Preparing for Homeownership-

Determine If You Are Ready To Be A Homeowner

Before you begin to look for a home, you first must know why you want to become a homeowner. Are you ready for homeownership? Is the purchase of a home something you want, or are outside influences like parents, family, friends, tax benefits, or market pressures pushing you toward homeownership? Would you like to own your home, or are you satisfied with renting? If you would prefer to purchase a home, are you able to take on the responsibilities of homeownership? Can you truly afford a house and be comfortable? Can you afford to make minor home repairs? Can you afford to pay for major repairs, such as plumbing, and electrical problems, should the need arise? These represent just a few of the questions you should ask yourself before you prepare to purchase a home. Following are additional items to explore before taking the next step towards homeownership:

VALUES
Prior to looking for a house, it is important to determine what specific features you value in a home. When thinking about buying a home, think about the aspects of a home that are most important to your family as a whole. Do not assume that everyone in the household will share similar values and goals. Ask each person who will live in the house to list what is important to him or her and then compare the answers given by each.

GOALS
Buying a home is probably the most expensive purchase you will make in your lifetime, and is also one of the most important decisions you will ever make. Therefore, it is imperative that you approach the decision carefully, keeping in mind your family´s overall goals.

DESIRES
Most people would like to be able to get everything they desire when choosing a home. Realistically, however, homebuyers are probably not going to get everything they desire. Often, we tend to make purchases based on emotion rather than forethought and logic. Therefore, you should understand the difference between what is desirable and what is acceptable. It is important to prioritize your desires so that you can better choose a suitable home. For instance, if you desire a three-bedroom, two-bath home with a large kitchen and a breakfast nook, you may want to give priority to the number of bedrooms and bathrooms, but be willing to compromise on the size of the kitchen, or whether it has a breakfast nook. By setting such priorities, you can decide when to compromise on a house that meets most, but not all, of your desires.

LOGIC|
While purchasing a home can be an emotional experience, it is important to use logic to make this decision. The simple fact is that you can only borrow a certain amount of money, depending on you income and your other debt. If you have little cash to contribute toward your house, then you are further limited in what you can afford. A REALTOR®, housing counselor, or mortgage loan officer will prequalify you to determine the maximum amount you can borrow towards the purchase of a home. Keep in mind that, in many cases, the borrower won´t really be comfortable taking on the maximum amount of debt for which he or she has been qualified. It is your responsibility to determine the maximum amount of mortgage debt that is right for you. You must communicate this information to your REALTOR and mortgage lender, and be sure to work only with professionals who respect your limits and goals. Once you determine a realistic mortgage amount, you will know the price range of homes you can afford. Keep in mind that you may eventually want to purchase furniture or appliances for your new home. That could become difficult if you spend the majority of your monthly income on housing.

Determine If Homeownership Is Really Right For You

You may think you would like to own your own home, but have you carefully weighed the advantages of homeownership against its disadvantages? For some, paying rent is preferable to the financial burdens of owning a home. Following are some of the points to consider when it comes to owning a home versus paying rent:

WEIGHING THE ADVANTAGES OF HOMEOWNERSHIP

There are a number of benefits to owning a home. Among them is the opportunity to build "equity." Equity is the portion of your home´s value that you own "free and clear." Equity is calculated by subtracting the amount you owe on the home from the home´s actual value. Home equity can help secure future loans for events such as college, major home improvements, or business loans.

Here´s an example of how to calculate equity:

Another key benefit of homeownership is the ability to deduct mortgage interest and property tax on income tax returns. (Borrowers should consult a qualified tax advisor to determine their specific tax benefits). Some of the less tangible benefits include the sense of personal control and sense of belonging to a community that comes with owning a home.

WEIGHING THE DISADVANTAGES OF HOMEOWNERSHIP

Owning a home is not ideal for everyone. With homeownership come a number of challenges. For example, the first year or two of a person´s mortgage are usually the toughest. Often, it is during this time that the majority of a new homeowner´s cash is tied up paying for rehabilitation, repairs, or furnishings. Paying for plumbers, electricians, and other skilled workers can add up quickly. If homeowners want to break even from closing and down payment costs, they should plan to stay in the home at least three to five years. Homeowners have far more responsibility for their homes than renters. Additionally, homeowners experience greater financial risk due to real estate market fluctuations, increases in property taxes, etc.

WEIGHING THE ADVANTAGES OF RENTING

Renting a home is the ideal situation for a number of people. There are a number of advantages to paying rent versus owning a home. Renters have fewer financial responsibilities for maintaining appliances, repairing their homes, or keeping up the condition of the exterior and interior of the residence. Renters often enjoy greater amenities, such as swimming pools, exercise rooms, cable television, party rooms, kitchen appliances, etc. Often, first-time homebuyers have to wait quite a while before they can afford to purchase these amenities. Renters do not experience the same financial burden that homeowners face. A rental deposit does not exceed one month´s rent, and is therefore considerably less than the 3% of the sales price on a house that is often required as a down payment. Rent may fluctuate at the end of the lease, but renters do not have to worry about emergency repairs such as a broken gas line or broken water heater. Renters need not be concerned with greatly fluctuating real estate markets. The market may result in increased rent, but landlords cannot increase rent before negotiating another lease, nor can they increase rent beyond a certain percentage that is capped by state law. In comparison, a homeowner can lose thousands of dollars if the real estate market fluctuates greatly. If renters do not like the neighborhood, the city, or their neighbors, they can easily fix the situation by moving. While renters must follow the terms of their leases, providing a 30-day notice can make moving possible.

WEIGHING THE DISADVANTAGES OF RENTING

For many, paying rent is a transitional phase until the renter can afford his or her own house. Renters do not build up the financial security that comes with home equity. Additionally, renters do not receive tax advantages. Homeowners can deduct their mortgage interest every year from their taxes. Renters do not have similar options. Renters are also limited in their ability to alter their housing to their needs or desires. A homeowner, on the other hand, can do basically what he/she pleases according to building codes and city zoning. Another disadvantage to renting is the possibility that landlords can increase the rent on a regular basis.
 

Research What It Takes To Be A Homeowner

You may have decided that you would like to own a home, but are you really prepared to be a homeowner? If your answers to the questions presented in Steps One and Two have convinced you that you are ready to purchase a home, you must now begin the most intensive phase of preparation: researching what you will need to be eligible for homeownership. This section addresses what you should know about homeownership in advance.

DETERMINING MORTGAGE ELIGIBILITY

In order to be able to buy a home, you must either have money saved, or you must be able to borrow money to purchase your house. It is much easier to get a loan for 95 to 97 percent of the value of your house than it was ten years ago. In order to do this, however, you must be "mortgage eligible." Being "mortgage eligible" means that you qualify to borrow money to purchase a house. How you answer the following questions will help you determine whether or not you are mortgage eligible:

DO YOU HAVE A STEADY INCOME?
"Steady income" means that you can reasonably count on a source of documented money. These include items such as:

• Salary or wage from a job
• Social security benefits
• Survivor benefits for children under 18
• Money from a trust account
• Documented child support
• Net profits from a business, self-employment

Income does not include reimbursable items such as:

• Food stamps
• AFDC
• Unemployment benefits
• Mileage checks
• Cash labor (undocumented)

Following are additional questions to consider in determining if you have a steady income:

• Do you receive permanent benefits from social security or disability?
• What income did you make in the past?
• Has your income changed significantly over the last two years?
• Will your income change significantly over the next two years?
• Is your income documented, or in cash?

DO YOU HAVE STABLE EMPLOYMENT?

• How long have you been employed at your job?
• Do you have a history of changing jobs frequently?

HOW LONG DO YOU PLAN TO REMAIN IN THE AREA?

• Do you plan to be in the area for at least three years?

DO YOU HAVE A GOOD CREDIT HISTORY?

• Have you had a bankruptcy within the last two years?
• Do you have any unpaid collections?
• Do you have a credit history, or do you pay for everything with cash?
• Do you pay bills before or after their due date?
• Do you have unpaid judgments or liens?
• Do you have any alternative credit references in case they´re required? (e.g., rent, auto insurance payments, storage unit payments, utility payments, etc.) Sometimes, for those who have limited established credit, these alternative sources can be used, depending upon lender requirements.

DO YOU HAVE SAVINGS FOR A DOWN PAYMENT AND CLOSING COSTS?

• Do you have a checking or savings account? • If you do, do you make deposits to it on a regular basis?
• If you don´ t, why not? When would you be able to begin making regular deposits?

It is important to understand that while you can get financial assistance from a government or housing finance agency/program, this is usually only partial assistance. Therefore, it is necessary that you have cash available for down payment and closing costs.

EXAMINING YOUR DEBT

While you may have determined that you are financially stable, you must examine your debt before you can take on the financial burden of owning a home. Can you truly afford a home, or will your debt prevent you from being able to comfortably make monthly mortgage payments? In this case, debt refers to those bills or outstanding balances that accrue interest. This includes items such as:

• Car payments
• Student loans
• Credit card bills
• Other installment loans such as a title loans
• Personal loans Debt does not include expense items such as rent, utility bills, telephone, etc.

CALCULATING DEBT

Do you regularly use your credit card to buy things? Does most of your money go towards paying credit cards or consumer bills? In other words, are you an over-spender?

The following formula will help you figure out how much debt is "reasonable" debt:

1. Take your gross monthly income and multiply by 12%
2. Does this number cover all of your credit and consumer payments?
3. If not, your debt is probably too high. This will affect the amount of mortgage loan money for which you qualify. The more debt you have, the less money you can borrow for a house.
   
   
   

   Understand The Home Buying Process

   Once you have determined that you are ready to buy a home, it is important to educate yourself on how the home buying process works. This section will take you through the home buying process so that you can understand how best to prepare yourself for homeownership.

   • DETERMINING HOW MUCH YOU CAN AFFORD TO PAY

   How much of a house payment can you afford? Mortgage lenders will qualify you for the maximum loan amount, according to your income, debt, and prevailing interest rate. However, this may not be the actual amount you want to borrow. Remember that you can always borrow less. Take your projected PITI (principal, interest, taxes, and insurance) and all your other debt payments and calculate what you have left, based on your net income. Do you have extra money left? Or will you be "house poor"?

   A mortgage loan officer takes many variables into account when they pre-qualify a prospective homebuyer. Credit score, current salary, employment history, and current debt are major factors in the approval process. However, the homebuyer must be keenly aware that it is he who is paying the mortgage note. Lenders often qualify a homebuyer for a loan amount that exceeds the comfort level of the borrower. It is the homeowner´s responsibility to tell both the lender and the real estate agent that s/he desires to spend less than that amount.

   As mentioned in a previous section, you must also understand the difference between what you desire in a home and what you can afford. Once you establish what you can afford, you must familiarize yourself with the particular areas within your local real estate market that are likely to offer houses in your price range.

    

   UNDERSTANDING HOME BUYING RATIOS

   Lenders use two common ratios to determine the maximum home mortgage loan amount they will allow you.

   The first ratio lenders use compares your total monthly housing costs with your total monthly gross income. Your expected monthly housing costs, including mortgage principal, interest, taxes and insurance (PITI) should not exceed 28% of your income (although many home loan programs allow up to 35%).

   The second ratio lenders use is your debt-to-income ratio. Your total monthly debt, including your expected PITI, credit card, and other loan payments, should not exceed 38% of your gross monthly income. The actual percentages vary by lender and home mortgage loan program, but keep in mind that your goal is to arrange a mortgage that best suits your needs without creating a financial burden.

   Your home buying ratios, in combination with your credit score, which is also known also known as a FICO® score, are two of the most important factors lenders consider when you apply for a home mortgage loan. Keep in the mind that taxes and insurance vary from county to county.

    

   EXAMINING YOUR CREDIT

   It is preferable for a homebuyer to have at least four (4) good credit references when qualifying for a loan.

   Traditional credit references include:

   • Car loans
   • Credit cards
   • Student loans
   • Personal loans

   Non-traditional credit references can include:

   • Rent payments
   • Utility payments
   • Phone payments
   • Storage payments
   • Title loans
   • Car insurance payments, etc.

   If a homebuyer has poor credit, it is more difficult to qualify for a mortgage. A borrower with good credit means that s/he has:

   • No unpaid judgments or liens
   • No foreclosures within 10 years
   • No bankruptcies within the last two years
   • No unpaid collections
   • No slow pays or late pays within the six months prior to applying for a mortgage
   • No delinquent child support obligations

   CREDIT SCORES

   During the past several years, credit scores have become increasingly important in determining if a consumer qualifies for a favorable interest rate. Recently, credit scoring has even been used to determine insurance rates. The higher your credit score, the more favorable your insurance rate will be.

   Along with checking your credit report, lenders can also access your credit score, which is based, in part,on the information in the report. That score is calculated by a mathematical equation, which evaluates a variety of factors in your credit report. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score identifies your level of future credit risk.

   The term FICO refers to a credit scoring system developed by Fair Isaac & Company. The FICO score was developed in the 1950s as a tool lenders can use in determining the creditworthiness of the prospective borrower. It calculates the statistical likelihood that a borrower will or will not pay a debt. FICO scores range from 300 to 890. The higher the score, the more attractive the interest rate the homebuyer will receive. In order for a FICO score to be calculated on your credit report, the report must contain at least one account that has been open for at least six months. In addition, the report must contain at least one account that has been updated in the past six months. This ensures that there is enough information- and
   enough recent information- in your report on which to base a score.

   ABOUT FICO SCORES

   Three major credit reporting agencies, Equifax, Experian, and TransUnion, provide FICO scores to lenders.

   

   FICO scores are believed to provide the best guide to future risk based solely on credit report data. The higher the FICO score, the lower the risk of default. At the same time, no score can predict whether a specific individual will be a "good" or "bad" customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single "cutoff score" used by all lenders and there are many additional factors that lenders use to determine your actual creditworthiness and interest rate. At least you now have a general idea of how lenders determine how much credit to offer and what interest rate to charge a particular borrower.

   OTHER NAMES FOR FICO SCORES

   FICO scores have different names at each of the three credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac & Co., and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data. The chart below gives the proprietary name each bureau uses in referring to a credit score.

   Credit Reporting Agency	FICO Score Name
   Equifax	BEACON®
   Experian	Experian/Fair Isaac Risk Model
   TransUnion	Empirica®

   In general, when people talk about "your score," they are talking about your current FICO score. However, there is no one score used to make decisions about you. This is true for the following reasons:

   • Credit Bureau Scores Are Not The Only Scores Used.
     Many lenders use their own scores, which often will include the FICO score as well as other information about you.
     
   • FICO Scores Are Not The Only Credit Bureau Scores.
     Although FICO scores are the most commonly used, there are other credit bureau scores. These credit bureau scores may evaluate your credit report differently than FICO scores. In some cases, a higher score may mean more risk, not less risk, as with FICO scores.
     
   • Credit Reporting Agencies May Score Differently.
     The FICO score from each credit reporting agency considers only the data in your credit report at that particular agency. If your current scores from the three credit reporting agencies are different, it is most likely because these agencies each have slightly different information on you.
     
   • Your FICO Score Changes Over Time.
     As your data changes at the credit reporting agency, so will any new score based on your credit report. So your FICO score from a month ago is probably not the same score a lender would get from the credit reporting agency today.

    

   IMPROVING YOUR CREDIT SCORE

   Raising your credit score is a bit like losing weight: it takes time, and there is no quick fix. In fact, quickfix efforts can backfire. The best advice is to manage credit responsibly over a period of time. Following are tips that will help you maintain good credit history:

   • Pay Your Bills On Time.
     Delinquent payments and collections will have a negative impact on your score.
     
   • If You Have Missed Payments, Get Current And Stay Current.
     The longer and more consistently you pay your bills on time, the higher your score will be.
     
   • Be Aware That Paying Off A Collection Account Will Not Remove It From Your Credit Report.
     Your history will stay on your report for seven years. However, most lenders require that collection accounts be paid in order to proceed with your mortgage approval process.
     
   • If You Are Having Trouble Making Ends Meet, Contact Your Creditors Or See A Legitimate Non-Profit Credit Counselor.
     This will not improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

   If you have accounts on which you carry a balance, the following tips will assist you:

   • Keep Balances Low On Credit Cards And Other "Revolving Credit."
     High outstanding debt can affect your score.
     
   • Pay Off Debt, Rather Than Moving It Around.
     The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
     
   • Don´t Close Unused Credit Cards As A Short-Term Strategy To Raise Your Score.
     
   • Don´t Open A Number Of New Credit Cards That You Don´t Need Just To Increase Your Available Credit.
     This approach could backfire and actually lower your score.
     
   • If You Have Been Managing Credit For Only A Short Time, Don´t Open Several New Accounts Too Rapidly.
     New accounts will lower your average account age. This will adversely affect your score, particularly if your file contains limited credit information. Additionally, rapid account buildup can look risky, especially if you are a new credit user.

   If you are trying to establish or re-establish credit history, the following tips will help you:

   • Do Your Rate Shopping For A Given Loan Within A Focused Period Of Time.
     FICO scores distinguish between a search for a single loan and a search for many new credit lines in part by the length of time over which inquiries occur.
     
   • Re-Establish Your Credit History If You Have Had Problems.
     Opening new accounts responsibly and paying them off on time will raise your score in the long term.
     
   • Request And Check Your Own Credit Report.
     This won´t affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
     
   • Apply For And Open New Credit Accounts Only As Needed.
     Don´t open accounts just to have a better credit mix: it probably won´t raise your score.
     
   • Manage Credit Cards Responsibly.
     In general, credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
     
   • Be Aware That Closing An Account Doesn´t Make It Go Away.
     A closed account will still show up on your credit report, and it may be included in your score.

   Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information. Your social security number, date of birth, and employment information are used to identify you. These factors are not used in scoring. Updates to this information come from information you supply to lenders.

    

   UNDERSTANDING TRADE LINES

   Trade lines are your credit accounts, past and present. Lenders report on each account you have established with them. They report the type of account (bank card, auto loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.

    

   MAKING INQUIRIES

   When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of everyone who has accessed your credit report within the last two years. The report you see lists both "voluntary" inquiries, spurred by your own requests for credit, and "involuntary" inquires, such as when lenders order your report so as to make you a pre-approved credit offer in the mail.

    

   UNDERSTANDING PUBLIC RECORD AND COLLECTION ITEMS

   Credit reporting agencies also collect public record information from state and county courts and information on overdue debt from collection agencies. Public record information includes bankruptcies, foreclosures, suits, wage attachments, liens, and judgments.

   ---

   TRANSUNION PERSONAL CREDIT REPORT

   Doe, John 1515 Mockingbird Lane Anytown, USA 17999 Personal Data	Date of Report: 02/03/04 File Number: 5234322
   Former Address 321 Noplace Road Anytown, USA 17999 Employment Data	Reported Social Security Number: 123-45-6789 Date of Birth: 08/08/65 You have been in our files since: 10/01/88
   Employer: ABC Company, Inc. Position: Manager	Address: 123 Snow Palace Ave. Camden, NJ 09877 Date Verified: 10/18/2001

   PUBLIC RECORD

   The following items obtained from public records appear on your report. You may be required to explain public record items to potential creditors. Any bankruptcy information will remain on your report for 10 years from date of filing. Unpaid tax liens will generally be reported for an indefinite period of time depending on your state of residence. Paid tax liens may be reported 7 years from date of payment. All other public record information, including discharged Chapter 13 Bankruptcy and any accounts containing adverse information may be reported for 7 years.

   Docket Number: SM 102030 Small Claims Plaintiff: XYZ Corporation Plaintiff Attorney: PRO SE

   Paid civil judgment: 01/03/98 Assets Liabilities: $819 Paid 09/01/1998

   ADVERSE ACCOUNT INFORMATION SECTION

   The following accounts contain information that some creditors may consider to be adverse. Adverse account information may generally be reported for 7 years from the date of first delinquency, depending on your state of residence. The adverse information in these accounts has been printed in for your convenience to help you understand your report. They are not bracketed this way for creditors.

   XYZ Updated Date: 02/15/2003 Opened: 05/01/2000 Closed: 12/01/2000

   Acct. # 098767903 Balance: 0 Most owed: $939                    $80 Past Due: $0

   Installment Account Automobile Individual Account Payment Terms: 60 Monthly Credit Limit $0

   SATISFACTORY ACCOUNT INFORMATION SECTION

   The following accounts are reported with no adverse information

   \Bank of Arco Updated Date: 02/15/2003 Opened: 03/01/1996

   Acct: # 98765558 Balance: $3678 Most owed: $3907 Past Due: $0

   Revolving Account Credit Card - Joint Account Payment terms Credit Limit: $5000

   REGULAR INQUIRY SECTION

   The following companies have received your credit report. Their inquiries remain on your credit report for two years.

   Date 09/13/2002 08/06/2002

   Inquiry Type Individual Joint

   Subscriber Name XYZ Financial Corp. Credit Data/ABC Corp.

   Companies that request your credit report must first provide certain information about you. Within the past 90 days, companies that requested your report provided the following information:

   Date 08/06/2002 Identifying information they provided: Doe, John J. 1515 Mocking Bird Lane Anytown, USA 17999 Employer: Acme Rentals Date: 09/16/2002 Identifying information they provided: Doe, John J. 1515 Mocking Bird Lane Anytown, USA 17999 Employer: Acme Rentals PROMOTIONAL INQUIRY SECTION Date 02/10/03      MBNAAmerica 11/01/02      XXYY Financial

   Subscriber Name XYZ Financial Corp. Subscriber Name Credit Data/ABC Corp.

   ACCOUNT REVIEW INQUIRY SECTION

   The companies listed below obtained information from your consumer report for the purpose of an account review or any other business transaction with you. These inquires are not displayed to anyone but you and will not affect the decision of any other creditors or any score.

   Date 02/15/2003 02/01/2003 CONSUMER STATEMENT SECTION No Consumer Statement on file SPECIAL MESSAGES SECTION No Special Messages on file END OF REPORT SECTION	Subcriber name AFDE Financial ABCD Bank
   If you believe any of the information in your credit report is incorrect please let us know. Please address all correspondence regarding your credit report to:
   Contact Bureau:

   
   Credit Bureau´s Name
   Bureau Address: 222 1st Avenue
   Anytown, USA 99999
   1-800-555-5555
   Our Business Hours: 6:30 A.M. to 2:30 P.M. Monday thru Friday, except on major holidays.
   A. PERSONAL CREDIT SCORE
   Your Credit Score: 600
   Minimum Score +150
   Maximum Score +934
   B. FACTOR DESCRIPTION

   Factor 1: Collection amounts ever owed are too high. Consumers with collection activity are more likely to have future delinquency; making prompt payments over a longer period of time may improve your score.

   Factor 2: Too many serious delinquencies. Your credit report reflects one or more accounts with a delinquent payment history of 90 days or more past due. Making prompt payments over time may improve your credit score.

   Factor 3: Average balance of revolving accounts is too high. Lowering your balances on these accounts may improve your credit score

   Factor 4: Too many delinquencies. Your credit report reflects delinquent payment history on one or more accounts. Making prompt payments over time may improve your credit score

    

   CHECKING YOUR CREDIT REPORT

   You should make sure the information in your credit report is correct. Not only is your credit score based on this information, but lenders also review this information in making credit decisions. Review your credit report from each credit reporting agency at least once a year and before making a large purchase, like a house or car. If you have been turned down for employment or credit during the last 60 days, you are entitled to one free credit report. To request a copy, contact the credit reporting agencies directly:

   • Equifax: (800) 685-1111, www.equifax.com
   • Experian (formerly TRW): (888) 397-3742, www.experian.com
   • TransUnion: (800) 888-4213, www.transunion.com

   If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report. Your lender will need to reorder your credit report and score once any changes have been made to your credit file. Small errors may have little or no effect on your score. If there are significant errors, however, the lender may disregard the score. You may order your own score on the web at:

   (www.MYFICO.com)

    

   BORROWING WITH POOR CREDIT

   
   There are some lenders (known in the industry as "subprime" lenders) that will provide loans to high-risk borrowers, but they will charge higher interest rates. Before approaching these lenders, you must factor in the cost of these loans. Will these higher interest rate loans prevent you from recovering from financial difficulties? Can you postpone borrowing until you clear up at least some of your credit problems? If you can, you may be able to receive a lower interest rate in the future. Before making your decision, ask a housing counselor to provide you with a cost analysis. As with anything you buy, be sure to shop around for the best terms.

    

   UNDERSTANDING MORTGAGE LOANS

   There are a number of loan products available to low- and moderate-income buyers. The majority of loans that these homebuyers use come from the following sources:

   • FHA (insured by Federal Housing Administration, a department of HUD)
   • Community Home Buyers
   • VA (guaranteed by Veterans Administration)
   • Rural Development
   • Conventional

   FHA LOANS

   FHA loans are originated by an FHA-approved mortgage lender and are guaranteed by the Federal Housing Administration division of HUD. Borrowers often have easier access to FHA mortgage loans because historically FHA credit requirements have been more flexible. Borrowers never have direct contact with HUD or FHA, as neither HUD nor FHA loan money. Instead, an FHA loan means that in the event that you were to default on your mortgage loan, FHA would pay off the lender and take possession of the
   house. FHA loans typically:

   • Have more flexible credit requirements
   • Qualify borrowers for an existing home loan using 29% of the borrower´s gross monthly income ("front-end ratio") and a debt-to-income ratio of 41%, and for new construction loans using a 31% front-end ratio and a debt-to-income ratio of 43%
   • Require mortgage insurance, which involves an up-front premium charge as well as ongoing monthly premium payments. The exact charges are based on a percentage of your loan amount (usually 1.50% up front and 0.5% monthly). The up-front premium may be financed in the loan, and the monthly premium is usually included in your total payment (PITI). The monthly mortgage insurance payment will automatically be cancelled when the outstanding principal balance reaches 78% of the original purchase price, provided that the monthly mortgage insurance payments have been made for a minimum of 5 years. If a buyer makes a down payment greater than10% of the purchase price and takes a 15-year mortgage, the monthly mortgage insurance premium isn´t required. However, all FHA loans require the up-front premium. The Federal Housing Administration also insures other types of specific loans, such as loans to Native Americans on trust land or the 203(k) rehabilitation loan for any owner-occupied residence.

   COMMUNITY HOME BUYERS

   Most local lenders will offer a loan product that is called Community Home Buyers, usually modeled after the Fannie Mae community homebuyer´s product. Most of these loans are targeted toward low- to moderate-income buyers. Typically, these loans have maximum income limits, which are determined by HUD as 80% of median income for the local area. Additionally, these loans usually allow a higher housing ratio because they understand that lower income borrowers need to use a higher percentage of their overall income to pay for housing. They also usually offer some special incentives, such as no mortgage insurance
   premium and more flexible credit requirements.

   VA LOANS

   VA loans are loans guaranteed by the Veterans Administration for qualified veterans. To determine if you are qualified for a VA loan, contact your local VA office for an eligibility certificate. VA loans do not require the borrower to make a down payment. Not unlike FHA and HUD, the Veterans Administration does not loan money. Instead, they guarantee the loan. The guarantee means the lender is protected against loss if the borrower fails to repay the loan. VA loans typically:

   • Require no down payment
   • Require a funding fee that can range from 1.25% to 3% of the loan amount, depending on whether the borrower is a first-time or subsequent user of benefits.
   • Require no mortgage insurance premium When shopping for a VA loan, it is extremely important to choose a lender that knows how to originate VA loans.

   RURAL DEVELOPMENT

   Rural Development (formerly Farmers Home Administration) is another government entity. In contrast to FHA and VA, however, Rural Development does loan money directly to borrowers, in addition to guaranteeing loans. Their loans are available in communities with a population of 20,000 or fewer people.

   Rural Development has a variety of different loan types including rehabilitation loans, leverage loans, and guaranteed loans. Rural Development loans typically:

   • Target low- to very low-income families
   • Subsidize interest rates to in order to qualify these families for mortgages

   CONVENTIONAL LOANS

   Conventional loans are loans that are not guaranteed or insured by a government entity. Private investors that provide capital for these loans take the risk. Mortgage loans that are not targeted toward first-time homebuyers are often conventional.

   Conventional loans typically:

   • Qualify borrowers for a home loan using lower front-end and debt-to-income ratios (typically 26% and 36%, respectively)
   • Require the borrower to pay a monthly private mortgage insurance premium for loans with less than 20% down. This premium may be gradually reduced as the principal balance of the loan is paid down, and once the principal balance is 80% or less, the premium may be cancelled.
   • Have more stringent credit requirements
   • Require more money down-usually a minimum of 5%

   MFA LOANS

   In 1975, the New Mexico state legislature created the New Mexico Mortgage Finance Authority (MFA) to provide capital for affordable housing. MFA has a number of loan programs that are designed specifically for first-time homebuyers. Each prospective homeowner must meet certain income eligibility criteria, must not have owned a home within the three years prior to applying, and the property cannot exceed certain sales price limits. MFA is similar to FHA, HUD, and the VA in that it does not lend money directly to firsttime homebuyers, nor does it take applications from them or qualify them for loans. MFA has approved many lenders throughout the state to use MFA programs to help first-time homebuyers. A list of eligible
   lenders can be found on MFA´s website: www.housingnm.org.

   MFA programs include:

   • Mortgage$aver Program - Below-market, thirty-year fixed rate mortgage loan for low- to moderateincome first-time homebuyers. Mortgage$aver is available statewide through MFA´s network of lenders.
   • Mortgage$aver Plus - Thirty-year fixed rate mortgage loan with a slightly higher interest rate than the Mortgage$aver loan, and a 3.5% grant that can be used for down payment and closing costs.

   Mortgage$aver Plus is available statewide through MFA´s network of lenders.

   • HELP - Second mortgage loan of up to $4,000 that may be used for down payment and closing cost assistance. HELP loans have an interest rate of 6% and a ten-year term, and they may be used in conjunction with Mortgage$aver. HELP is available statewide through MFA´s network of lenders.
   • Payment$aver - Lower-income families in most areas of the state may be eligible for an 8% subsidy for down payment, closing costs, principal reduction and/or interest rate buy-down. Used in conjunction with Mortgage$aver, Payment$aver does not need not to be paid back unless the property is sold or refinanced. After the first five years of living in the home, Payment$aver loans are forgiven at a rate of 20% per year; they are completely forgiven in ten years. Payment$aver is always available
     outside of the cities of Albuquerque and Las Cruces through MFA´s network of lenders.

   Usually Payment$aver is also available in Albuquerque and Las Cruces: interested borrowers and lenders should check MFA´s website or contact MFA´s Homeownership Department (505-843-6880 or 800-444-6880) to confirm availability.

   • Helping Hand - Provides down payment and closing cost assistance to low-income families in which one person has a disability. The Helping Hand loan is used in conjunction with Mortgage Saver. A maximum amount of $6,000 is available with the Helping Hand program.
   • Building Trust - Provides below-market, thirty-year fixed rate loan to Native American families or individuals from federally recognized tribes who have a home-site lease. MFA makes Mortgage$aver loan products available and waives first-time homebuyer requirements.

    

   APPLYING FOR A LOAN

   INCOME

   Your income will determine the amount of money you can borrow. Some mortgage lenders will allow you to exceed their standard debt-to-income ratio requirements if you can prove that your current housing cost is more than your projected mortgage payment. In other words, it is riskier for the lender if the borrower´s new mortgage payment will be substantially higher than the amount of monthly rent the borrower is used to paying.

   Another factor that affects the amount you can borrow is interest rate. The lower the interest rate, the higher the amount you can borrow. The higher the interest rate, the lower the amount you can borrow. See sample chart below.

   INTEREST RATE	MORTGAGE	PRINCIPAL & INTEREST PAYMENT
   6.00%	$80,000.00	($479.64)
   6.25%	$80,000.00	($492.57)
   6.50%	$80,000.00	($505.65)
   6.75%	$80,000.00	($518.88)
   7.00%	$80,000.00	($532.24)
   7.25%	$80,000.00	($545.74)
   7.50%	$80,000.00	($559.37)
   7.75%	$80,000.00	($573.13)
   8.00%	$80,000.00	($587.01)
   8.25%	$80,000.00	($601.01)
   8.50%	$80,000.00	($615.13)
   8.75%	$80,000.00	($629.36)
   9.00%	$80,000.00	($643.70)

   Note: Your housing expense, or "front-end" ratio includes property taxes, hazard insurance and mortgage insurance payments (PITI). The principal and interest payment calculations in the above table do not include property taxes and hazard insurance, nor do they include monthly mortgage insurance premiums, which are not generally impacted by interest rates.

   EMPLOYMENT & INCOME REQUIREMENTS

   You need a minimum two years of employment in the same line of work to count that income when qualifying for a loan. If you receive assistance such as social security, it must have a documented two-year history and projected two-year future (not unlike a job).

   The above information is only a basic guideline for mortgage qualification. Every lender will consider "compensating factors" that may offset certain aspects of your situation that may be weaker than what is typically preferred. Compensating factors can include:

   • Amount of time at current place of employment and projected duration of employment with current employer

   • Part-time job that cannot be used as qualifying income
   • Child support income
   • Large down payment

    

   10 QUESTIONS TO ASK YOUR MORTGAGE LENDER

   Buying a home for the first time can be overwhelming: REALTORS, builders, and lenders may use terms with which you may not be familiar, and you will be asked to provide a significant amount of personal financial information in order for a lender to determine the right loan for you. Knowing the right questions to ask your mortgage lender will ease the stress, and it may also save you time and money.

   1. What are the interest and annual percentage rates on this mortgage?
      To know exactly what you will be paying in interest over the life of the loan, you need to know these rates. These are two of the important figures to obtain.
   2. How many discount and origination points will I have to pay to get the loan at this rate?
      A "point" is equal to 1% of the original loan amount. For example, a one point charge on a $100,000 loan equals $1,000. Lenders can charge discount points that act to lower, or "buy down" your interest rate and origination points that serve as compensation to the lender for making you a loan, or "originating" your loan. Find out how many points you will be expected to pay for the loan, which kind of points they will be, and whether they´ll be included in your loan amount or if you´ll be expected to pay cash up front. Also, ask if you have the option to get the loan without paying any discount points, and if so, what your interest rate would be in that case.
   3. What closing costs will be charged on this loan, and will you provide the "good faith estimate" of those costs up front?
      Mortgages come with legitimate fees for various services that lenders and other parties involved in the transaction provide. Early on in the process, you will need to find out what you will be charged. The federal laws governing real estate loan transactions require that you are given certain cost estimates in writing fairly early in the process. If your lender doesn´t volunteer the information, be sure to ask. If your lender is reluctant to provide information or clear answers to your questions, you may be better off shopping for a different lender.
   4. When can I "lock in" the interest rate, and what will it cost me to do so?
      Because mortgage interest rates can fluctuate daily, you may want to ask your lender about "locking in" a quoted rate for your mortgage. Quite often, the time period between when you first apply for a mortgage and the time you actually close can be several weeks. You may not want to risk letting the rate "float" until the closing date, because it could increase. Be sure to ask the lender if there is any fee for locking in the rate, and whether you can also lock in points. An advantage to locking in your interest rate is that you´ll know exactly what interest rate you´ll receive at closing. The main disadvantage to locking in a rate is that if market rates decrease, then you will be "locked in" at a higher rate than you might have been had you allowed the rate to float. Ask your lender to clearly explain your options to you.
   5. Is there a prepayment penalty on this loan?
      The prepayment question is most important for loan shoppers with less-than-perfect credit, primarily because penalties are common in non-conventional or "subprime" loan structures. Even conventional borrowers should ask about any prepayment penalties that may apply. In some cases, borrowers get lower rates by accepting penalties on their loans. Find out the duration of any penalty period and how the fee would be calculated. Some penalties are 1% of the loan amount; others are equal to six months´ worth of interest. Some apply only when you refinance or reduce the principal balance of the loan by more than 20%; others may apply if you sell the house. It may be a good idea to ask the lender for a written copy of any prepayment clause to which you would be subject.
   6. What is the minimum down payment required for this loan?
      Depending on the amount of your down payment and its relation to the price of your home, you might be charged different interest rates or quoted different loan terms. Loans made at high loan-to-value, or "LTV" ratios (meaning the borrower has made a small down payment) can cost more than loans with larger down payments. Nevertheless, borrowers with good credit who are willing and able to pay private mortgage insurance (PMI) can get conventional loans with down payments that are much lower than 20 percent.
   7. What are the qualifying guidelines for this particular loan?
      The qualifying guidelines can relate to your income, employment, assets, liabilities, and credit history. Some first-time homebuyer programs and government-sponsored loans have easier qualifying guidelines.
   8. What documents do I have to provide?
      You will need to provide proof of income and assets to get a mortgage loan. Find out what documents will be required in your particular situation by asking your lender. It´s a good idea to gather and organize your personal financial documents prior to beginning the loan application process. By doing so, you may prevent delays in the process later on.
   9. How long will it take to process my application?
      This varies from lender to lender. It often depends on how much business your particular lender is doing and how busy the mortgage loan industry is overall. During periods of peak activity, underwriting departments may back up, appraisals may take longer to obtain, and other bottlenecks may develop. Get a realistic estimate, and use that to figure out if it makes sense to pursue a rate lock and how long it should be.
   10. What might delay the approval of my loan?
       If you provide the lender with complete, accurate information, everything should go smoothly. However, there could be a delay if the lender discovers credit problems or if other unforeseen circumstances develop. This is why it is critical to get your credit in order.

    

   UNDERSTANDING PRIVATE MORTGAGE INSURANCE (PMI)

   Private Mortgage Insurance (PMI) protects the lender from the expense of foreclosing on the property if you default. If you buy a house with a conventional mortgage, and you make a down payment of less than 20%, in most cases you will be required to pay for PMI.

   The insurance benefits the lender, but the borrower pays for it. The premiums for PMI are added into the borrower´s total monthly mortgage payment.

   The cost of PMI varies, depending upon the size of the mortgage and the percentage of the down payment.

   If you made a down payment of more than 15%, but less than 20%, you´ll pay about 0.32% of your loan amount annually in PMI premiums. That´s about $40 a month for a $150,000 mortgage.

   When you´re buying a house with a conventional mortgage, and you make a down payment of less than 20%, you will probably pay PMI. About the only option you have to avoid paying PMI is to get a "piggyback" or "combo" loan. This means you would have to take out second mortgage that allows you to make a 20% down payment. For example, you would pay 10% cash down, get a first mortgage of 80%, and get a second mortgage of 10%. That second mortgage-the piggyback loan-is always at a higher rate. You´re not paying for PMI, but you´re still making a monthly payment, which will probably be close to the same amount you would pay for PMI.

   Many argue that the benefit in obtaining a piggyback or combo loan lies in the fact that the interest you pay on the second mortgage loan is tax deductible: you cannot deduct the cost of PMI from your income taxes. Any borrower considering a piggyback loan is well advised to consult a qualified tax advisor to obtain information that pertains to his or her individual situation.

    

   RECOGNIZING PREDATORY LENDING PRACTICES

   Predatory lenders take advantage of consumers with credit problems and those who fail to safeguard their own financial transactions. These lenders charge extremely high fees and interest rates. A loan from a predatory lender will cost you much more throughout the life of the loan and-in extreme cases-could lead to foreclosure on your home. Predatory lenders take advantage of those borrowers who are not able to secure lending from traditional financial institutions.
   In recent years, many observers claim that the incidence of abusive or predatory lending practices has increased. The State of New Mexico has passed legislation to combat predatory lending, but there are still quite a few predatory lenders operating in the state. Remember that you are responsible for protecting your own financial well-being. Do not transact any business with a lender who pressures you sign documents you haven´t read or don´t thoroughly understand. The following are indications that the lender with whom you are dealing may practice predatory lending:

   FINANCING EXCESSIVE FEES INTO LOANS

   Predatory lenders often finance large fees into loans, stripping thousands of dollars in hard-earned equity and racking up additional interest. Sometimes victims of predatory lending practices find that they have been charged origination fees of as much as 8% of the loan amount, compared to the average 1 - 2% assessed by most lenders. Once the paperwork is signed and the rescission period expires, there is no way to recapture the equity that has been lost. Consequently, borrowers can lose hundreds or even thousands of dollars in equity while receiving little, if any, benefit from the financing structure. The damage is compounded by higher interest rates, as borrowers often pay tremendous interest costs in the years it takes to pay down the fees. Typically, loan fees are kept below 8% in order to stay under the HOEPA fee threshold established by federal law, which would then require additional disclosures to the borrower and additional consumer protections.

   CHARGING HIGHER INTEREST RATES

   While the higher interest rates charged by legitimate subprime lenders are intended to compensate the lenders for taking a greater credit risk, some borrowers pay higher interest rates unnecessarily. Abusive lenders have been known to charge borrowers with perfect credit interest rates 3 to 6 points higher than market rates if they perceive that an unaware borrower will permit them to do so. Some lenders do not offer lower rates, no matter how good the borrower´s credit might be. For borrowers with imperfect credit, the rates are sometimes higher than is warranted based on industry standards. Predatory lenders are also sometimes hesitant to quote rates in advance.

   CHARGING PREPAYMENT PENALTIES

   A large percentage of subprime loans have prepayment penalties, compared to less than 2% of conventional prime loans. The penalties are assessed when borrowers pay their loan off early. Early payoffs typically take place as a result of borrowers refinancing or selling their houses. Although contractual agreements vary from lender to lender, oftentimes the penalties can end up costing the borrower hundreds or thousands of dollars.
   When a borrower with a prepayment penalty refinances, the amount of the penalty is sometimes financed into the new loan. For borrowers who refinance or sell their houses during the period covered by the prepayment penalty, the penalty functions as an additional and expensive fee on the loan, further depriving them of their equity.
   Some lenders argue that prepayment penalties protect them against losses incurred due to frequent turnover of loans. The truth is, however, that a large number of these borrowers refinance within the period covered by the prepayment penalty, and so the lender is entitled to and collects the fee anyway. If a borrower isn´t careful, he or she could pay more in the penalty than they "saved" by refinancing, even if their interest rate was reduced.
   Another way predatory lenders might take advantage of a borrower is to combine prepayment penalties with an adjustable rate loan. Borrowers are sold a loan with a seemingly reasonable starting rate that lasts for two or three years but increases dramatically thereafter. When faced with the higher interest rate, these borrowers look to refinance, only to discover they must pay a prepayment penalty.
   Often, borrowers are unaware that their loans contain a prepayment penalty. Lenders´ agents simply fail to point it out, or they deliberately mislead borrowers by telling them that they can refinance to a lower rate later and not telling them that by doing so, they will have to pay a penalty. Many borrowers miss this information, as it is buried in the numerous documents they must review and sign during the loan closing process.

   A borrower who is not diligent in protecting him- or herself from such practices may find that their financial problems only become worse with time. Once again, it is up to you to know what you are signing before you sign it.

   NEGATIVE AMORTIZATION
   In a negatively amortized loan, the borrower´s payment does not cover all of the interest due, much less any of the principal of the loan. Consequently, the borrower´s loan balance increases every month and s/he loses, rather than builds, equity. Many borrowers are not aware that they have a negative amortization loan until they call the lender to inquire why their loan balance continues to increase. Predatory lenders use negative amortization to sell the borrower on the low payment, without making it clear that this payment will cause the principal to rise, rather than fall.

   AGGRESSIVE AND DECEPTIVE MARKETING
   Predatory lenders often employ very aggressive, and sometimes deceptive, marketing campaigns. Their goal is to reach those individuals who, for any number of reasons, would be more likely to agree to apply for a loan. Once they have identified a potential customer, they try to reach them by mailing, phoning, and even visiting them in their homes to encourage them to take out a loan.
   One of the most common methods used by predatory lenders is to mail "live" checks to prospective borrowers. These checks are usually for several thousand dollars, and by cashing or depositing them, the borrower is entering into a loan agreement with the lender.
   This initial loan is sometimes just an entry point into the financial life of the homeowner. The loan has an artificially high interest rate and monthly payment, so that the predatory lender can offer an opportunity to refinance it, along with other debts, with another loan. The predatory lender´s ultimate goal is to get the homeowner to refinance their first mortgage with them.
   While this list of predatory lending practices seems extensive, these are just a few of the methods some lenders use to take advantage of borrowers. When considering any lender or loan product, keep in mind that if something looks too good to be true, it probably is!
   
   

   Shopping For Your Home

   After applying for a mortgage loan and receiving a commitment letter from the lender for a maximum loan amount, the next step is to shop for your home. There are a variety of ways to find a home that is right for you. The most common is to use a licensed real estate agent or real estate broker. You can even employ a homebuyer´s agent, which is a licensed real estate professional that works on your behalf in the home buying process. If the agent is not a homebuyer´s agent, you must be aware that s/he works on behalf of the seller. Real estate professionals should disclose the exact nature of their relationship with you up front. You can utilize the following resources to aid in your search for a real estate professional:

   • Real estate advertisements in newspapers (Sunday papers usually have the most ads)
   • Real estate web pages
   • Open houses
   • State, county, or city housing departments
   • Nonprofit housing agencies

   It is also a good idea to ask for a referral from a friend or relative who has recently been through the process. Real estate salespersons will probably ask that you begin working with a lender in order to get pre-qualified. If a buyer is pre-qualified, then the real estate professional knows that they´re serious about making a purchase.

   DECIDING WHICH HOME TO BUY

   Whether using a REALTOR or other licensed real estate professional, you should make a list of the practical requirements of your home such as number of bedrooms, number of bathrooms, size of yard, desired neighborhood, etc. If you are using a real estate professional, they will likely search on the Multiple Listing Service (MLS) for homes that match these criteria and fit within your approved mortgage loan amount. The printout of this MLS will also show other useful information such as available financing, average annual cost of utilities, etc. Remember to communicate clearly to your real estate professional the amount you wish to spend, especially if it is less than the amount for which you´ve been pre-approved. It is important that you stay in control of this process.

   When you decide to look at the house, you should consider many things:

   NEIGHBORHOOD AND COMMUNITY

   Is this the type of neighborhood in which you and your family desire to live? How well will the area fit with your lifestyle? Factors affecting this decision include school districts, zoning, restrictive covenants in planned communities, amenities, access to public services, character, and future economic well-being of the community. Housing Authorities sometimes offer certain incentives for home purchases in "targeted areas." Be sure to ask if a home in which you´re interested is in a targeted area, and if so, ask if there are any incentives being offered. The incentive may be to allow a higher income or sales price limit than in non-targeted areas, or to make funds available to someone who is not actually a first-time homebuyer.

   NEIGHBORS

   Do the neighbors seem agreeable and cooperative? Do they keep their own property in good repair? Do they throw loud parties on Friday nights? Are the surrounding homes occupied by renters or homeowners? Rental units sometimes change hands frequently, and could result in less overall stability for the neighborhood. Be sure to drive by the property on several different occasions to see what the neighborhood is like on the weekends, at night, or during morning rush-hour, for example. You´re trying to get a feel for whether you could live there on a long-term basis.

   PROXIMITY TO WORK AND SCHOOL

   Is commuting a long distance undesirable to you? Would you like your children to be able to walk to school? Make a note of the distance and time it takes you to get to your usual daily destinations from the home. Is the major arterial street to the home congested at most hours? Is it dangerous? How accessible is it?

   MAINTENANCE REQUIREMENTS

   Is the home going to require major repairs? Does it need cosmetic repairs? Can you afford these repairs? Industry professionals strongly recommend that prospective buyers order a home inspection and make their purchases contingent on a satisfactory inspection. (For more information on this topic, see the "Understanding Home Inspections" section.)

   PRACTICAL VS. UNREALISTIC REQUIREMENTS

   Does the home have what you need for you and your family, such as an adequate number of bedrooms and bathrooms, the right size back yard, etc? What features does the house have that are not practical? How does this house compare to other houses you´ve looked at? Perhaps you and your family members should think about "rating" each house on a scale of one to ten. This method may help you narrow your focus and get closer to a final decision.

   UNDERSTANDING MANUFACTURED HOUSING

   Manufactured housing (or mobile homes) has come a long way since trailer homes. Prospective home buyers have a variety of options from which to choose, including square footage, floor plan, color scheme of the décor, and finishing materials. Each manufactured home is built to conform to a federally regulated HUD code rather than to local building codes which are enforced at the home destination site. Manufactured homes are usually less expensive than a "stick built" home. This is due to the fact that manufactured homes are pre-built and then moved to the homeowner´s land or a manufactured housing subdivision or mobile home park. Prospective buyers should consider a number of factors before investing in a manufactured home.

   PURCHASING A MANUFACTURED HOME

   If you are considering the purchase of a manufactured home, you should give special attention to the following:

   1. Where
      You Purchase Your Home If possible, buy your mobile home directly from a manufacturer´s retail outlet. Shop around to find a mobile home that you like. Call to see if you can purchase a mobile home directly through the manufacturer. Negotiate your price. You may want to check with the Better Business Bureau to ensure the manufacturer is reputable and reliable.
      
   2. Roof
      A shingled roof can be better than a metal roof, as it can prevent leakage problems and improper ventilation.
      
   3. Walls
      Vinyl siding is best for manufactured homes, as it can eliminate some of the common leakage problems that may occur with metal or hardboard siding. Exterior wall studs should be 16 inches apart, and walls should be at least 7? feet high.
      
   4. Plumbing
      Plumbing systems tend to cause the most problems in manufactured homes. It is worth the upgrade to have the best quality plumbing fixtures for each faucet and sink and to be sure there are shutoff valves at each plumbing fixture. Nearly one out of three manufactured home owners report plumbing problems.
      
   5. Windows
      To prevent water damage, windows should have welded vinyl frames and be insulated with double panes. The frame corners should be fused together instead of screwed or glued.
      
   6. Floors
      Floors should have 2x8 joints spaced 16 inches apart. They should also have plywood sub-floors. Particle sub-floors do not provide adequate water resistance.
      
   7. Climate Control
      For the cool climate of northern New Mexico, it is advisable to choose a home with heating and cooling outlets around the edges of the room, preferably along the exterior walls. A manufactured home in northern New Mexico should meet Wind Zone 2 and Thermal Zone 3 governmental standards. Southern New Mexico residents should choose a home with air outlets in the ceiling. A manufactured home in southern New Mexico should meet Thermal Zone 2 standards.
      
   8. The Underside and the Foundation
      Be sure the bottom of your home is well ventilated with a protective skirting placed around it. A solid foundation is essential to protect your mobile home from structural damage. Be sure supports rest on deep concrete pads, or footings not directly on the soil. Certain loan programs, such as VA, have some very specific requirements as to how the home should be attached to the foundation. Be sure to ask about the exact requirements that will apply to your situation. Also, make certain that the person doing the work is qualified, licensed, and approved by the lender.
      
   9. Warranties
      Choose a manufacturer that provides a long-term warranty with few exclusions.

   COSTS TO CONSIDER

   Manufactured homes may offer low initial maintenance costs. It is important to remember that the price does not include a site for the home. The site must be rented or purchased separately. In order to provide a mortgage loan for a manufactured home, lenders require that it be secured to a permanent foundation. Also remember that a manufactured home is more likely to appreciate in value if you own the land to which it is attached. Further, proper transportation of your home is critical. Every manufacturer must provide instructions explaining how to prepare the home site and install your home. Get a copy of this guide and read it before your home is installed. If possible, be present when it is being installed. Bring the installation guide and follow what the installer is doing. Make certain that your installer is qualified and appropriately licensed.

   Sometimes the seller will combine all related costs into the sales price. Be certain to ask for an itemized statement which shows you the breakdown of what you´re paying. Ask questions until you have a good understanding of the overall price structure. Remember to negotiate the price and always ask the following questions:

   • What is the cost of the home itself?
   • What is the cost of a site for the home?
   • What are the costs for utility hook-ups and other infrastructure needs?
   • Is there a transportation fee to move the home to the site?
   • Is hazard insurance affordable and easily available?
     
     

     Buying Your Home

     Now that you have completed your research and qualified for a loan, there are still a number of steps in the home buying process that you must follow before you can reach your goal of homeownership.

     NEGOTIATING A PURCHASE AGREEMENT

     Buying a home requires solid negotiation. Most homebuyers and home sellers want to arrive at a win-win agreement, but that´s not to say either side would regret getting a bigger "win" than the other. Successful negotiation is more than luck or natural talent. It requires the learned ability to use certain skills and techniques to bring about those coveted win-win results. Here are suggestions for turning negotiation into agreement:

     1. Start with a fair price and a fair offer.
        When sellers significantly overprice their homes, it turns off potential buyers. Likewise, making an offer that is far lower than the asking price is practically guaranteed to alienate the sellers. Asking and offering prices should be based on recent sales prices of comparable homes. The condition of the home is also a point that can be used in negotiations. If the buyer will be forced to replace old, worn carpeting, for example, the seller should take that into consideration when considering an offer that is below the asking price.
        
     2. Respect the other side´s priorities.
        Knowing what is most important to the person on the other side of the negotiating table can help you avoid pushing too hard on hot or sensitive issues. For example, a seller who won´t budge on the sales price might be willing to pay more of the transaction costs, or to make more repairs to the home. On the other hand, a buyer with an urgent move-in date might be willing to pay a higher portion of the transaction costs or forego some major repairs.
        
     3. Be prepared to compromise.
        "Win-win" doesn´t mean both the buyer and the seller will get everything they want. It means both sides will win some and compromise a little. Rather than approach negotiations from an adversarial winner-take-all perspective, focus on your top priorities and don´t let your emotions get in the way of your better judgment.
        
     4. Meet in the middle.
        Having trouble deciding who will pay the recording fee? Do you disagree on a close-of-escrow date? Are you arguing over cosmetic repairs? Split the difference. Splitting the difference is a timehonored and often successful negotiation strategy. Pay half the fee. Count off half the days. Fix half the blemishes. Both sides will come out ahead.
        
     5. Leave it aside.
        Politicians and corporate executives are famous for their "for future discussion" agreements. If you have a major sticking point that isn´t a major factor in the overall contract (e.g. the purchase of furniture or fixtures), finish the main agreement, and then resolve the other difficulties in a side agreement or amendment. This technique allows both sides to recognize and solidify basic areas of agreement. They can then come up with a fair compromise on other terms and conditions. Summarizing the points of agreement in writing is another helpful strategy.
        
     6. Ask for advice.
        Successful real estate professionals tend to be experienced negotiators. In countless real estate transactions, they have seen what does and doesn´t work. They have also established a track record of bringing buyers and sellers together. Consult your agent about negotiating strategies, win-win compromises, and creative alternatives.

     UNDERSTANDING HOME INSPECTIONS

     It is recommended that you pay for a home inspection before you buy the home. You should make the purchase contingent on a satisfactory inspection. Home inspectors will evaluate the structural aspects and certain mechanical systems of the home. They primarily inspect the foundation, roof, plumbing, electrical, and heating and cooling systems, but services vary widely, so be sure to communicate just how thorough an inspection you want. The more detailed the inspection, the more costly the service. Always seek out a qualified and licensed home inspector with a solid reputation for standing behind his or her work. Any warranties offered should be given to you in writing. Also ask about having the home inspected for termites, radon, or other potential environmental hazards.

     Keep in mind that if you do make the purchase of the home contingent on a satisfactory inspection, you need to specify a dollar amount of liability. For example, the seller may agree to a contingency clause with a liability limit of $500, meaning that the seller will make repairs or replacements only up to that dollar amount. The inspection report will recommend certain repairs, if needed, with an estimated cost for these repairs. If the estimated cost of repairs is beyond the agreed upon cap of liability, the seller is not obligated to meet those repairs and the purchase agreement izs void. The buyer usually pays the cost of inspections.

     CLOSING ON YOUR LOAN AND GOOD FAITH ESTIMATE

     Within three days of receiving your completed mortgage loan application, your mortgage lender is required by federal law to provide you with a good faith estimate of the fees and other costs due at the closing. These mortgage fees, also known as settlement costs, cover every expense associated with your transaction. Items such as inspections, title insurance, taxes, credit report, etc., will all be disclosed to you in writing. Closing costs can vary, but usually range anywhere from 3% to 5% of the sales price. Make sure you understand and agree to any costs disclosed to you. Always ask questions if a fee seems unnecessary or excessive.

     In addition to your down payment, which is your investment in the house, you will be required to pay certain closing costs on the transaction. Following is a list of these costs:

     Loan Origination Fee ? This is a fee charged by the lender to originate the loan, or reserve funds for your loan in the pool of mortgage money. It is usually one "point," or 1% of your base loan amount.

     Points ? (Also called Discount Points) refer to the cost of "buying down" your interest rate. One point is equal to 1% of your loan amount. For example, if a loan is for $100,000, one point is $1,000.

     Credit Report ? At the time you make your loan application, your mortgage lender will order a Residential Mortgage Credit Report. This report is a detailed history combining information from two or three credit bureaus, and covers the last several years of your credit history. (As discussed previously in this workbook, the length of time an item remains on your credit report depends on the nature of the item.) The cost of a credit report can vary, but usually ranges from $50 to $65.

     Appraisal Fee ? This is what you will pay a professional appraiser for an estimate on the value of a house. As discussed earlier in this workbook, the appraised value of the home is one part of the equation used to figure your "loan-to-value" ratio (LTV). Currently, the cost of a residential appraisal ranges from $350 to $450.

     First Year´s Mortgage Insurance Premium ? When your down payment is less than 20% of the home´s value, you will be required to buy mortgage insurance that protects the lender against loss due to foreclosure. This insurance premium is usually added into your monthly mortgage payment.

     Hazard Insurance Premium ? You will need to prepay the hazard insurance premium for specified number of months.

     Commitment Fee ? This is the cost of reserving your loan with a lender at a certain rate and amount, provided that the loan is closed within a specified period of time.

     Lender´s Title Insurance Policy ? This is insurance against any defects in the title that may jeopardize ownership (e.g. forged documents, undisclosed heirs, etc.) The liability is limited to the outstanding loan balance at the time of any claim. Rather than a monthly premium, title insurance is paid for in advance as a one-time fee. It becomes void when the loan reaches a zero balance.

     Owner´s Title Insurance Policy ? This is the owner´s insurance against any defects in title that may jeopardize ownership (e.g. forged documents, undisclosed heirs, etc.)

     Property Taxes ? Property taxes are customarily paid in arrears. Therefore, they are prorated at the time of closing in order to make sure both the seller and buyer each pay only their fair share

     Recording Fee for Deed ? This is the fee charged by the county clerk to record your deed in the official records.

     Survey Fee ? This pays for a professional surveyor to determine boundaries and land area of the property you wish to purchase. Lenders generally require a survey of the property before they approve your loan.

     Inspection Fee ? This is the cost of hiring a professional inspector to inspect the structural and major mechanical systems of the home. In most cases, the buyer pays for the inspection. Although an inspection is usually not required, it is strongly encouraged as it helps the buyer make a more informed purchasing decision.

     PREPARING FOR POST-CLOSING COSTS

     As this workbook has emphasized, it is important to formulate a budget prior to purchasing your home. Once you become a homeowner, you will most likely incur additional costs. If you have savings and maintain a balanced budget, you will be ready to handle most of the unforeseen expenses that can occur after you buy your home. Following are just some of the costs you´ll encounter as you transition to your new home:

     Moving Expenses ? These include renting a van or truck, plus packing material, etc. Renting local transportation can range from $150 for a trailer that you hitch to the back of your own truck, to between $300 and $1,000 for a rental truck. Rates are based on the distance you´ll travel and how many days you´ll use the vehicle. You can negotiate the best price of a rental by calling different companies. You should retain all receipts related to your moving expenses, as they may be tax deductible. Be sure to check with a qualified tax advisor for details.

     Utility Connections ? Gas, electric, water, and telephone services all require hook-up fees in addition to any actual deposits required. You may have to pay a deposit if you have never had a utility account in your name, or if you´re moving here from another city or state. If you are currently paying utilities, but the account is in someone else´s name, (e.g. landlord, parents, etc.) you should inquire as to whether your name can be added to the account. This may allow you to avoid additional deposits by establishing yourself with the utility provider prior to moving. For example, if you are living with your parents, and everything is under their name, you can request that your name be added to the utility bill. Both names should then show up on the bill. Each utility company has its own requirements, and in some cases, there´s no way around a deposit requirement.

     Appliances ? Your purchase agreement will clearly spell out which, if any, of the major appliances will be transferred with the home. Make sure that you´re prepared to buy whatever you´ll need to establish your new household. You wouldn´t want to wait until moving day to find out you don´t have a refrigerator!

     Furnishings ? Typically, homes do not come furnished. You may be able to negotiate curtains, blinds, etc. as part of the sale, but any such agreement must be made a part of the purchase agreement. It´s a good idea to wait until after the closing to purchase any furnishings for your new home.

     Landscaping ? Depending on whether you buy a new or existing home, landscaping can be another costly item. Make certain that you have a clear understanding of how much, if any, landscaping is included with your new home. Because landscaping is not usually considered an immediate necessity, you can wait until after closing to address the issue. However, you should keep in mind that part of being a good neighbor is keeping your front landscaping attractive and neat. Also, check to see if your area has covenants regarding landscaping requirements.

     Maintenance and Repairs ? Your pre-purchase inspection report should have given you an idea of what, if any, repairs might be needed once you move in. It is a good idea to keep a separate household account to be used for maintenance costs and repairs. Even if your home doesn´t require any immediate repairs, it will at some point. At the very least, you should always set aside enough money to cover the deductible on your hazard insurance in the event of robbery or fire.

     UNDERSTANDING HOMEOWNER´S INSURANCE

     It is important to purchase a homeowner´s insurance policy that fits your particular needs. For example, consider the area in which you live. Is it prone to flooding? If it is, the lender will require the homeowner to purchase flood insurance. The following are additional items to consider as you shop for insurance:

     REPLACEMENT COST COVERAGE INSURANCE

     Insure your home´s replacement cost, not its market value. The market value may be higher or lower than the cost to rebuild your home. With replacement cost coverage, you can rebuild your home on the same lot at current local construction costs if it is destroyed.

     Companies use various methods to determine the estimated replacement cost of your home. Be prepared to answer questions about your home´s square footage, number of bedrooms, and number of bathrooms. Inform your insurance agent of any custom features that are part of the dwelling.

     When considering replacement cost coverage, be sure to deduct the value of the land, foundations that are below the surface of the ground, and other items such as landscaping and lawn sprinkler systems. If a loss does occur, the insurance will cover the cost to replace the actual structures on your property.

     Be sure to review your policy on an annual basis. If you make major improvements or additions to your home, you´ll want to contact your insurance carrier to arrange additional coverage.

     Household contents are only covered for their actual cash value. Actual cash value is the replacement cost minus depreciation. You can buy replacement cost coverage for your possessions as a policy add-on, or endorsement. A homeowner´s policy also offers very limited coverage for valuables like jewelry, furs, cash, and stamp or coin collections. You can buy separate endorsements to cover these items, but doing so will significantly increase your premium. You may also be required to have such items professionally appraised, at your expense.

     LOWERING YOUR PREMIUM BY INCREASING YOUR DEDUCTIBLE

     You can lower your premium by raising your deductible. The deductible is the maximum amount the homeowner is required to pay for each covered loss. A deductible can range from $100 to $1,000 or more. Most homeowners find it reasonable to carry a $500 to $1,000 deductible.

     ASK ABOUT DISCOUNTS

     You may be eligible for discounts on your homeowner´s insurance. Some discounts are mandatory. Others are optional. Ask your agent if you´re eligible for any of the following discounts:

     Mandatory Discounts* Electronic burglary alarm system	15%
     Burglar-proofing: dead-bolt locks, secondary locking system, etc.	5%
     Sprinkler system	8%
     Impact-resistant roofs	5 - 35%
     * Exempt companies may set their own percentages.
     Optional Discounts*
     Age of house (companies set own standards)	15%
     Noncombustible roof	2%
     Premises in good condition (companies set own standards)	2%
     Good claims experience for three consecutive years	5%
     Other policies with same company or group	5%
     House insured to full replacement cost	5%
     Senior citizens discount	5%
     Central station	12%
     Remote alarm	10%
     Local alarm	2%
     Combination fire, smoke, and burglar alarm system	15%
     Automatic sprinkler systems that do not qualify for the mandatory discount	8%
     Fire extinguishers	2%
     Home security devices	5%
     Stovetop fire suppression devices	2%

     
     

     * The amounts listed are maximum discounts.

     
     

     Realizing The Dream

     For most of us, buying a house is probably the largest single investment we´ll ever make. This is why careful planning is so critical. While it is important to develop and adhere to a monthly budget once you own a home, it is also important that you have a budget now, no matter what your housing situation may be. Developing and working within a budget is a smart strategy for every responsible adult. It is important to prove to yourself and others that you have the self-discipline to pay your bills on time, limit your discretionary spending and impulse buying, and save a portion of your income. An additional benefit is the peace of mind you´ll gain knowing that you´re building a good credit history and that you´re at least somewhat prepared for some of life´s little emergencies. If you choose to follow the advice provided in this workbook, you will be able to handle the challenges that come with homeownership. And while it may be a new challenge to take on monthly mortgage payments, in the long run, you will enjoy the equity, comfort, and pride that homeownership offers.
     
     Enjoy and Welcome Home!