, I will notify
you of them as soon as possible.
Sincerely,
Name
Address
Credit account number
117
Study Guide | Appendix B
Source: Fannie Mae
Radian
Notes
Homeownership
Study Guide
119
Study Guide | Notes
Radian
Notes
Homeownership
Study Guide
120
Study Guide | Notes