Home loan guide

Home Financing Guide



Buy Your Home
and Keep It Too
HOME LOAN GUIDE

HomeFinancingGuide
MortgageBasics......................................................................................................................................................................4
What'samortgage?.................4
What'sincludedinmymonthlypayment?....................................................................4
Whatisanescrowaccount?.................................5
MortgageProcess....................................................................................................................................5
Step1:Determineyourbudget..........................................................5
Step2:FindaLender..............................................................................5
Step3:GetPre-Approved.....................................................................6
Step4:GoFindYourNextHome........................................................................................7
Renter’sguidetopreparingforhomeownership.......................................7
Adjustingyourfinances.........................................................................................................................................7
PITI.................................................7
Maximumloanbalance..........................................8
RentandSavings.......................................................................................................................................................9
Interestratesandtherent-saveratio...........10
Thebottomline......................................................10
ConservativeHouseFinancing........................................................................................................11
MortgageInterestRates.....................................................................12
TypesofBorrowers..............................................14
TypesofLoans........................................................................................14
Conventional30-YearAmortizingMortgage................................................................15
TheInterest-Only,Adjustable-RateMortgage..............................................................16
NegativeAmortizationMortgages.....................................................17
StatedIncomeLoans............................................................................................................................................21
Downpayments.....................23
EquityComponents..............................................24
InitialEquity................................................................................................................................26
FinancingEquity........................................................26
InflationEquity...........................27
SpeculativeEquity.....................................................................................................................28
MortgageEquityWithdrawal................................30
TheFallacyofFinancialInnovation...............................................33
Summary...................................................................................................................................36
FHALoanRequirements....................................................36
FHAMortgageInsurance....................................37
FHALoanLimits.....................................................................................................................................................................................38
LoanChecklist.........................39
ClosingCosts............................39
FHADebtRatios.....................................................................................................................................................................................40
MortgagePaymentExpensetoEffectiveIncome........................40
TotalFixedPaymenttoEffectiveIncome.......................................41
FHACreditIssues..................................................................................................................................................42
NoCreditHistory.......................................................42
Chapter13Bankruptcy...........42
Chapter7Bankruptcy.............................................................................................................42
LatePayments.............................................................................................................................................................43
Foreclosure..................................43
Collections,JudgmentsAndFederalDebts....43
FHAFinancingandLoanAssumption...........................................................................................................................43
Utilizefixed-rateassumablefinancing.........................................43
Maximizeyourdownpayment(withinreason)......................44
Expectnohome-priceappreciation..............44
AssumptionofMortgage....................................................................................................................................................................45
Lendersdespisemortgageassumptions(andtheyshould)...45
Understandingbyexample...46
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Sellfasterorsellformore.....................................................................................................................................47
Howtouseownerfinancingtoobtainequityfromassumableloans................48
Sellerfinancedsecondmortgages......................................................................................................................48
Wrap-aroundmortgages....................................................................49
Factsaboutloanassumptions..........................50
BeWarytheHighCostofFHAInsurance....................................................................................................51
AcceleratedMortgagePayoff...........................................................................51
Paymorewhenyoucan......52
Refinancingforacceleratedamortization..................................................................................................52
TimetoPayoff.........................................................................................53
HowNottoManageYourDebt........................................................................54
WhatisaPonziScheme?....................................................................................................54
PonziSchemesofdebt.........................................55
GoingPonzi..............................................................55
ThePonzilimit........................................................................................................................................................57
TheFateofPonzis.................................................58

info@ochousingnews.com 949.769.1599 HomeFinancingGuide
MortgageBasics
Thisisaverybriefoverviewofsometermsyouwillneedtounderstandtogetthemostfromthisguide.Ifyouare
familiarwithbasicmortgageterminology,youcanskipthissection.
WHAT'SAMORTGAGE?
• Typeofloanthatissecuredbyrealestate(i.e.,thehomeyoupurchase).Unlessyouarepayingcashfor
thehome,you'llneedamortgage.
• Youpromisetopaybackthelender(usuallyinmonthlypayments)inexchangeforthemoneyusedto
purchasethehome.Ifyoustoppaying,you'llgointodefault,whichmeansyou'vefailedtomeetthe
termsoftheloanandthelendercantakebacktheproperty(foreclosure).
WHAT'SINCLUDEDINMYMONTHLYPAYMENT?
YourmortgagepaymenttypicallyincludesPITI:
• Principal–Whatyouborrowed(alsoreferredtoas"amountfinanced");
• Interest–Whatthelenderchargesyoutoborrowthemoneyusedtopurchaseorrefinancethehome;
• Taxes–Whatyoupayinpropertytaxestoyourlocalcity/municipalityandsometimescounty;and
• Insurance–Whatyoupaytoinsureyourhomefromdamages(fire,naturaldisasters,etc.).Thereisalso
PrivateMortgageInsurance(PMI)whichisusuallyrequiredonmostloanswhenyourdownpaymentis
lessthan20%.PMIispaidmonthlyuntilyoureachthe20%equitythreshold.
NOTE:insomecases,yourmonthlypaymentmightalsoincludethefeespaidtoahomeowner'sassociationon
yourproperty(HOAfees).

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WHATISANESCROWACCOUNT?
Taxesandinsuranceareusuallyheldinanescrowaccountandpaidbythemortgagecompanywhentheyaredue
(aportionofyourmonthlypaymentgoestofundtheescrowaccount).Thiscanbebeneficial—especiallyforfirst-
timebuyersorbuyerswithoutsignificantsavings—asyousetasideasmallamounteachmonthinsteadofhavinga
large,semi-annualorannualout-of-pocketexpense.But,itdoesincreaseyourmortgagepaymentandreduceyour
cashfloweachmonth.
Somelendersrequireanescrowaccountandsomeletthehomeownerpaytheirinsuranceandtaxesdirectly.
Alwayscheckwithyourlendertoseewhat'scoveredinyourmonthlypayment.
MortgageProcess
Nowthatyou'velearnedsomebasics,let'sgothroughthestepsofgettingamortgage.
STEP1:DETERMINEYOURBUDGET
Don'tlookforhomesuntilyouknowwhatyoucanreasonablyafford.Remembertonotonlyfactorinyour
monthlymortgagepayments,butalsotaxes,insurance,maintenanceandanyothermonthlycosts(car,student
loan,creditcards).
STEP2:FINDALENDER
Nowthatyouhaveanideaofwhatyoucanspend,it’stimetofindalender.Unlessyouarepayingcashforthe
home