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Before The Sale



House hunting

 - Buying or renting
 - Taking a house tour
 - House tour checklist
 - Visiting open houses

Other topics

 - Foreclosures
 - Appraisals
 - Real estate agents
 - Title companies


 - Pre-approved loans
 - Benefits of pre-approval
 - Improving your lender appeal
 - Checking your credit history
 - Different financing methods
 - Loan process
 - Types of lenders
 - Types of loans
 - Paperwork needed for loans
 - Loan comparison sheet



Should you rent or buy?

Deciding to make the move from renting to buying is one of the most important decisions you will make. Owning a home involves taking on a large debt and requires a larger commitment to a community than renting. Owning a home gives you significant financial collateral. It affords you a chance to have an investment appreciate in value while you enjoy a place to live.

Being a homeowner has significant financial benefits. But to buy a home, you need enough money for a down payment. Depending on the mortgage type, this can be as low as 3 percent of the purchase price. In addition, as a homeowner, you will need to pay for upkeep to your house.

In addition to the financial considerations, owning a home can have a big effect on your lifestyle. Taking out a mortgage is a long-term decision -- moving is no longer as easy as signing a new lease. By owning a home, you have a stake in the future of your community, and gain a greater sense of permanency. Even if you plan on moving in a few years, as a homeowner you are affected financially by changes to the community, such as rising crime or new schools.

Buying a home means you will be responsible for the upkeep of your house. Whereas a renter can call the apartment complex's management company or owner if something breaks, as a homeowner you will have to make your own arrangements or fix the problem your self. On the flip side, you will be able to customize the house to suit your needs. If you want to add a wall, you can, without discussing it with management.

When deciding between home ownership and renting, consider your long-term plans, and decide which is better for you. There is no right or wrong answer -- it depends on your lifestyle and future plans.


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Taking a house tour

"I love it." Those three words may mean you've found the right house. Or they could mean your emotions got the best of you when you stepped into the living room and saw that perfectly restored leaded bay window.

Homebuyers often follow their hearts -- and they should. But when it's house-touring time, temper your passion with clear-headed thinking and a critical eye.

Consider your lifestyle and how you will use the house. Naturally, you might want a bigger dining room if you entertain a lot, and you may need a first-floor bathroom if you have small children.

Look beyond the decor
Don't fall for the furnishings and decor while touring a home. Some people don't realize they're captivated by the surroundings -- not the home itself. Rooms can look completely different with your possessions in place.

Likewise, don't dismiss a poorly decorated house. A few changes to wall treatment and furniture can brighten a dim interior.

Beware of small closets. People tend to underestimate the amount of space needed for their belongings.

Look for structural problems
Once a house meets livability standards; check its structure and systems. Most real estate agents and attorneys recommend a professional inspection before you complete the sale, but buyers can spot the more obvious trouble signs early.

General upkeep speaks volumes about how the owner has maintained the property. A quick look at the structure will tell whether its resident made regular repairs.

Plumbing, wiring, heating and air conditioning should meet minimum standards. Check that everything works, and look for signs of rust or other visible problems.

Watch out for old kitchens and bathrooms -- they're possible money pits. Gaps in the tile can mean leaks. And that avocado green stove may function, but you might want to replace it if you just can't stomach the color.

Tour all areas. Cracks in the foundation can mean serious structural problems. Walk around the house and look for potential problems.

Finally, ask when the owner last replaced the roof and if there have been any leaks. Roof repair and replacement are costly, and you want to be aware of potential problems.

Keep in mind that no house is in perfect shape -- it's reasonable to expect some minor problems. However, taking a careful look at a house can help avoid disputes and disappointment after you've signed the contract.

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Questions to ask on a house tour

Print this checklist and use it when touring a home

Things to check:

_______ The foundation, for cracks and loose block work or mortar
_______ Outside trim, for splits and rotted wood
_______ Windows and doors, for leaks and proper fit
_______ Ceilings and walls, for cracks
_______ Kitchen, for leaks; also note cupboard and counter space
_______ Bathrooms, for water stains and loose tiles, which indicate                              leaks
_______ Signs of termites (look for small piles of wood shavings), asbestos and lead paint

Condition of gutters and downspouts: ________________________________________________________

Condition of landscaping, plants and trees: ________________________________________________________

Condition of heat: _________________________________________

Condition of electrical: ________________________________________________________

Condition of plumbing: ________________________________________________________

Condition of air conditioning: ________________________________________________________

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Visiting open houses

You want to buy a house, but you're not quite ready to make a big commitment. You'd like to see some properties, but you're reluctant to set up formal appointments. These are the telltale signs of "buyer limbo" -- that uneasy state somewhere between wanting to rent forever and signing a 30-year mortgage.

At this stage, prospective owners often visit open houses, virtually the only opportunity to tour a property without making a date with an agent or homeowner.

Attending open houses is fun. It's also a great way to see many properties in a few weeks. You'll get a handle on prices, and you won't feel the pressure of dealing with an agent.

Sellers’ agents conduct open houses, but not all agents think open houses actually sell properties. So understand that you'll be missing houses shown by appointment only.

The classified ads of local newspapers list homes you can visit on weekend afternoons (Sundays are usually best).

Be selective. Buyers can get caught up in the excitement of house hunting, scouring neighborhoods for more open houses to tour. Overkill can lead to burnout. And looking at houses out of your price range, even one step above, can make the home you eventually select seem shabby by comparison. Consider getting pre-approved for a mortgage before looking, to establish your buying power.

One more caveat: If you're working with an agent, tell the agent conducting the open house about the connection. This will forestall any misunderstandings if you buy the house and commissions are divvied up.

When you're ready to go, remember you're visiting someone's residence and heed these rules of open house etiquette:

  • Attend during the hours specified. Agents and homeowners don't appreciate stragglers and early birds.
  • Don't be offended if you're asked to register or show some identification. Agents who conduct open houses alone are sometimes the targets of crime. Most open houses have some form of screening.
  • Get a copy of the listing if you're considering the house. Houses become a blur when you visit one after another. A recap of specifics, which usually comes with a photo, will help you remember the best ones. If a listing isn't available, take notes.
  • Don't bring a crowd. You're looking for a house, not finding a cheap way to entertain the family on a Sunday afternoon. Leave the kids (and pets) at home.

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Unfortunately for home buyers, once a lender forecloses on a residence, the lender's asking price is often marked up to full market value and the home is no bargain for the buyer. The key to buying foreclosure bargains is to buy at the right time in the foreclosure process.

How to buy distressed properties at wholesale prices

If you enjoy paying the full retail price for a home, phone any real estate broker. You'll be shown hundreds of homes listed for sale through the local multiple listing services.

But if you want to buy a home at a wholesale discount price, it will take some W-O-R-K. It's a dirty word, but there is no other way to explain buying homes at below-market prices.

In addition to houses being foreclosed by mortgage lenders for nonpayment, other types of wholesale distress bargains are probate sales, IRS tax seizure sales, property tax sales, abandoned properties, condemned properties, and distress, run-down properties.

Some people make a full-time living tracking these distress properties because of the tremendous profits available. These bargains become available in all price ranges, from the very best to the very worst neighborhoods.


Here is the foreclosure bargain-finding procedure:

  • Start with a reliable local information source, such as a legal newspaper or privately published daily or weekly newsletter. To find these sources, ask local real estate attorneys, realty brokers and title insurance officers. The county recorder of deeds is another good source.

Most large cities have one or more publications of foreclosure and distress property notices. But in smaller communities you may have to go to the county recorder's office to do your own research. Incidentally, most of these distress properties are not listed for sale so don't expect much help from real estate agents.

  • Develop a tracking system to keep records of the bargain properties you discover. It often takes many months from the recording of the notice of default or mortgage lawsuit until a property owner decides to sell just before losing the property by foreclosure or other legal process.
  • Talk with the distress property owner to learn about the residence to see if (a) you are interested in acquiring it and (b) if the owner will be cooperative. Unfortunately, many distress property owners bury their heads in the sand and do nothing until they lose their properties.

The major distress property buying opportunities

Since foreclosures comprise the majority of wholesale real estate buying opportunities, it pays to understand how foreclosures work. Exact procedures vary by state and locality; so don't hesitate to buy an hour of a local real estate attorney's time to ask your detailed questions.

Most distress properties become available due to divorce, unemployment, death and illness. Since you didn't cause the owner's problem, don't feel bad about acquiring the home or other property at a wholesale price. Someone will benefit. It might as well be you.


Here are the major foreclosure acquisition opportunities:

  • Buy before the foreclosure sale.
    The first wholesale buying opportunity occurs before the foreclosure auction. Many homeowners who are unable to maintain their mortgage payments will sell before the lender's foreclosure sale.

The key question to ask is, "How much do you want for your equity?" It is often possible to buy a residence for $1,000 to $20,000 cash to give the owner some "walking money."

However, before paying the seller any money be sure to have the title checked to be certain you know what existing encumbrances you will be assuming. Often you will discover the owner has mortgaged the house to the hilt and has zero equity.

  • Buy at the foreclosure auction.
    If you can't buy the distress property before the lender's foreclosure sale, the next bargain opportunity occurs at the foreclosure auction. This sale wipes out most junior liens, such as junior mortgages and judgment liens. However, unpaid property taxes are not eliminated.

Another advantage is avoidance of dealing with an emotional seller who is losing his property. But a disadvantage, in some states, is the owner retains a right of redemption. If there is an IRS tax lien on the property, the IRS has a 120-day redemption period. However, few redemptions occur.

  • Buy after the foreclosure sale from the foreclosing lender.
    If no bidders showed up at the foreclosure sale and the foreclosing lender acquired the residence, many lenders want to quickly dispose of the property at bargain prices.

Immediately contact the lender to see if you can buy the residence at a bargain price close to the amount of the foreclosed mortgage. However, many foreclosing lenders list their foreclosed properties with local realty brokers at full retail market value.

Distress properties offer excellent opportunities to buy homes and other types of real estate at wholesale prices. However, it takes work to find and buy these properties because not every distress property is a true bargain. 


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Getting an appraisal

What is an appraiser? Generically, an appraiser is someone who determines how much something is worth. In real estate, an appraiser uses similar house sales, on-site visits and other factors to give an estimate of how much a house or other piece of real estate is worth. An appraisal provides a way for the lending company and buyer to ensure they aren't paying too high a price for the property.

All states require appraisers to be licensed or certified after completing a combination of coursework and field experience. The specific requirements vary by state.

What is an appraiser looking for?
Appraisers first we make a physical inspection of the property being appraised. During the physical inspection, they go through the house,  take measurements of the exterior dimensions of the house, take pictures of the subject property, while also looking at the subject neighborhood to look at the predominant value of the homes in the neighborhood.  Appraisers also consider other factors, whether they be positive or negative, that may have an effect on the marketability and the market value of the property. For example, if you're in a neighborhood that has a commercial [development] or a heavy volume of traffic, [that] could be a negative factor. Positive factors could be a park or a neighborhood that's close to the goods and services in the area.

Appraisers take into consideration what amenities the house has -- number of bedrooms, fireplaces, pools and other structural features. Also important is the condition of the house; they'll even notice if the house has avocado-green carpeting that hasn't been changed since the 1980s!

An appraiser will then compare the house being evaluated with similar houses that have sold recently in the neighborhood. The final results (including estimated value) will be recorded on a checklist, which the buyer should get a copy of.

Do I need an appraiser?
You may not have a choice about getting an appraiser -- state law may require an appraisal of your future home if you are taking out a mortgage. Many states require appraisals if the mortgage is above a specified amount. That amount varies by state.

If an appraisal is required, your lender will tell you. The cost of the appraisal will be added to the closing costs, and in some cases can be added to the mortgage.

What should I look for in the appraisal report?
The most important thing is to make sure the information is correct -- go over the appraisal report and make sure the appraiser correctly recorded the number of rooms, amenities and condition of the house. Mistakes can make a big difference in the value of the home, and checking the information can save you headaches later.

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The real estate agent

What is a real estate agent?
Real estate agents have been licensed by their state to help people buy and sell property. Typically, people licensed by the state have to have completed courses in real estate, including coursework in real estate law, real estate financing, and listing, according to the National Association of Realtors.  A broker is a person licensed to own a real estate firm. Realtors are real estate agents who belong to the National Association of Realtors.


What does a real estate agent do?
Agents counsel you through the whole buying process, from deciding what type of home you want and finding it to tracking the progress of your loan application.

The first step is to determine what needs you have and make appointments to visit houses that fit those criteria. Once you have found a house, the agent will help you prepare an offer and negotiate with the seller's agent.

At that point, the roles changes, as agents become the overseer of getting the paperwork done.  That paperwork includes following through on the mortgage application, arranging for an inspection and any necessary repairs, and coordinating the work of the attorney, title company and any other specialists necessary to complete the deal.  An agent puts it all together to make it all happen. 

An agent CANNOT arrange a mortgage or other financial deal.  Agents can, however, recommend several mortgage companies, attorneys, inspectors and other professionals for the buyer to interview.


How should I select an agent?
To find an agent:

  • Ask friends or relatives for recommendations.
  • Drive around the neighborhood in which you want to buy, looking for agents who specialize in that area.
  • Look for an agent with a good reputation. Call the local real estate board or ask people who have bought houses in the neighborhood.
  • Call recommended brokerage firms.

When you interview agents, ask:

  • How long have they been selling/buying houses?
  • Are they a buyer's agent or a seller's agent?
  • Do they specialize in your target neighborhood?
  • What types of degrees do they have?
  • How many listings do they have?
  • What services will they provide?

What is their commission, and who will pay it?


How does an agent get paid?
Typically agents receive a fee based on the purchase price of the home.  The commission varies according to the agent.  The seller usually pays a real estate agent’s fee, but this can be part of the negotiation process.  The specific fee a real estate agent charges is negotiable.


What is a buyer's agent?
The concept of a buyer's agent is recent -- the first ones began appearing in the mid-1980s, in response to confusion over whom agents work for. Under the traditional agency system, an agent could work for a buyer AND a seller -- an obvious conflict of interest. His (or her) duty was to the person paying the sales commission, regardless of who first contacted the agent. What that meant was an agent didn't necessary represent the buyer's interests in achieving as low a home price as possible and having a full selection of properties from which to choose.

In contrast, a buyer's agent works exclusively for the homebuyer, and cannot represent the seller unless specifically agreed upon by the buyer.

Buyer's agents are still a controversial topic in many communities, but most states now require your agent to disclose whom he or she works for.


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Title companies and title insurance

Before signing on the various dotted lines, it's important to confirm that the seller truly owns the property and isn't overlooking problems, such as outstanding mortgage payments or debts.

A buyer can find out critical information about a piece of property by getting a preliminary title report (also referred to as a title search). Title companies research these reports using public records, and guarantee the findings by selling title insurance.

The preliminary title report, which takes several days to complete, establishes who legally owns the property. The report indicates if the seller is the only person authorized to sell the property, and includes a list of previous owners as well as purchase and sale dates. It also lists any liens against the property.

Sellers usually pay for the report because they are responsible for guaranteeing a clear title. The seller's real estate agent or attorney often orders the report after opening escrow.


Types of title insurance
Title insurance, issued by the title company and often required by lenders, guarantees the house is free of liens. There are two types of title insurance:

  1. A lender's policy protects the lender against loss due to unknown title defects, and guarantees that the lender has a valid first lien against the property.
  2. An owner's policy protects the buyer from unpredictable factors, ranging from human error to forged documents, which might emerge after a sale is complete. This type of title insurance has no annual premiums. The buyer pays when the policy is issued. In some states a seller purchases title insurance to guarantee that the buyer is receiving a clear title. In others, the buyer pays for the policy to protect the lender. Only an owner's policy will protect the owner from personal loss, such as legal expenses for a dispute after the sale.

The cost of title insurance depends on the findings of the title report, but since costs vary from county to county, comparison-shopping is a good idea.

Once buyers have reviewed the title report, the buyer should discuss the findings with the seller, real estate agent and others involved in the sale. A buyer may demand that the seller clear anything on the report that could become a liability in the future, such as an existing lien.


What happens if there is a lien on the property
A title company often withholds proceeds from the sale of the house to pay the liens. The title company will refund the money to the seller if the seller clears up the issue.

Types of liens

  • Tax lien: A type of lien placed on a title when the owner has not paid property or assessment taxes or other state and federal taxes.
  • Judgment lien: An unpaid, court-ordered monetary judgment against a current or previous property owner.
  • Mortgage lien: The unpaid balance on the mortgage loan.
  • Mechanic's lien: Any payment owed to a contractor for work done on the property.

Once clear title has been established, the buyer will have ownership and exclusive use of the property.


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The pre-approval process


Advantages to pre-approval

  • Pre-approval will determine the maximum you can spend on a house before you shop, so you know what price range to target. Many shoppers aim too high, bidding on a home that they later learn is beyond their means because of unforeseen debts or other financial factors.
  • A pre-approved loan is the equivalent of a cash offer. Sellers are more likely to accept such a secure bid over other, simultaneous bids for which financing is still pending -- even if those bids are higher.
  • The contract you sign upon submission of your bid allows a finite period in which to find a mortgage -- typically 30 days or less. If you fail to secure financing within that period, the seller may drop your bid. In the meantime, another buyer may offer the seller a higher bid -- or even a lower one -- and bump you out of the picture. Some contracts allow the seller to find a mortgage for you if you miss the deadline, possibly with no consideration of the terms and how they affect you.

Pre-approved buyers can rush the closing if the seller is in a hurry to deal. Pre-approval gives buyers bargaining power.


Approval vs. qualification

Know the difference between pre-approval and pre-qualification. Some loan officers and mortgage brokers pre-qualify applicants based on a cursory check, never going through the full appraisal necessary to guarantee a loan. Without written certification, it's not a true pre-approval and it carries no weight. In a true pre-approval, the lender will present you with a letter, certificate or wallet-size card bearing your name and the maximum loan amount. It proves that an underwriter has completed all the checks and guaranteed your loan.

Many lenders pre-approve applicants, mostly because it lessens the chance that the buyers will look to other lenders once they find a house. Pre-approval, however, does not preclude shoppers from changing prospective lenders at any time.


How long does it take?

The length of the pre-approval process varies, depending on the lender and applicant. Some banks can complete it in one day. Lenders that promise 20-minute pre-approval usually take that amount of time to gather and discuss the applicant's information, but the approval is still pending a review of the filer's resources, income and debt. Some lenders perform these checks over the phone.

What paperwork is required?
Who benefits most from pre-approval?


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Paperwork required to get pre-approved for a loan

Loan underwriters examine an applicant's resources, income and debt to determine eligibility. A credit check is the foundation of this process. Many homebuyers choose to inspect and clear their credit reports before applying for a mortgage. To be pre-approved for a mortgage, you must supply the loan officer copies of your:

  • W-2 forms (usually two years' worth) or profit-and-loss statements (for self-employed individuals)
  • Pay stubs (usually one month's worth)
  • Bank statements (three months' worth), including:
    • Checking
    • Savings
    • Other assets, such as mutual funds and CDs
  • Tax returns (usually two years' worth)

W-2 forms allow the underwriter to scrutinize income and job history, which directly affect applicants' buying power and help reveal how great a risk they might be to the lender.

Profit-and-loss statements help self-employed individuals substantiate their income. Gross income may appear low, but business expenses are often "written back" in tax deductions. Lenders usually require profit-and-loss statements, at least for the current year (year-to-date).

Pay stubs help confirm current income level and verify the applicant's employment. Upon closing, most lenders reconfirm employment, especially if much time has passed since the loan was underwritten.

Bank statements indicate the applicant's resources. Underwriters generally hope to establish that the average amount required for a down payment has been maintained over time -- not recently obtained.

Tax returns provide a wealth of financial information. Underwriters look for red flags that could reveal an unforeseen debt in the case of an audit.

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Who benefits most from pre-approval?

Experts recommend mortgage pre-approval for almost all home shoppers, but some buyers are even more likely to benefit. They include:

  • First-time buyers, who have no equity.
  • Self-employed individuals, whose income may not be well reflected in a tax return and may be perceived as less stable than that of a full-time employee.

Home sellers, who may need to purchase a new house quickly once their current one sells.

First-time buyers are seen as an unknown quantity, both by sellers and lenders, simply because they have no equity. A bidder who has equity is likely to be taken more seriously than a first-time buyer in a competitive situation. Pre-approval should help alleviate this distrust.

Self-employed individuals often look bad on paper. When business expenses are high, the result often is lower-than-expected bank balances. Many of these expenses are "written back" in tax deductions. Lenders usually require of self-employed workers a year-to-date profit-and-loss statement.

Free-lancers, particularly, tend to live the type of boom-and-bust existence that makes lenders nervous. Their approval process is bound to take longer than that of a full-time employee who, for example, has held the same job and filled out the 1040EZ form for 10 years. In a competitive market, time is precious, and pre-approval keeps self-employed home shoppers in the running.

Home sellers often need to find and buy a house quickly once their current home sells. Mortgage pre-approval facilitates this approach. On the flip side, home sellers often are interested in non-contingent offers, those that don't depend on any other sale or condition. Given that they may be at once selling and buying homes, they may not want to complicate matters by dealing with someone who is doing the same.

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Making yourself attractive to a lender

Applying for a mortgage is like getting ready for an important appointment: You want to look your best and have no surprises. That's why it's important to review your personal financial records even before you begin house shopping. You'll get the best rates and fastest approval if your credit history is clean and your finances are in order.

Most lenders sell their mortgages to federally sponsored agencies such as the Federal National Mortgage Association, better known as Fannie Mae. It has specific requirements for borrowers; meet them and you're on your way.

Here's what you need and how to get ready:

Maintain a clean credit history.
Lenders want borrowers who have no negative items on their credit report--no defaults, no late payments, no bankruptcies. You might think you have "A" credit, but odds are 1-in-4 that there's an error in your report. Find it first, before the lender does, by getting a copy of your report from a major credit bureau such as TRW, Trans Union or Equifax.

Look for mistakes, such as accounts that are not yours. First, contact the creditors by phone or mail and correct the report. Then get another copy of the report 30 to 60 days later to make sure the corrections have been made.

Trim credit card accounts and balances.
Lenders look at how much debt you have and what you might take on. The fewer cards you carry -- and the lower the balances -- the better. That's especially true if you have other debts such as a car loan. However, don't pay down or pay off balances with cash intended for a down payment.

The easiest way to improve your debt picture is to close all dormant credit card accounts. Contact card issuers and ask for instructions on closing the accounts. You may be asked to cut up your card and return it by mail. In any event, you should instruct the card issuer in writing to enter into your credit report "Closed at request of cardholder." That way, the mortgage lender will have no reason to suspect that a credit problem caused the account to be closed.

Solidify your savings.
Lenders will ask for back copies of your bank accounts to see that you have enough cash for that 5 percent or 10 percent down payment. If a relative is giving you some or all of that money, make the deposit at least six months before you apply for a loan. That way, the lender won't ask why and from where the cash suddenly appeared.

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Checking your credit history

Before you hunt for a real estate agent, before you step into one open house, before you search our sites real estate ads, check your credit history. A poor credit history can mean higher loan rates and delays. An error by a bank or reporting company can prevent you from getting a loan, even if you can claim -- without blushing -- that you've paid every bill on time. And you won't know whether the big three credit reporting companies hold you in good standing until you've checked out their reports. Mistakes are common. They are easy to correct, but they must be spotted to be fixed.

If you've had a less-than-stellar financial past, you'll need a copy of your report to see if late payments were noted. Although untimely debt repayments don't vanish from your credit report for seven years, lenders will be more receptive if you can show that you've paid your bills on time for at least two years.

If blemishes remain or your financial woes are recent, you'll need to explain them to a lender in writing. Lenders recognize legitimate reasons for credit problems, such as divorce, unemployment or illness. They will work with you, if you explain your situation.

To get a copy of your credit history, contact one of the three main credit-reporting companies. Reports cost about $8 each from Experian -- formerly TRW -- ([800] 682-7654), Equifax ([800] 685-1111) and from Trans Union ([800] 916-8800).

When you receive your report, carefully check that all information is correct. Don't skip over details such as Social Security numbers, addresses and name spellings; errors can link you to someone else's records.

If you do spot an error, send letters to the credit reporting companies. Law requires them to check the accuracy of their information and respond to your complaint within a reasonable time, usually 30 days.

Corrections to your credit report may take several additional weeks to appear. Once your report is clean, then start house hunting.

When you do find the house you want, you'll be way ahead of other buyers clamoring to buy the same great property. You can march quickly and confidently into your mortgage broker's office and know that your credit report will not delay or prevent you from getting a loan.

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Financing methods

You've found the perfect home. How are you going to pay for it?
There are several options:

1. Borrow the money from a lending institution.
This is the most common way of buying a home. You pay a down payment on the house (as low as 3 percent), and borrow the rest of the money from a bank or other lender.

2. Assume a mortgage.
If the seller agrees, you can assume responsibility for the seller's mortgage on the property. In addition, you may have to pay the seller additional money or pay the mortgage company a transfer fee.

3. Investigate seller financing.
Instead of taking out a mortgage, see if the seller is willing to finance the purchase. The seller can hold the mortgage, and you will make the monthly payments to him or her.

4. Ask about lease-options.
Instead of buying the house, lease it with an option to buy it at some point in the future. A portion of your monthly rent goes toward the purchase price.

5. Use all cash.
If you have the money, you may want to pay the entire purchase price of the home upfront. You may get a better deal on the property, and it may make sense financially.

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The loan process

Getting a mortgage can be a pleasure or a nightmare. It starts with that first phone call to a lender and ends at closing on your new home. Here are the four stages of the mortgage process, and what you should do to make the experience as painless as possible.

Phase 1: Choosing a lender. You can select among banks, mortgage bankers and mortgage brokers. The last doesn't supply the funds for your loan, but has a list of money sources. Base your selection primarily on cost and references. The lender should have competitive rates and fees and be recommended by someone whose judgment you trust. Many states require lenders to be licensed, but that's no guarantee they will be highly professional. Ask for references.

Phase 2: Making an application. This is more complicated than you might think. The lender probably will ask you to pay up front for an appraisal and credit report, and will require many documents, such as proof of income and bank account statements. In return you'll get a ton of paper back, much of it disclosures required by law. Forms must be completed and signed. You'll have to wade through them, especially the good-faith estimate of expenses related to the mortgage. Read everything carefully; ask questions and challenge any charges you think don't make sense.

Phase 3: Getting the loan approved. Murphy's law applies here. You may encounter glitches, such as errors in your credit report. Lenders might lose important papers, forget to order inspections or just get bogged down with too many customers. It's up to you to keep the process going. Check with your loan officer at least once a week to see that you are on schedule for closing. Keep your own checklist of what the lender should complete and by what date.

Phase 4: Conducting the closing. This can be painless or painful, just like the other steps. The signing of the final paperwork can take place in a lawyer's office or at a title company, depending on where you live. You, the seller, real estate agents, the lender and any other interested parties will attend. Again, papers must be signed. Read them carefully. The lender could make a mistake on the paperwork, even about the loan check amount.

Diligence and a little luck will make your mortgage application go smoothly. Be persistent when you encounter glitches, and you should come out with a home and the right mortgage.

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Types of lenders

Homebuyers can choose from a variety of financial institutions to secure a mortgage, often without visiting the lender's office. Mortgage brokers can find you the best mortgage among many lenders. Or your real estate agent can log on to a computer listing of lenders and learn about the mortgages they offer. Mortgage applications can even be filled out over the Internet now in some cases.

Here are some options:

Banks and thrifts, or savings and loans

These are the traditional, but no longer the major, mortgage lenders. Often they are the most flexible regarding whom they will grant a loan, and the amount, because many hold on to the mortgages rather than sell them to investors.


Mortgage bankers

Providing mortgages is their only business, so they offer many types. Their standards vary, however, because they sell their loans to investors, whose expectations about return also vary.


Mortgage brokers

They do business with virtually any lender, collecting fees on each deal. This means they can find the most appropriate mortgage for you and then handle all the paperwork.

'B' and 'C' lenders: People who do not have the A-quality credit history demanded by banks, thrifts and traditional mortgage bankers are called "B" or "C" borrowers. Many new mortgage bankers, and mortgage brokers who represent them, now offer mortgages to "B" and "C" borrowers at rates ranging from 1 to 3 percent higher than the standard A-quality loan rate.


Computerized loan origination networks (CLOs)

These online services, accessible in the offices of many mortgage brokers and real estate agents, list all mortgage programs, rates and fees offered by a variety of lenders. CLOs also may enable online mortgage application. A caveat: The list of lenders represented may not be extensive.


Credit unions

These savings institutions make loans to their members, who have purchased a share in the credit union. Members are usually people who work in the same industry or for the same company, or live in the area. Credit unions traditionally have made only small personal loans, but many now offer home mortgages.


Finance companies

These were once the only source of mortgages for borrowers with credit ratings of B and below.


National Cooperative Bank

People who purchase units in a housing cooperative are actually purchasing stock in the corporation that owns the building, so they often have difficulty-securing financing. The Washington, D.C.-based National Cooperative Bank, which has affiliates in other cities, exists solely to provide financing for cooperatives.

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Types of Loans


A fixed rate mortgage is one in which the rate remains the same across the life of the loan. The advantage is that monthly payments will remain the same. However, if you lock into a higher interest rate, the rate will not change, even if interest rates go down in the future.

The lowest monthly payments come from 30-year fixed-rate mortgages. However, these mortgages also take longest to build up equity in your home. Experts recommend a 30-year mortgage if you are planning to stay in your home for several years and want a stable rate.

Also common are 15-year fixed-rate mortgages. These loans spread the principal and interest across a 15-year period, after which you have paid off your loan. Because of the shorter term of the loan, you enjoy a reduced interest rate and build up equity in your home at a much faster pace. However, monthly payments are higher than for a 30-year fixed-rate mortgage. Experts recommend a 15-year fixed-rate mortgage if you are planning to sell your home in a few years and want a stable rate.


Adjustable-rate mortgages, or ARMs as they are commonly called, are ones in which the interest rate changes periodically according to a fixed index. A 1-year ARM adjusts the interest rate annually. Monthly payments will increase or decrease along with the index rate, which is specified by the mortgage. Common indices include 1-year Treasury notes, Federal funds rate and the national cost of funds index. A margin -- usually one or two percentage points -- is added to the index rate.

Adjustable-rate mortgages include two caps on the amount the rate can increase or decrease. One cap limits the interest rate adjustment in any one-adjustment period (e.g. one year in a one-year ARM), and the second cap limits the interest rate adjustment across the lifetime of the loan.

The advantage of an adjustable-rate mortgage is that monthly payments can decrease when the index goes down. However, monthly payments will increase when the index goes up.


One way of shortening the length of your mortgage is to purchase a balloon mortgage. It works like an ARM or a fixed-rate mortgage for the first several years. After that period of time has expired, you owe a large payment -- sometimes the remaining balance on the loan. The advantage of this type of loan is that it keeps monthly payments low. Experts recommend this type of loan for people who are planning to sell their homes within a few years, and can pay off the balloon payment from the proceeds of the sale of the house.

A convertible loan is an ARM that can be converted to a fixed-rate mortgage after a specified number of years. There may be a cost associated with this.


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Paperwork required for a loan

Getting a loan can mean miles of forms to fill out. The process will be easier if you find the paperwork ahead of time and bring it with you to the lender's office. Here is a checklist you can print out and use when getting ready to apply for a loan:

_____W-2 forms or profit-and-loss statements (for self-employed individuals) for the past two years

_____ Pay stubs (one month's worth)

_____ Bank statements (three months' worth) for checking, savings and other accounts

_____ Investment statements for stocks, bonds and other investments

_____ Tax returns (two years' worth)

_____ Mortgage papers for any other property owned

_____ Copies of loan papers for other loans (e.g. car loans)

_____ Paperwork showing any other major debts

_____ Telephone numbers and addresses of your workplace, so the lender can verify your income


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Loan comparison sheet

Compare several mortgage lenders and types of loans before choosing a lender.  Print this guide and use it to compare mortgages.

Name of lender: __________________________

Total purchase price: $ __________

Mortgage amount: $ __________

Down payment: $ ___________

If the down payment is less than 20 percent of the home purchase price, cost of PMI: $ _______

Type of mortgage: Fixed-rate ___ ARM ___ Other __________________

Number of points: ______

Application/processing fee: $ ___________

Balloon payment?: $ _____________ after _________ years


Mortgage rate: _____ %

Annual percentage rate (APR): _____ %

Term: _____ years

Monthly payment: $ _________


Initial rate: _______ %

Index used: _________________

Current index rate: _______ %

Margin: _______ %

How often the index changes: _____________

Annual percentage rate (APR): ________ %

Discount? Yes ___ No ___

If yes, what is the discounted rate? _______ %

And how long does it last? ___________

Initial payment: $ _________

Interest rate cap

Periodic: _______ % per ________________

Long-term: ________ %

Is the ARM convertible? ____________________________

Are there prepayment penalties? _____________________

Where is the index published? _______________________

How has the index performed over the past several years? ________________________

What would the mortgage payment be if the index increased 2 percent? $ __________




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