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C H A P T E R    M E N U
 ❑ Home Affordability
 ❑ Down Payment
 ❑ Mortgage Loan Basics
 ❑ Upfront Costs of Buying a Home
 ❑ Have Your Credit in Good Shape
 ❑ Don't Make Major Purchases!
 ❑ Documents Needed for a Loan
 ❑ Importance of a Good Realtor
Chapter02 Know the Basics
Even for a home-buying veteran who have been through 3-4 closings, purchasing a home is not a piece of cake. However, knowing the basic things you need and the basic cost to expect can certainly reduce some of the fear for the unfamilier process of home buying. So, let us start learning the basics before starting a home search!

Home Affordability
The most important thing you need to know before starting your home search is to figure out how much you can realistically afford to pay. Typically, most people can afford a home that costs up to three times their annual household income, that is if they can make a 20% down payment and have only a moderate amount of other debt. If you have little to no debt and can put 20% down you can probably buy a house worth up to four times your annual income. Please click the link below to launch our Home Affordability Calculator to see how much you can afford for a home.
Home Affordability Calculator
Also, you may have to sit down and make a list of your debt (including credit cards, car note, school loan, etc.) and your other monthly obligations (including auto insurance, child daycare expenses, child support, etc.) to exactly figure out how much of a monthly mortgage payment you can realistically afford.
Whether you're a homeowner or a renter, conventional wisdom says you should not spend more than a quarter to a third of your before-tax salary on housing. Ideally, your housing expense should stay within 25 - 33% of your gross income.
Down Payment

Most mortgage lenders expect you to put down some cash on your home purchase. A traditional mortgage program generally requires the buyer to place a down payment of 20% of the purchase price. Some lenders allow you to put 10 percent or 5 percent down payment depending on your credit scores and other circumstances. You probablly remember there used to be a lot of advertisement for "Zero-Down Mortgage Loans" before the Subprime Loan Crisis broke out in 2007. However, placing less down payment usually comes with the catches, like higher interest rate & fees, higher monthly payment, and necessity to purchase private mortgage insurance (often referred to as "PMI").

The bottom line is that the more money you put down, the less monthly payment you would have to make since you are likely to get a much better deal for a mortgage loan with reasonable interest rate and without having to purchse PMI.

One thing to remember about down payment for a home is that it has to be YOUR MONEY. You cannot borrow any part of your down payment even from your parents or relatives, unless both you and your parents or relatives consider the fund as gift and sign a "Gift Letter" to prove that the fund is a gift, and not a loan.

Tip:   Having your down payment ready in your bank account at least 60 days before applying for a mortgage loan helps a great deal for a smooth loan approval.


Mortgage Loan Basics

To fill the gap in between the home purchase price and your down payment, you have to get a loan from a bank. The loan you get from the bank to purchase a home is called a "mortgage loan" (also called a "note"), and the bank loaning the money to you is the "lender".

You will probablly say, "I know that!", but we will still say this to you. If you fail to make your mortgage payments for any reason, the bank will repossess the house (this is called "foreclosure"). Then, they will sell it to make sure that they can recoup the money they loaned to you, and that you didn't pay back. Needless to say foreclosure will really hurt your credit history, and stays with you to haunt you for at least 7 years.

The number of years it takes to pay back the loan is called the "term", which in the U.S. is either 15 or 30 years. If you want the most flexibility, we reccomend that you choose 30-year fixed rate mortgage. You can still pay your loan off early by paying the bank a little extra each month whenever you can afford it. Most lenders do not charge a penalty for paying off your mortgage early, but it is better to make sure with your mortgage consultant.

With a 15-year loan you have to make bigger payments every month whether you like it or not. However, if you can definitely afford the payments on a 15-year loan, you should take the 15-year loan and enjoy the fact that you'll save a bundle of interest and pay off the loan in half the time without having to call the mortgage company to make extra payments.

To calculate how much your monthly payment will be on 30 or 15-year mortgage, please click the link below to launch our Monthly Mortgage Payment Calculator.
Monthly Payment Calculator

Upfront Costs of Buying a Home

Costs associated with home purchase is more than just the down payment and moving expenses. Many first-time home buyers are shocked to find that there are numerous other charges buyers must pay upfront at the closing table, like "closing costs", "loan discount points" and "prepaid items" for the escrow account. Buyers need to keep these upfront costs in mind and plan for the closing.

Closing Costs: Closing costs are loan fees which the actual expenses that lender (and/or mortgage broker) incurs in the origination of a new home loan and title fees which is the expenses that the closing attorney and the title company incurs for the closing of the transaction. These fees are called by different names depending on different lenders or what part of the country you're buying your new home, and it can be pretty confusing. Generally, closing costs run between 3 and 5 percent of the amount being borrowed, but the best thing is to get a Good Faith Estimate from your lender (or mortgage broker) and ask questions you may have.

Loan Discount Points: Loan discount points are, in a nutshell, a form of prepaid interest. Some borrowers pay for this points to lower their interest rate on the note. One discount point quals to one percent of loan amount. Consult your loan professional to see if paying discount points is an option for you, and if it benefits you in your situation.

Prepaid Items: Most mortgage lenders want you to set up what is called an "escrow account". This is a savings account that the lender holds for you to pay for the property taxes and homeowner's insurance. Every month, you will pay a portion of annual property tax and insurance premiums in addition to your regular monthly payment for your loan. And when it is time to pay for your annual property tax or insurance renewal, your lender will make the payment for you. Prepaid items are prepaid taxes and insurance to be deposited initially into your escrow account for the future payment. How much you need to prepay depends on the county or city you live in, but generally 6-9 months worth of taxes and 2-3 months worth of insurance payments.

Have Your Credit in Good Shape
After the subprime loan crisis started in 2007, banks became more cautious about lending the money to people with "bad" and "not so good" credit. Before the mortgage crisis, credit scores as low as 580 could take out a mortgage loan. Now, you need at least 620 to get even pre-qualified for a loan with most lenders, and often they charge a higher interest rate for borrowers with credit scores less than 720. Typically, the better the credit score, the less you have to pay for interest and down payment.

Your credit report and your credit score are two different things. Your credit report is a list of accounts like your credit card and bank accounts, outstanding loans, and your payment history. Your credit score is a statistical method to quickly and objectively assess your credit risk based on your report. In other words, your credit report is a bunch of pages with your accounts and payment history, and your credit score is a number from 300 to 850. It is very important to know what's on your credit report, and know your credit scores before applying for a mortgage loan.

The companies that keep track of your credit report are called credit reporting agencies (CRA's) or credit bureaus. There are three credit bureaus in the U.S.: Trans Union, Equifax, and Experian. So, you actually have three credit reports and three credit scores. Most lenders look at your "middle credit score" of the three as your indicator score. Three reports andn scores are usually very similar (often nearly identical), but sometimes they can differ. You can get a credit report that is "Tri-merged", to have all 3 credit reports and scores onto one report.

Once you get a copy of your "Tri-merged" credit reports with 3 scores, know where you are standing, and see if you need to improve your credit scores to apply for a mortgage loan.

Scores: Status: Advise:
750+ Super: No need to particulary try to improve your credit
720 - 749 Excellent: Look at your credit report one more time to see if there's anythink you can pay off to get your score up to 750
700 - 719 Good: May want to try to clean up your credit report if you want to get a lower interest rate
Less than 700 Fair to Bad It's time to start improving your credit by making your payments on time and paying off some of the debt

Don't Make a Major Purchase

Once you decided you're going to buy a home, do not make any major purchases at least for 90 days prior to your loan application. You will need to submit your bank statements to the lender (last 2-3 statements depending on the lender), and if they see large transactions, they get worried about your spending habit. It will only make it harder for you to get approved for the loan -- or it could potentially be lower the amount you'll be approved for, resulting in having to come up with more down payment or find a less-priced house.

If you need to make a large purchase for a vehicle, furniture, appliances and other expensive items, wait until the approval of the loan!

Tip:   If you're transferring funds from another bank account of yours to your primary account, it will help having the full amount ready in your primary account more than 60 days prior to your loan application.


Necessary Documents

After the subprime loan crisis, reasonable lenders got rid of their "no-doc (no document neccesary)" or "low-doc (only little document neccesary)" loan programs because they are much too risky. And any ethical mortgage brokers and lenders generally try to talk customers out of getting low-doc and no-doc loans because they generally cost much more than traditional "full-doc" loans.

Below are the basic documents needed for a mortgage loan:
Personal Identification:
Usually need 2 forms of IDs. Drivers Lisence, Social Security Card, Passport, etc.
Income Documents:
Paystub for the last 1-3 months,
W-2's for the last 2 years,
Last 2-years employment history with addresses and dates (will be verified),
Paper trails of down payment and any asset used if transferred from another account, etc.
Asset Documents:
Last 1-3 statements for all the bank accounts, 401(k) accounts, CD's, Stocks, etc.,
Credit Documents:
Recent credit report,
Residency history for last 2 years including addresses and contact for landload (if renting) or mortgage company and mortgage loan number (if own),
Pay off letter for recent payoffs that is not on the credit report yet, etc.
Other Documents:
Cancelled earnest money check,
Sales Contract, etc.

If the loan applicant is self-employed, he/she needs different documents like full tax returns including k-1's (instead of paystubs and W-2's), business license and a CPA letter stating 2+ years employment in same job or field of business.

Importance of Having a Good Realtor
Having a good realtor as your buyer's agent means the agent is working with your best interests (and wallet) in mind. A buyer's agent will negotiate hard to talk to the seller (or the listing agent) for the best price possible, ensure the property is peroperly inspected, and make sure you have the representation you need at the closing table.

Good buyer's agents are knowledgeable about the things that are important to a Buyer, like the real estate market of the area, real estate laws and financing. They can answer your questions and ease your concerns. Home buying process can be much less complicated with a good buyer's agent.


You just learned the basic ideas and things to consider before starting your home search. If you still feel that purchasing a house is the right thing for you instead of renting after reading this chapter, you are ready to buy a house of your own. Now, let us start going through the typical steps you're likely to face in the process of buying a home.

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