First Time Buyer Mistakes to Avoid

Congratulations! You have decided to buy your first house. Before you jump into the process, take some time to educate yourself by learning some of the common mistakes first-time homebuyers often make. Having an awareness of these prevalent – and potentially dangerous and expensive – mistakes will help you avoid making them yourself.

  • Running before walking. This is easy to do once the decision to buy a home is made. It means rushing off looking at homes, surfing the web or calling on advertisements before doing some preparation. Not spending time preparing can be a disaster. Remember, if you hastily make a contract to purchase a home and change your mind, the chances of being released from the contract are almost non-existent.

  • Over-buying the first time. Being house poor is a very uncomfortable existence. A large, beautiful home with little or no furniture tends to be cold. A life where every dime of your income goes to pay for a house wears thin and is a cause of family stress. Pushing yourself to your financial limits leaves you vulnerable in case of economic downturn.

  • Finding out too late that you have no representation. This can be a nasty surprise when you assume that the agent with whom you are working represents you when they actually represent the seller. How does this happen? By not taking the time to familiarize yourself with the laws regarding agents. Or, by rushing to look at homes advertised, and not having a relationship with an agent who acts as your representative. Another pitfall is when you try to represent yourself in the purchase of a home, thinking that you will save money. That may be the case, but it is just as likely that you will run into a seller who is looking to keep the commission savings in their pocket. Without representation and the use of a Comparative Market Analysis, how do you determine a realistic selling price for a property? Consider hiring a REALTOR® as a buyer’s representative, whose duty is only to you. A buyer’s rep is paid out of the seller’s commission payment.

  • Not comparing mortgages. There are far too many variables, types of mortgage, terms, lenders and amounts of points, etc., not to investigate all of your options. Do not simply accept the first plan you see, whether from a mortgage broker or on the recommendation of a friend. Spend time comparing to get the most advantageous plan for your requirements and financial situation.

  • Not getting mortgage pre-approval. Prequalification and preapproval are important parts of the home buying process. Not only will it give you an exact price range for your purchase, pre-approval will add a great deal of strength to your negotiating power.

  • Waiting for the perfect home. Many first time buyers make the mistake of thinking that they will find a home that has 100 percent of their wish list if they just look long enough. With the thousands of variables available in housing, including location, style, size, amenities and condition, this could be an unrealistic goal. As a result, these buyers pass by homes that meet 90 percent or more of their requirements only to eventually give up and purchase homes with fewer of their requirements because they become tired of the home search process, or while they wait for the perfect home, housing market prices, and often mortgage rates, continue to rise. To avoid this, prioritize your wish list and identify your most important needs and your most desired wants, and select a home that meets the majority of them.

  • Shortcutting the inspection process. This can involve skipping a whole house inspection completely in order to save a relatively small amount of money. You run the risk of not exposing potentially expensive or even hazardous defects in the property. Protect yourself by investing the money and time for a professional home inspection.

Steps to Prepare for Home Ownership

  1. Decide how much home you can afford. Generally, you can afford a home equal in value to between two and three times your gross income.

  2. Develop a wish list of features you would like your home to have. Then, prioritize the features on your list.

  3. Select three to four neighborhoods in which you would like to live. Consider items such as schools, recreational facilities, area expansion plans and safety.

  4. Determine if you have savings sufficient to cover your down payment and closing costs. Closing costs, including taxes, attorney’s fees and transfer fees average between 2 and 7 percent of the home price.

  5. Money matters. If you’re considering a mortgage, shore up your credit and get a copy of your credit report.

  6. Consider your resale value. Even if you don’t have school-aged kids, a strong school district is a good thing.

  7. Determine how large a mortgage for which you qualify. Also, explore different loan options and decide what is best for you.

  8. Organize all the documentation a lender will need to preapprove you for a loan. This includes past income tax returns, recent pay stubs, bank statements, etc.

  9. Do research to determine if you qualify for any special mortgage or down payment assistance programs.

  10. Calculate the hidden costs including property taxes, insurance, maintenance and association fees, if applicable. These can impact your wallet over time.

  11. Do your homework. Bid based on sales trends of similar homes in the neighborhood.

  12. Get help. Consider hiring a REALTOR® to get the most for your money. It pays to have someone looking out for your interest.

Reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Buying vs. Renting

If you are like most Americans, owning your own home is a part of the American Dream, and the starting point for American families to accumulate wealth. Homeownership provides shelter and security to families, and fosters involvement in community life as well as participation in democratic institutions.

Given record levels of homeownership in the United States, owning a home of your own appears to be the clearest sign of achieving the American Dream.

Homeownership provides important social, as well as economic, benefits. It is the cornerstone of a healthy community and the basis for positive community involvement.

When you are renting a property, you are waving good-bye to your money each month. Renting a home does not provide tax advantages to the renter; any advantages go to the landlord or property owner.

When considering your options, you should be aware of the benefits of home ownership.

  1. Tax breaks. The U.S. Tax Code lets you deduct the interest you pay on your mortgage, property taxes you pay, as well as, some of the cost involved in purchasing your home.

  2. Equity. Money paid for rent is money that you will never see again, but mortgage payments let you build equity ownership interest in your home.

  3. Savings. Building equity in your home is a ready-made savings plan. When you sell, you can generally take up to $250,000 ($500,000 for a married couple) as gain without owning any federal income tax.

  4. Predictability. Unlike rent, your mortgage payments do not go up over the years, so your housing costs may actually decline, as you own the house longer. However, keep in mind that property taxes and insurance costs will rise.

  5. Freedom. The home is yours. You can decorate any way you want and be able to benefit from your investment for as long as you own your home.

  6. Stability. Remaining in one neighborhood for several years gives you a chance to participate in community activities, lets you and your family establish lasting friendships, and offers your children the benefit of educational continuity.


Rent-to-own deals: Questions buyers should ask

  • How much of the rent is going to the down payment?
  • How locked in are you if you change your mind?
  • What will it cost you to get out of the deal?
  • How long will it take to accumulate enough of a down payment that you are likely to qualify for a mortgage?

Do the math

Visit www.fha.gov for an interactive Rent vs. Buy Calculator to help you compare the costs and benefits of renting vs. buying. To access this tool go to www.fha.gov. Under the section labeled “Business Tool” click on the “Mortgage Calculator” link and then select the “Rent vs. Buy” option.


The tax deductions you can take for mortgage interest and property taxes greatly increase the financial benefits of home ownership. Here is how it works.

Assume: 

$9,877 =Mortgage interest paid (a loan of $150,000 for 30 years, at 7%, using year-five interest)

$2,700 =Property taxes (at 1.5% on $180,000 assessed value)

$12,577 =Total deduction

$3,521.56 =Amount you have lowered your federal income tax (at 28% tax rate) ($12,377 X .28 = $2,521.56)

There is not much doubt that for most people owning a home is better over the long term than renting. When you have made the decision to buy, do your homework, and contact a professional REALTOR® to assist you. Note that mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Getting Your Finances In Order

Once you have decided to purchase a home, you should do a financial inventory to determine your ability to secure a mortgage and to identify problem areas, if they exist. By assuring that your finances are in order, you enhance your ability to secure a mortgage at a favorable rate.

The following steps will assist you in getting your finances in order.

  1. Create a budget and live by it. Review your receipts and bills from the past six months to estimate your monthly expenses accurately. Remember to build in money for unexpected expenses like doctor visits, car repairs, etc. Then, commit to living by your budget as closely as possible.

  2. Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 and 28 percent of income, you need to get the rest of your installment debt – car loans, student loans, credit cards – down to between 8 and 10 percent of your total income.

  3. Get a handle on expenses. You probably know how much you spend on rent and utilities, but little expenses add up. Try writing down everything you spend for one month. You will probably see some great ways to save.

  4. Increase your income. It may be necessary to take on a second, parttime job to pay down debt or get your income to a high enough level to qualify for the home you want.

  5. Save for a down payment. Although it is possible to get a mortgage with only 5 percent down – or even less in some cases – you can usually get a better rate and a lower overall cost if you put down more. Shoot for saving a 20 percent down payment.

How Much House Can You Afford

When you approach lenders about financing a mortgage, they will use two commonly accepted guidelines to help determine your ability to make mortgage payments. These guidelines are a starting point for evaluating your ability to make the payments on the proposed loan. Therefore, your lender will look at your individual financial situation to determine if more flexible guidelines are appropriate for you.

  1. Your monthly housing costs (including mortgage payments, property taxes, homeowner and mortgage insurance, and homeowner’s fees) should total no more than 28 percent of your monthly gross (before taxes) income. In addition to your regular pay, your income can include funds you receive from overtime work, a part-time job or second job; retirement, VA and Social Security benefits; disability; welfare and unemployment benefits; alimony; and child support.
  2. Your monthly housing costs plus other long-term debts such as payments on car loans, student loans, or other installment debt (debts with more than ten months left to repay) should total no more than 36 percent of your monthly gross income.

Let the numbers do the talking

An easy-to-use calculator will help you understand how much home you can afford, or if you would like to compare the monthly payments of an adjustable-rate mortgage to a fixed-rate mortgage. For a free calculator to help you crunch the numbers visit www.bankrate.com. Click on the "Calculators" tab. Then, under the heading "Mortgage Calculators", select the "How much home can I afford?" The site offers a large variety of mortgage-related calculators including those that will help you calculate mortgage payments, weight fixed vs. adjustable rates and determine whether it is more financially feasible for you to rent or buy. For the best estimate of what you can afford you will need the following information:

  1. Gross income (before taxes)
  2. Monthly debt (do not include debt that will be paid-off within the next six months)
  3. Funds available for down payment and closing costs
  4. Interest rate (the site offers links to help you determine average rates based upon zip code)
  5. Mortgage term (length of the mortgage)
  6. Down payment amount
  7. Estimated cost for homeowners insurance policy
  8. Estimated property taxes

In addition to mortgage-related calculators, the site offers free access to numerous financial calculators related to managing personal finances, retirement savings, credit card debt, personal savings and much more. These can all assist you in getting your finances in order which will in turn prepare for the loan qualification process ahead.

Mortgage Shopping

Knowing and understanding all the mortgage options available to you could be the determining factor that moves you from wanting to buy a home to actually making the purchase a reality. When looking for a mortgage, the Federal Reserve Board advises consumers to shop, compare and negotiate.

Shop

The mortgage industry is a competitive market, so start the process by shopping around to learn who offers what products. This will help you identify the loan products that will work best for your particular financial situation. Obtain information from commercial banks, mortgage companies and credit unions. Mortgage brokers are another source for home loans that consumers should explore. Mortgage brokers arrange loan transactions rather than lending the money. In a sense they do the shopping for you by contacting several lenders on your behalf and presenting options to you. Note that mortgage brokers are not obligated to find the best deal for you unless they have contracted with you to work on your behalf.

Since lending institutions sometimes act as brokers too, consumers should always ask whether a broker is involved. This is an important question because brokers are typically paid for the service they provide which could add fees to the total cost of your loan. On the flipside, a mortgage broker’s professional contacts may yield a better deal than a consumer could find alone, resulting in overall savings that outweigh the cost associated with paying for the broker’s services.

Compare

To accurately compare mortgages, make a checklist of information you should obtain from each lender or broker. A wide variety of terms and fees usually contribute to the final cost of the loan, so it is not enough to simply know the amount of your monthly payment and the interest rate. Ask for the following information with each loan inquiry:

Rates

  • What are the current interest rates and are the rates quoted the lowest for that day or week?
  • Are the rates fixed or adjustable? When adjustable interest rates rise, so will your monthly payment.
  • If the rate is adjustable, ask how the rate change will affect the amount of your payment.
  • Ask for the annual percentage rate (APR). The APR includes points, broker fees, and other charges as a yearly rate.

Points

  • Points are fees paid to the lender or broker and are usually tied to the interest rate.
  • Ask lenders and brokers to quote points as an actually dollar amount rather than a number to help make accurate comparison.

Fees

  • Fees associated with a mortgage often include origination or underwriting fees, broker fees, and transaction, settlement and closing costs.
  • Request an explanation of what each fee includes because some times lenders lump fees together.
  • Many of these fees are negotiable.
  • Some fees are paid at the time of loan application and others at closing.

Down payments

  • Down payments vary from loan to loan. Many lenders now offer loans that require less than the standard 20 percent for a conventional loan. Some may be as low as five percent for conventional loans.
  • Loans backed by government programs such as the Federal Housing Administration (FHA), Veterans Administration (VA), or Rural Development Services require even lower down payments.
  • Ask the amount of down payment required.
  • Ask the lender to explain any down payment assistance programs for which you may be eligible.

Private mortgage insurance (PMI)

  • When a borrower’s down payment is less than 20 percent of the loan value, lenders require the borrowers to purchase PMI as a safeguard to protect the lender for taking on the larger risk associated with this type of loan and the possibility that the borrower might fail to pay it.
  • If PMI is required, ask what the total insurance premium will be.
  • Ask what your total monthly payment will be once PMI is added.

Negotiate

Once you have shopped around and compared the rates available to you in your market, revisit lenders or brokers that seem to have the best offer. Review the costs associated with the loan with your potential lender or mortgage broker. Ask that they waive or reduce one or more of the fees, agree to a lower rate or fewer points or match the terms of a competitor.

Once you and your lender or broker arrive at an agreement, request a written lock-in of the terms of the agreement. The lender may charge a fee for this and the lock-in is usually limited to a certain period of time, but this small investment will help you in the long run as it will protect the terms that you negotiated while you are in the process of buying your home.

Source: The Federal Reserve Board

Final Walk-Through Inspection and Closing

Final walk-through inspection and closing

Homebuyers should plan to make a final walk-through inspection of their new home prior to closing, and after the sellers have moved, in order to assure the condition of the property is as it was on the day you signed your purchase contract. You should take an early walk-through to check repairs agreed to by the seller, but this early inspection does not replace your final walk-through on closing day.

Plan to verify that requested repairs have been made as soon as the seller notifies you they are complete. Do not put off this inspection, because if problems still exist, you will need time to get them corrected before closing. If possible, the home inspector who discovered that repairs were necessary and your REALTOR® should accompany you to verify that repairs have been made properly.

Be sure that:

  • Repairs you have requested have been made. Obtain copies of paid bills and any related warranties.
  • All items that were included in the sale price – draperies, lighting fixture – are still there.
  • Screen and storm windows are in place or stored.
  • All appliances are operating.
  • Intercom, doorbell and alarm are operational.
  • Hot water heater is working.
  • HVAC is working.
  • No plants or shrubs have been removed from the yard.
  • Garage door opener and other remotes are available.
  • Instruction books and warranties on appliances and fixtures are there.
  • All personal items of the sellers and all debris have been removed.
  • No damage has occurred during the move.

If the condition of the home has changed since your offer to purchase it, you are in a better position to get the problems handled when you bring them to everyone’s attention before the deed changes hands. If necessary, repair or replacement funds can be negotiated, deposited into an attorney’s trust fund, and then drawn on to bring the home back to the shape it was in on your contract date. It is usually best to hold back an amount that exceeds the estimate for making repairs.


Typical pre-paid expense and closing costs

There may be closing costs customary or unique to a certain locality, but closing costs are usually made up of the following:

  • Attorney's or escrow fees (Yours and your lender's if applicable)
  • Property taxes (to cover tax period to date)
  • Interest (paid from date of closing to 30 days before first monthly payment)
  • Loan origination fee (covers lenders administrative cost)
  • Recording fees
  • Survey fee
  • First premium of mortgage insurance (if applicable)
  • Title insurance (yours and the lender's)
  • Loan discount points
  • First payment to escrow account for future real estate taxes and insurance
  • Paid receipt for homeowner's insurance policy (and fire and flood insurance if applicable)
  • Any documentation preparation fees
  • Appraisal fee
  • Credit report fee

Items the buyer will receive at closing

  • Settlement Statement, HUD-1 Form is given at or before closing if live closing and within 48 hours after closing in an escrow state. If you want a copy prior to closing for review, you must request it from the closing agent.
  • Copy of Truth-in-Lending Statement
  • Copy of mortgage note
  • Keys to your new home

Source: The Federal Housing Administration


Closing

Those around the closing table typically include the sellers, the buyers, attorneys for buyers and sellers, a title company representative, the sellers’ and buyers’ real estate agents and the closing representative from the lender or title company.

The closing agent will have a stack of papers for you and the seller to sign. While they will give you a basic explanation of each, you may want to take the time to read each one and/or consult your agent to make sure that you know exactly what you are signing. In Mississippi, attorneys conduct real estate closings. Conveyance is by warranty deed, and deeds of trust are the customary security instruments.

Before you go to closing, your lender is required to give you a booklet explaining the closing costs, and a good faith estimate of how much cash you will have to supply at closing, and a list of documents you will need at closing. If you do not get those items, be sure to call your lender BEFORE you go to closing.

Do not hesitate to ask questions.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Home Owners Insurance Coverage

Before you close on your home mortgage, you will be required to show proof of homeowners insurance. A standard homeowners insurance policy typically includes:

  1. Dwelling (often called Coverage A) – Pays for repairs or rebuilding if the home is damaged or destroyed by the events listed in the policy.
  2. Other structures (Coverage B) – Pays for repairs or rebuilding if structures on the property, but not attached to the home, such as a garage, are damaged or destroyed.
  3. Personal property (Coverage C) – Covers loss or damage to furniture, clothing, appliances and other non-fixture items.
  4. Additional living expenses (Coverage D) – Covers costs of living away from home if the homeowner needs a place to stay while the home is being repaired or rebuilt.
  5. Liability – Covers homeowners against bodily injury or property damage lawsuits brought because of incidents that occurred on the property. Pays to defend homeowner in court and awards granted by the court up to the policy limits.

Five Things to Understand about Homeowners Insurance

  1. Look for exclusions to coverage. For example, most insurance policies do not cover flood or earthquake damage as a standard item. These coverages must be purchased separately.
  2. Look for dollar limitations on claims. Even if you are covered for a risk, there may be a limit on how much the insurer will pay. For example, many policies limit the amount paid for stolen jewelry unless items are insured separately.
  3. Understand replacement cost. If your home is destroyed, you will receive money to replace it only to the maximum of your coverage, so be sure your insurance is sufficient. This means that if your home is insured for $150,000 and it costs $180,000 to replace it, you will only receive $150,000.
  4. Understand actual cash value. If you choose not to replace your home when it is destroyed, you will receive replacement cost, less depreciation. This is called actual cash value.
  5. Understand liability. Generally, your homeowners insurance covers you for accidents that happen to people on your property, including medical care, court costs and awards by court. However, there is usually an upper limit to the amount of coverage provided. Be sure that it is sufficient if you have significant assets.

Tips for lowering homeowner’s insurance premiums

Shop around and compare the costs of comparable coverage from different insurers to get the best value.

Install smoke detectors in key locations; keep fire extinguishers handy, especially in the kitchen.

Install dead-bolt locks and a burglar alarm system, particularly one that directly contact the police or fire department or an external monitoring service.

Maintain a good credit history, as many insurance companies offer better rates to individuals with good credit ratings.


Important flood insurance information

Flood insurance is a special policy that is federally backed by the National Flood Insurance Program (NFIP) and is available for homeowners, renters and businesses.


Reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Home Warranty

Home warranties cover repair and replacement costs for appliances and other home systems that break down. A home warranty can be purchased by a homebuyer or current homeowner, and is often paid for at closing. Builders typically furnish a limited warranty for their new homes, but the home warranties described here are different. They cover homes of any age.

Standard home warranty coverage differs quite a bit by provider. Many standard home warranties cover plumbing, appliances, and heating and cooling systems. Some policies cover the roof. You usually purchase extra coverage for private wells and septic systems or other highticket items.

Cost varies, but many standard home warranty policies range from $350 to $450 – extra to cover special systems.

Most home warranty policies are effective for one year with an option to renew coverage upon expiration. The renewal cost is often higher than the fee paid for the initial policy. Ask providers about renewal fee is so that you can compare costs.

Check the home warranty policy to see which of the following items are covered. Also, check to see if the policy covers the full replacement cost of an item.

  • Plumbing
  • Electrical Systems
  • Water Heater
  • Furnace
  • Heating Ducts
  • Water Pump
  • Dishwasher
  • Stove/Cook top/Ovens
  • Microwave
  • Refrigerator
  • Washer/Dryer
  • Swimming Pool (may be optional)

Your REALTOR® will be able to provide you more information on home warranty policies.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Property Taxes

Counties and municipalities levy a property tax on real and tangible personal property. Owner-occupied residential properties are assessed at a percentage of true value. Property is appraised and assessed by local assessors. Depreciation is allowed in determining true value. Tax rates are set by each city and the county based on local budget requirements. Mississippi does not have a state property tax.

Generally, the term real property refers to land. Land, in its general usage, includes not only the face of the earth, but also everything of a permanent nature over or under it. This includes structures and minerals.

Property tax questions you should to ask

  1. What is the assessed value of the property? Note that assessed value is generally less than market value. Ask to see a recent copy of the seller’s tax bill to help you determine this information.
  2. How often are properties reassessed, and when was the last assessment completed? Generally, taxes increase most significantly when a property is reassessed.
  3. Will the sale of the property trigger a tax increase? Often the assessed value of the property increases based on the amount you pay for the property. Moreover, in some areas, taxes may be frozen until resale.
  4. Is the amount of taxes paid comparable to other properties in the area? If not, it might be possible to appeal the tax assessment and lower the rate.
  5. Does the current tax bill reflect any special exemptions for which you may not qualify? For example, many tax districts offer reductions for those over 65 or with special circumstances.
  6. Was homestead exemption filed for by the seller during the current year? If yes, this could affect the amount of tax you as the buyer would pay in the first year of ownership.

You can contact the Tax Collector’s Office in the county in which you are purchasing property or you may talk with your REALTOR® for information about the tax on the property that you are considering.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Title Insurance

When you purchase a home, you are really purchasing the title to the property, which is the right to occupy the space. That title could be challenged based upon past rights and claims asserted by others. Such claims can interfere with your purchase of the property or cause you to lose money.

Since a home is usually the largest purchase we make, it is wise to protect against loss of value due to fraud, forged signatures on deed, unknown property heirs, liens, and documentation errors. If you were uninsured and your title was challenged, you could spend a significant amount of money defending yourself or could lose your home. Your mortgage lender will require a loan policy of title insurance to protect their interest in the value of your property, and a homeowner should purchase an owner’s policy for the same reason.

For a one-time premium, generally paid at closing, an owner’s title insurance policy remains in effect as long as you, or your heirs, retain an interest in the property.

Title search

A title search is a close examination of all public records that involve title to the real estate you are purchasing occurs. The person conducting the search looks at past deeds, wills and trusts to assure that the title has passed correctly to each new owner. The examiner tries to verify that all prior mortgages, judgments and other liens have been paid in full. If a problem, called a defect or cloud on the title, is found, it should be corrected prior to closing. However, even an expert title examiner can miss a defect that might cause problems for you later.

Five things to understand about title insurance

  1. Title insurance protects you from fraudulent claims against the ownership of your property and from mistakes that could have been made in earlier sales of the property such as the misspelling of a person's name or an inaccurate description of the property.
  2. The cost for title insurance is usually based on the price of the property and is usually paid as a one-time fee.
  3. The buyer usually pays the cost of the title insurance for the property.
  4. Lender title insurance policies protect the interest of the lender and are usually required by the lender at the time of the sale. Buyer policies are also available and are recommended to protect the buyer's interest.
  5. Discounts on premiums may be available if the home has been bought within only a few years since not much work is required to check the title. Ask the title company if this discount is available for you purchase.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Your Credit: Know Your Score

A credit score is a number that indicates how likely a borrower is to repay future debts. The most common credit score used by lenders is the FICO® score, which ranges from 300 – 850. The higher the score, the better. The FICO score is generated by a mathematical formula or scoring model. This scoring model applies the same standards to everyone and is not based on human judgement. Your FICO score affects how much money and what loan terms (interest rate, type of loan, etc.) lenders will offer you at any given time.

The credit reporting agencies Experian, TransUnion and Equifax collect and store individual consumer credit information that they use to generate a credit report. To generate a FICO credit score, the credit agency runs the data in a credit report through its FICO scoring model. When the information on your credit report changes, your credit score tends to change too.

Obtain a copy for free

By law, you are entitled to receive one free credit report from each of the three national credit reporting agencies once per year. You can order them by calling 1-877-322-8228 or view them immediately online at www.annualcreditreport. com - after you provide identification information. You also may order your credit score from each agency, but you will have to pay a small fee per score.

Data included in your credit report:

  • Identifying information (name, address, employer, Social Security number, etc.)
  • Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
  • Previous collections
  • Tax liens, judgments and bankruptcies
  • Inquiries for new credit

How payment and debt information ranks in your score:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • New credit: 10 percent
  • Types of credit used: 10 percent

In general, when people talk about your "credit score," they are talking about your current FICO score. Many lenders get credit scores from smaller credit bureaus that typically get FICO scores from the national credit reporting agencies. However, some lenders generate their own credit scores or get them from a custom credit score developer. As a result, there is no one score used to make decisions about all borrowers.

Your FICO score may be different at each of the main credit reporting agencies. The FICO score from each credit reporting agency considers only the data in your credit report at that agency . If your current scores from the credit reporting agencies are different, it's probably because the information those agencies have on you differs. You should check your report at all three agencies once a year.

If any of your credit reports contains inaccuracies, contact the credit agency that compiled the report. All three agencies detail their dispute processes on their Web sites. The Fair Credit Reporting Act (FCRA) requires the agency to investigate your disputed items within 30 days. The credit reporting agency must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute. If ever you are denied credit, you are entitled to a free credit report.

Head off unwanted surprises

Before meeting with your mortgage broker or lender, obtain copies of your three credit reports. Review them before your meeting to check for errors. If you see errors, take steps to correct them before you submit any loan application.

If you have had credit problems, be prepared to discuss them honestly and provide your lender with a written explanation. Every lender knows there are unavoidable reasons for credit lapses, such as unemployment, illness or other financial strains.

If you have had a problem but have worked with your creditors to correct it, and your payments have been on time for a year or more, you’ll probably have nothing to worry about.

If a lender asks you to pay off an account to improve your debt ratio, it typically takes 30 days for the new information to appear on your credit report. If you need to prove this sooner, talk to the creditor about getting a letter or ask the closing attorney to indicate the paid account on the closing statement.

Tips to improve your credit score

  • Pay loans first.
  • Pay off credit cards every month.
  • Remind yourself that credit cards are loans and use them sparingly.
  • Charge less than your card’s credit limit.
  • Only apply for credit you need – not to simply get a promotions discount on a retail purchase.
  • Pay more than the minimum due each month.
  • Keep track of bills and pay them on time.

Source: Mortgage Bankers Association

Home Inspections and Appraisals

A home inspection is an objective visual examination of the physical structure and systems of a home, from roof to foundation. A home inspection is the equivalent of physical examination from your doctor. When problems or symptoms of problems are found, the inspector may recommend further evaluation or remedies.

Hidden home defects you can observe.

  1. Water leaks. Look for stains on ceilings and near the baseboards, especially in basements or attics.
  2. Shifting foundations. Look for large cracks along the home’s foundation, cracks in walls, and doors and windows that do not close properly.
  3. Drainage. Look for standing water, either around the foundation of the home or in the yard.
  4. Termites. Look for weakened or grooved wood, especially near ground level.
  5. Worn roofs. Look for broken or missing copings and buckled shingles as well as water spots on ceilings.
  6. Inadequate wiring. Look for antiquated fuse boxes, extension cords (indicating insufficient outlets), and outlets without a place to plug in the grounding prong.
  7. Plumbing problems. Very low water pressure, banging in pipes.

Questions to ask a home inspector

  1. What are your qualifications? Are you a member of the American Association of Home Inspectors?
  2. Do you have a current Mississippi license? Home inspectors are required to be licensed in Mississippi.
  3. How many inspections of properties such as this do you do each year?
  4. Do you have a list of past clients I may contact?
  5. Do you carry professional errors and omission insurance? May I have a copy of the policy?
  6. Do you provide any guarantees of your work?
  7. What specifically will the inspection cover?
  8. What type of report will I receive after the inspection?
  9. How long will the inspection take? How long will it take to receive the report?
  10. How much will the inspection cost?

Portions adapted from Real Estate Checklists and Systems and used with permission.


Appraised value

What is a home worth? That is a basic question that a lender will ask when considering a loan for a potential mortgage borrower and it plays a fundamental role in the mortgage process. Determining the value of a home to be financed limits a lender’s risk associated with a loan because the property will provide a means of recovery for the lender should the borrower default on the loan.

A residential real estate appraisal is generally required for all mortgage transactions to assist in limiting risks. It is a supportable estimate of property value, drawing conclusions from data obtained from the market and the subject property. In addition, the mortgage company hires the appraiser, a licensed individual who conducts the appraisal, rather than the buyer or the seller, in order to provide a clear and objective statement of a property’s value.

Though qualifications vary, a minimum standard must be met by all approved appraisers to include additional education and training, state licensing or certification and approval by the lender to conduct appraisals. An appraisal is not a home inspection and it does not guarantee that a home is without flaws.


What does a home inspection include?

A standard home inspection summarizes findings from a visual inspection of the condition of the home’s heating system, central air conditioning system, interior plumbing and electrical systems; roof, attic and visible insulation; walls, ceilings, floors, windows and doors; foundation, basement and the visible structures of the home.

Why do I need a home inspection?

A home inspection summarizes the condition of property, points out the need for major repairs and identifies areas that may need attention in the near future. Buyers and sellers depend on an accurate home inspection to maximize their knowledge of the property in order to make intelligent decisions before executing an agreement for sale or purchase.

A home inspection points out the positive aspects of a home, as well as the maintenance that will be necessary to keep it in good shape. After an inspection, both parties have a much clearer understanding of the value and needs of the property.

For homeowners, an inspection may be used to identify problems in the making and to learn about preventive measures, which might avoid costly future repairs. If you are planning to sell your home, an inspection prior to placing your home on the market provides a better understanding of conditions which may be discovered by the buyer’s inspector, and provides you an opportunity to make repairs that will make your home more desirable to potential buyers.

How much will it cost?

Inspection fees for a typical single family home vary by geography, size and features of the property, and age of the home. Additionally, services such as septic inspections and radon testing may be warranted depending upon the individual property. Prices vary. It is a good idea to check prices in your area as you consider a professional home inspection.

Do not let the cost deter you from having a home inspection or selecting an inspector with whom you are comfortable – knowledge gained from an inspection is well worth the time and expense. The inspector’s qualifications, including experience, training and professional affiliations, should be the most important considerations in your selection.

Can I do it myself?

Even the most experienced homeowner lacks the knowledge and expertise of a professional home inspector. A professional home inspector has the experience, depth of knowledge and training to make an unbiased and informed report of the condition of a property. An inspector understands how the home’s systems and components are intended to function together, as well as how and why they fail. An inspector knows what to look for and is uniquely suited to interpret what findings reveal about the condition of the property.

Can a house fail a home inspection?

No. A professional home inspection is an examination of the current condition of your home. It is not an appraisal, which determines market value, or a municipal inspection, which verifies compliance to local codes and standards. A home inspector will not pass or fail a house. A home inspection describes the physical condition of a property.

How do I find a home inspector?

Word of mouth, the experiences and referrals from friends and your REALTOR® are ways to find a home inspector. Someone who has used a home inspection service and is satisfied with the level of customer service and professionalism of that service will likely recommend a qualified professional.

In addition, names can be found on the website of the Home Inspector Board at www.mrec.state.ms.us or in the local Yellow Pages directory where many advertise under Building Inspection Service or Home Inspection Service. Real estate professionals are generally familiar with the services in your area and can provide a list of qualified professionals.

Professional inspectors subscribe to a professional Code of Ethics, which prohibits members from engaging in conflict of interest activities, which may compromise their objectivity. This is the assurance to the consumer that the inspector will not, for example, use the inspection to solicit or refer repair work.

When do I call in the home inspector?

Before you sign the purchase agreement, make your purchase obligation contingent upon the findings of a licensed home inspection. This should specify the terms to which both the buyer and seller are obligated. Home inspectors are aware of the time constraints involved in purchase agreements and most are available to conduct the required inspection within a few days.

Do I need to be present for the home inspection?

While it is not required for you to be present, it is recommended that you join the inspector for the visit. This allows you to observe the inspector, ask questions as you learn about the condition of the home, how its systems work and how to maintain them. After you have seen the property with the inspector, you will find the written report easier to read.

What if the report reveals problems?

No house is perfect. When the inspector identifies problems, it does not indicate you should not buy the house. The inspector’s findings serve to educate you in advance of the purchase about the condition of the property. A seller may adjust the purchase price or contract terms if major problems are discovered during an inspection. If your budget is tight, or if you do not want to be involved in future repair work, this information will be extremely valuable.

If the house is in good condition do I need an inspection?

Yes. An inspection allows you to complete your home purchase with confidence about the condition of the property and all its equipment and systems. From the inspection, you will have learned things about your new home and will want to keep the information for future reference.

Portions of this article reprinted from REALTOR® Magazine Online by permission of the National Association of REALTORS®. Copyright 2008. All rights reserved.

Understanding Traditional Mortgage Types

When shopping for a mortgage, consumers have numerous choices. Many lenders now offer specialty mortgages that help make homeownership more affordable but have risks that consumers should fully consider before selecting. But for most consumers, the traditional fixed-rate mortgage and adjustable-rate mortgage (ARM) continue to be excellent options. However, even these traditional financing options require a number of important decisions. Should you get a 15- or 30-year loan? Should you get a fixed-rate mortgage to lock in today’s interest rates for the term of the loan – or take an adjustable-rate loan with a lower current rate and payment, but with the risk of rate and payment increases in the years ahead?

Fixed-rate mortgages

With a fixed-rate mortgage, you are guaranteed the same interest rate over the life of the loan. Your monthly payments never change, and the loan is paid off completely over the term you select. The key decision regarding a fixed-rate mortgage involves how long you have to pay back the loan. The most common options are 15- and 30-year loans, with the 30-year being the most popular. As the following chart illustrates, a shorter 15-year loan comes with both a lower interest rate and higher monthly payments. As a result, you will pay your loan back faster and repay less interest than with the 30-year loan. Rates, and the differences between rates for 15- and 30- year loans, change daily. The following is only an example.


15-year

Interest rate 5.5%

Amount financed $200,000

Monthly payment $1,634

Loan balance after 5 years $150,578

Loan balance after 10 years $85,553

30-year

Interest rate 6%

Amount financed $200,000

Monthly payment $1,199

Loan balance after 5 years $186,109

Loan balance after 10 years $167,371


Adjustable-rate mortgages

The initial interest rate on an adjustable-rate mortgage (ARM) is generally lower than that for a fixed-rate loan. However, with an ARM, the interest rate may increase or decrease in the future, and the size of your payments will go up or down along with the rate.

Most ARMs are "hybrids," meaning that the interest rate is fixed for a certain number of years – after which the rate begins to float. The most common ARMs fix the initial rate for three, five or seven years. ARMs are probably most appropriate for people who have sufficient financial resources to handle potential payment increases or know that they plan to sell their home around the time the loan’s interest rate is set to change.

Homebuyers who choose an ARM usually intend to sell their home or refinance the ARM before the rate adjusts upward. They also may expect income to increase over time. If you are considering this type of loan, you should be confident that you can afford higher payments that will be required after the rate adjusts if you cannot refinance or sell your home.

Even small changes in your interest rate can increase your monthly payment significantly, resulting in "payment shock." Even a change of one or two percentage points in the interest rate can result in a substantial increase in your required monthly mortgage payment. For example, if the interest rate on your mortgage changes from four percent to six percent, your monthly payment could rise by as much as 50% (from $1,000 to $1,500).

ARMs can be complicated, and many specialty ARMs have risky terms that are appropriate for a small group of borrowers only. Be sure to avoid loans with terms that you don’t understand.

Before choosing an ARM, ask your lender these questions. Make sure that you fully understand the lender’s responses and agree to all of the terms before committing to an ARM.

  • How long does the initial interest rate apply?
  • How frequently can the interest rate change?
  • How is the adjusted interest rate determined? (Generally, a specified amount – the "margin" – is added to a current published rate – the "index.")
  • How high can the interest rate go?
  • Does the loan set a minimum interest rate?
  • Are there any limits on how much the interest rate can change each year?
  • Do the monthly payments still pay off the loan even if interest rates increase? (With some loans, the amount you still owe – your "loan balance" – can increase rather than decrease each month. This is called negative amortization.)
  • What is the maximum monthly payment that you could be required to pay?

Government-insured loans

Mortgage programs offered by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Rural Housing Service (RHS) are designed to provide mortgage options for people who might not qualify for conventional loans. Government-insured loans are particularly helpful for consumers with lower incomes and those who may lack the larger down payments required by conventional loans. These loans often offer consumers loans with better terms and can be a safer and more economical alternative to subprime loans.

Lenders view consumers with lower incomes and little or no down payment as a higher risk for default. With government-insured loan programs, the government agency (FHA, VA or RHS) assumes this risk of default by insuring the loan for the lender.

The FHA, VA and RHS do not loan money to consumers and do not set interest rates. Government-insured loans are available from many private lenders including banks, savings & loans and mortgage companies. When shopping for a mortgage ask lenders about these programs. For a list of lenders who offer government-insured loans in your area visit www.fha.gov, www.va.gov, and www.rurdev.usda.gov/rhs/.

Consumers should note that properties purchased under these programs must meet certain minimum standards and possible loan limits.

Special loan programs

Special loan programs exist to help first-time homebuyers. With some of the programs, you may be able to accept a gift from a relative or to borrow a portion of your down payment and closing costs from a local nonprofit organization or government agency. With others, you may be able to get a grant or other funds that you will not have to repay to cover some of the costs. Ask your REALTOR® or lender about whether you qualify for any such programs.


Fair Lending
It’s the law

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis or race, color, religion, nation origin, sex, marital status, age, whether all or part of the applicant’s income comes from public assistance programs or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status or national origin.

Source: The Federal Reserve Board

Who can government-insured loans help?

  • First-time homebuyers
  • Consumers who lack money for large down payments
  • Consumers who want to keep monthly payments as low as possible
  • Consumers worried about qualifying for a loan
  • Consumers with less than perfect credit

Which government-insured program meets your needs?

  • FHA-insured loans offer very low down payments.
  • VA-guaranteed mortgages with no down payment are available to qualified veterans. You must have a certificate of eligibility from the Department of Veterans Affairs for a VA loan.
  • The guaranteed rural housing program offered by the RHS is for people who meet certain income requirements and wish to buy a home in a rural area. This government-guaranteed loan requires no down payment.