First time buying home

Editor's Notes

• #2 Hello. My name is _________ and I am the _________ with NJ Citizen Action. I’m here today to speak to you about an important issue facing many homebuyers and homeowners -- predatory lending. I’m here today to discuss some of the important issues concerning housing, predatory lending, foreclosures and scams that exist within our communities. I’m here because people are losing their homes, are being ripped off and are victims of unfair housing practices. My organization, NJ Citizen Action is the state’s largest independent citizen watchdog coalition. Citizen Action has more than 60,000 individual members and over 100 affiliate organizations throughout the state. We work closely with senior, labor, tenant, faith-based, consumer, civil rights, disability, neighborhood, and community organizations. For the past 25 years, Citizen Action has been successful in organizing and mobilizing the community around social and economic justice issues that are important to all of us including fair housing, banking and community reinvestment quality health care for all, lead poisoning prevention, fair and affordable utility rates, affordable housing, campaign finance reform and financial education. NJCA also has a statewide oil group that provides discount prices for its members We have 9 offices throughout the state, from Passaic to Camden. These offices contain HUD-certified free loan counseling for low- and moderate-income consumers and crisis counseling for foreclosure issues.
• #3 Predatory lending is a major problem in NJ and all across the country. Citizen Action is working hard to help stop, prevent, and punish these scam artists who take advantage of consumers. These predators target individuals who are in desperate financial situations and are most vulnerable to their abusive tactics, specifically minorities, non-English speaking individuals, seniors and low-income consumers. By using abusive and fraudulent practices, these predators put people into situations that cause them to fall behind on their mortgages or other payments, ruin their credit, and in many cases lead to the loss of their money and all of their financial assets, including their homes. By knowing the common signs of different financial scams, we can all avoid becoming victims. Knowledge is our best defense. Knowing how to manage money and use technology and financial services to your advantage is the key to economic justice. NJ Citizen Action wants you to be a well-informed consumer.
• #4 How many of you own a home? (raise hands) How many would like to buy a home someday? (raise hands) Today, we’ll talk about how you can have and keep the American Dream of owning a home and how to prevent this dream from turning into a nightmare if you become a victim of predatory lending. For most people, their homes are their largest financial asset AND their largest investment. Most people don’t have the money to pay cash for a home, so they take out a loan called a mortgage.
• #5 Once you’ve decided that you want to buy a home, start thinking about what you will have to do to get a loan or mortgage to finance your purchase. There are many types of loans available through banks, federal government programs and mortgage companies. It’s good to consider all the possible lenders you can go to for a mortgage.   To obtain a mortgage, you must be able to show lenders that you are a good credit risk and that you will pay back your loan. Most mortgages are for 15 to 40 years. To determine whether you are a good credit risk, lenders will look at things like your savings and your credit. They’ll look to see if you have any late payments, bankruptcies, collection accounts, judgments or liens.   You’ll need to determine an affordable monthly mortgage payment. Figure out how much money you will be able to save for down payment & closing costs. There are programs for low- and moderate-income consumers that can assist first-time homebuyers with these costs. You must then consider how much a monthly payment will be - including the principle mortgage amount, the interest, the property taxes, and the cost of your insurance. Compare this total payment to your monthly income and expenses. Once you determine how much of a mortgage you can afford, you will have a general sense of the price range for your home. It’s important to get help and to get all your questions answered. NJCA offers free HUD certified loan counseling for first-time homebuyers. There are many educational programs you can attend, too. There are brochures with more information available in the back of the room.
• #6 The home buying process is fairly standard. Once you’ve decided to buy a home, you’ll have to get a loan or a mortgage to finance the purchase. Loans, including below-market rate loans for low- and moderate-income first-time homebuyers, are available through banks. There are federal government loans such as FHA and VA and mortgage companies offer loans. Mortgage Banker  A loan originator that uses its own funds to make real estate loans which it then resells to long term mortgage investors. Mortgage Broker  An agent that matches borrowers with lenders in exchange for a referral fee that amounts to part or all of the "loan points" being charged the borrower Mortgage solicitor an individual not licensed as a mortgage broker who performs any of the functions of a mortgage broker and who is employed by a mortgage broker Mortgage originator licensed individual who contacts prospective borrowers for the purpose of negotiating/advising the prospective borrowers with mortgage loan terms and availability, they receive compensation on a percentage basis and is authorized to accept a loan application on behalf of the mortgage lender. They may appear to be the lender Your credit history will be reviewed by the lender. The lender may find that you have a good or not-so-good history of paying your bills and debts. With good credit history and the income to make the payments, your loan will most likely be approved. With a poor credit history, you may be denied. An honest lender won’t lend you more than the house is worth or more than you can afford to pay each month When your mortgage is approved, you make an offer on the home in your price range. Once the offer is accepted by the seller, you will enter into a purchase agreement. As the buyer, protect your investment by having an independent inspection done. An inspection by a licensed inspection service will determine if major repairs are needed. Once the appraisal and inspection are completed, you decide to purchase or that you don’t want to purchase that home. Be sure to have your own attorney, one that is not recommended by the lender or seller, review your contract of sale. If you go ahead, a title search will be conducted to be sure that the property deed is clear. Once the title search is done, you will meet with the seller at a closing. At the closing, you will sign the documents and pay the seller for the home. An attorney is not required, but it is a good idea to have one to represent your interests. you will be responsible for making payments on your mortgage. If you don’t, the lender could foreclose. This means you will lose your home and your investment.
• #7 The first step in using credit wisely is figuring out how much credit you can afford to take on. You need to take a long, hard look at your current and future financial situation before you take on any new debt. As part of this analysis, you should look at your debt ratio and set a realistic budget for debt repayment.Debt ratioDebt ratio looks at how much you owe compared with how much you earn. It usually gives a clear picture of your financial well being. The lower your debt ratio, the more you have left over to save or spend on other things.Your debt ratio is the percent of your monthly take-home pay that goes to paying debts and monthly obligations. You calculate it like this: Take the amount needed to repay debts each month, including rent or mortgage, and divide this by your take-home pay (your net pay after deduction of tax).Example:  Monthly debt repayment of $800 divided by Monthly take-home pay of $2,000 = a Debt-to-income ratio of 40% Many experts recommend that no more than 15-20% of your monthly household take-home pay (excluding rent or mortgage) should be used to pay debts and make loan payments. Furthermore, no more than 40% of your monthly take-home pay should go to paying all debts, including mortgage payments.
• #8 Down Payment For most first-time home buyers, saving enough money for a down payment is the biggest hurdle to owning a little piece of paradise. Traditionally, lenders have required a down payment of at least 20% of the home's purchase price. But sometimes, special bank products, or the housing developer may require less of a down payment. Counseling is sometimes a requirement for a lower down payment. Some lenders will accept less than that if the borrower takes out private mortgage insurance. Lenders generally require mortgage insurance on loans with low down payments because experience shows that a borrower with less than 20% invested in a house is more likely to default on a mortgage. For some of the qualifying loans for LMI first time home buyers 3%-5% may be enough.
• #9 Prequalification acts as a dry run of the loan application process. The lender or counselor uses details you provide about your credit, income, assets and debts to estimate of how much mortgage you can afford. The whole process may take minutes, or a few hours at most, and is usually free. Preapproval takes prequal one step further. The lender will contact your employer, bank and others to verify your income, assets, debts and credit history and then issues a letter stating that your mortgage is approved for a certain $$ within a certain time. You may be charged a small fee for credit reports and your application, often refunded at closing. The lock period is the period during which the lender guarantees the rate and points. If rate is locked at 5.50% and 1 point for 30-days, for example, the lender is committed to make the loan at that price anytime within the following 30 days. Locks for longer periods are priced a little higher. Expect to pay another 1/8 point for each additional 15 days The closing fees, also called settlement costs, cover almost every expense associated with your home loan. Because closing costs typically amount to between 3% - 5% of the sale price, it is best to wait until you receive the good-faith estimate before committing to a loan. Some of the cost include: Abstract or title search•Title examination•Document preparation•Notary•Attorney•Title insurance•Recording•City/county tax stamps•Transfer tax•Survey•Pest inspection•Condominium application•Prepaids for interest, hazard insurance, property taxes and mortgage insurance and flood insurance Know the lender Get recommendations: Ask friends and family members for suggestions, especially if they've recently obtained a loan. Check credentials: Mortgage bankers are regulated by NJ department of banking. Check with them, their website will information on bad lenders. Mortgage brokers may be state regulated or not. If not, check with the NJ chapter of the Association of Mortgage Brokers or the Better Business Bureau to see if their record is clean. Take care online: There are plenty of attractive deals online, but first make sure you're dealing with a reliable broker or lender.
• #10 Prime lenders, or banks, have market rate mortgage products, and in some cases, below market rate products, available for homebuyers. These are called conventional mortgages. The federal government also sponsors programs like VA, FHA, and Fannie Mae to help consumers get prime loans. These programs insure the loan so the lender is protected. However, in order to qualify for a conventional loan the borrower must have good credit. People with less than perfect credit may not be able to get a mortgage from a bank. Lenders see these consumers as higher risks. Remember, a lender is allowing you to use their money for a fee. If you are a higher risk, they must protect themselves.   CRA loans are mortgages offered through nonprofit groups to help low and moderate income adults purchase a home. These are conventional mortgages that have an interest rate that is lower than other loans. These are called “below market rate” loans. Most have no points, PMI (private mortgage insurance), and low application fees. Some programs also offer down payment and closing cost assistance. These loans are available through some banks and may also be available by counseling agencies involved with first time homebuyer education.
• #11 People with less than perfect credit histories may not be able to get a conventional mortgage. Some of these people do not take the time to repair their credit. Sub prime lenders make loans to borrowers with less than perfect credit. As a result of a borrower’s less than perfect credit, sub prime lenders may charge higher interest rates, points and fees. Sub prime loans are often offered by mortgage companies. Some mortgage companies are independent businesses, others are owned by or related to banks. Sub-prime loans are generally advertised as your last option. Beware of ads that sound too good to be true, like “No credit, no problem. “ or “No money down. All credit situations considered.” Anything that sounds too good to be true usually is. Sub-prime loans are legal – they are legitimate, higher prices loans offered to higher risk borrowers. Sometimes, the payments on these loans may be too high for you and you are almost always better off taking time to repair your credit so you can get a lower costing loan. There are enough good products – not sub prime products – to make it worth your while to be patient and work through a troubled credit history. Keep in mind that even if you don’t have good credit now and can’t qualify for a prime loan, you always have the option of going to a free loan counseling service to help you repair any credit problems. Repairing your credit now will help you save thousands of dollars in interest or fees over the next 15 to 40 years.
• #12 Predatory Lending is the practice of a lender deceptively convincing borrowers to agree to unfair and abusive loan terms, or systematically violating those terms in ways that make it difficult for the borrower to defend against The loan should not have abusive terms and the terms should not be misrepresented.
• #13 Remember -- predatory lenders WANT to take your money. They want you to miss your payments. When you can’t make the payments on your loan, the lender takes your home and your money. These scam artists target people who can’t make their payments. If you do make the payments, you’ll end up paying much more than necessary. In many cases, you never pay off the loan Most predatory loans end up in foreclosure and you lose your home and your investment. These predators then try to resell the home to someone else and the cycle continues.
• #14 Remember -- predators target specific people. In the situations we’ve already discussed, the scams are targeted to the first-time homebuyer. They involve the sales of a home. In property flipping, a person will buy and resell a foreclosed property in a short time. When the property is resold, the value is inflated. Promises are made to the buyer that improvements will be made after the closing, but these false promises are never kept. The buyer ends up purchasing a property of little value and then can’t afford to make the payments. In many cases, the seller of the property has a relationship with the lender, the title agent, appraiser and attorney. The seller will direct the buyer to a lawyer or appraiser who works with the seller to steal your money This is type of Liar Loans are when the incorrect assets or income are put down in the loan documents The other type of scams are targeted at people who own a home. Beware of home improvement contractors that come to your door selling “left over” materials or offer to do a repair at a discount. If a contractor offers to finance the repair for you, get information about the lender before you sign anything. Go to your credit union or bank to compare the prices of home improvement loans. Predators will try to get you to consolidate your mortgage and home improvement loan and all other credit debts into a high priced loan. They may try to get you to refinance your home saying you’ll save money. Or they may try to get you to take out a loan against the equity or value in your home. Seniors who have owned their homes for a long time need to be extra careful. Predatory lenders will target you and offer loans that sound too good to be true. Also beware if you have lost your job or have a disability. Many scam artists will target you for refinancing because they think you need the money. Seniors should consider a reverse mortgage.
• #15 You’ll see ads for sub-prime loans in newspapers and magazines. Or you hear them on the radio or TV. Remember that predators are targeting specific people with these ads.
• #16 Don’t be a victim. You can help protect yourself. Shop around for a loan. Deal only with licensed lenders, appraisers, lawyers, and real estate brokers. Contact NJ Citizen Action about our free loan counseling program. If you are interested in purchasing a home or making home repairs; the loan counselors will help you find a low cost loan that you can afford and help prepare your for the responsibilities of owning a home. Read every contract thoroughly and keep a copy of everything you sign. Deal only with reputable well established businesses. Get your own attorney and inspection service. Remember – many predators work together to take advantage of borrowers and home buyers.