1 welcome to the new york homebuyer education program

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Welcome

to the

New York Homebuyer Education Program

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“Knowledge is Empowering” New York Homebuyer Education Program

Designed to provide you with information about the steps towards homeownership

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Introduction

The purpose of this seminar is to• empower you with knowledge to make wise financial

decisions throughout the home buying process

With knowledge, in time you will be able to• own the house of your dreams with the best

mortgage loan available based on your financial circumstances

From this session you will learn• the steps you need to take to be a responsible

homeowner and• preserve your biggest life-time investment

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Agenda

Seminar Duration: 3 hours• Step 1: Before You Start Looking for a Home• Step 2: Understanding Credit• Step 3: Finding a Home• Step 4: Applying for a Loan • Step 5: After You Move In

Reference to Workbook Questions and Answers Non Profit Host Presentation

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Overview

This seminar will provide an overall view of each subject on the agenda

At the end of the seminar you will be able to understand how all the individual topics fit together towards the road to homeownership

Appraisal

Price

Budget

LenderLoan

Broker

Rate

FICOCredit

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Step1: Before You Start Looking For a Home

Owning a home is not for everyone• some people do not want the responsibility• others do not want to change their spending habits

in order to make monthly and maintenance payments on a home

By the end of this session you will• have a better idea if homeownership is in your best

interest

Lets start by thinking about advantages and disadvantages of homeownership.

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Homeownership Advantages

• Tax benefits*• Equity• Control over your environment• Stability• Pride of accomplishing the dream• Stepping stone for your family’s future

Disadvantages• Not being able to afford a home• No guarantees that property will appreciate in value• Maintenance and repairs• Decreased mobility• Increased responsibility

*Consult your tax advisor

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Managing Your Money

Before you apply for a mortgage loan

Daily spending diary

Income and expenses

Reducing spending and increasing income

Tips and other budgeting tools

Managing your finances as a homeowner 3-8

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How Much Can You Affordto Pay For a Home?

$60,000

Income

$150,000-$180,000

House Price

2½-3 times

Debt

?

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How Much Can You Affordto Pay For a Home?

What is your gross income

What is your total monthly debt

How much have you saved towards:• Down payment• Closing costs

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Step 2: Understanding Credit

Credit is a privilege Traditional credit Non traditional credit Benefits and savings of good credit Ordering a credit report Correcting errors on a credit report Applying for credit

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Traditional Credit

Three types of accounts typically used by creditors that are reported to the credit reporting agencies:

Installment credit agreement

Revolving credit agreement

Open 30-day agreement

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Nontraditional Credit

What if you don’t have a credit history?

Many Lenders and other financial institutions accept non traditional credit:

• Rent payments• Gas, electric, and other utilities payments• Childcare or child support payments• Other large recurring expenses

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Ordering a Consumer Credit Report

What is a credit report

Why you should get your own credit report

Different types of credit reports• Consumer credit report• In file credit report• Residential mortgage credit report

How to get a consumer credit report

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Ordering a Consumer Credit Report

What is a credit report

Why you should get your own credit report

Different types of credit reports• Consumer credit report• In file credit report• Residential mortgage credit report

How to get a consumer credit report

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Credit Reporting Agencies

Experian (888) 397-3742

www.experian.com/consumer/index.html

TransUnion (877) 322-8228

www.transunion.com

Equifax (800) 685-1111

www.equifax.com

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Sites to Access Your Credit Report

www.AnnualCreditReport.com

www.MyFico.com

www.FreeCreditReport.com

www.CreditReport.com

www.FreeCreditReportInstantly.com

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If the Credit Report Has Errors

Under the Fair Credit Reporting Act • a consumer can dispute inaccurate information

Credit Scores may change once the information is corrected

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How to Correct Credit Errors

You have the right to have mistakes corrected for free

To correct errors and omissions follow the instructions - on your credit report under the “how to correct errors with a credit reporting agency” section

Inform the credit reporting agency about the errors in writing

Send any additional information that is needed to correct the error

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Tips to Improve and Manage Your Credit

Your payment history

The amount of outstanding debt

The length of your credit history

The types of credit you use

Open new credit wisely

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Your Credit Score

The Fair Isaac Company• created the standardization of credit scores for

consumers known as a FICO score

Credit Scores are vital to your financial health

www.MyFico.com

Factors that are not part of the credit score

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What’s In the FICO Score?

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More About Scores

A “Perfect Score” 800+

Very Good Score 750

Good Score 680

Marginal Score 620

Low Score Under 600

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Improving Your Credit Score

FICO® score component

Score Weight

Advice to improve credit

Payment History 35% Pay your bills on time

Amount owed 30% Decrease your balances and increase

your limit to balance ratio

Length of credit history

15% Keep older accounts open

Don’t swap accounts constantly

New credit 10% Apply for new credit only when you really need it

Types of credit used

10% Have a sensible mixture of credit

Total 100%

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Protecting Your Credit

Fraud and identity theft could ruin your credit

How to avoid it

What to do if you suspect that you are a victim

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Laws that Protect the Consumer

Equal Credit Opportunity Act Fair Housing Act Truth in Lending Act Fair Credit Billing Act Fair Credit Reporting Act Fair Debt Collection Practices Act Many States have similar Laws

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Check Your Knowledge

Subject True False

Installment loans, revolving loans, and 30 day open agreements reported by Lenders to the credit reporting agencies are part of traditional credit

Non traditional credit is accepted by some Lenders with verification of payments, such as rent, utilities, child support and other bills that are paid monthly

It does not matter if I don’t pay my debts on time, there are no benefits and savings for good credit

The 3 credit reporting agencies are; Experian, Trans Union, and Equifax

I can order one credit report from each credit reporting agency for free once a year but I have to pay a small charge if I request my credit score

I can correct errors on my credit report by contacting the credit reporting agency and sending proof that identifies the errors

If I don’t pay my monthly debt on time my credit report will show the accounts as “delinquent”. Delinquency affects my credit score

Payment history has a weight of 30% in your FICO score calculation

When I apply for credit, Lenders base their decision on whether I will pay them back as agreed by looking at my credit report and score

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Step 3: Finding a Home

The Home Buying Team

The Real Estate Professional

The Real Estate Attorney

The Lender

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Sold

Home Buyer Seminars

One on One CounselingYou are a Home Owner

$ The Lender $

You

Attorney

Real Estate Professional

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Sold

Home Buyer Seminars

One on One CounselingYou are a Home Owner

$ The Lender $

You

Attorney

Real Estate Professional

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Mortgage Providers

Banks and Savings and Loans

Mortgage Lenders

Credit Unions

USDA Rural Development

Government Agencies

Nonprofit Organizations

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Shopping for a Mortgage Could Be Daunting

You May Feel That You Cannot Do It AloneWhat are your options?

You could go directly to a Lender

Seek assistance from a Housing Counselor

Work with a Mortgage Broker

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How Mortgage Brokers Earn their Income

Fees paid by you

Broker points

Application fees

Other processing fees

Yield Spread Premium

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Selecting a Lender

Knowledgeable

Look out for your own best interests

Knows the mortgage lending laws and common business practices for your area

Good reputation with other customers and with local real estate agents

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Getting Pre-Qualified Before Applying For a Mortgage Loan

Reasons and advantages

The difference between prequalification and pre-approval

The down payment

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What Type of Property Are You Buying?

Single Family • Townhouse, Condo & Coop• Manufactured Home• Modular Housing

2-4 Family Dwelling

Duplex, Triplex, Fourplex

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Buying a Condominium

Home attached to another home

Share common area

Homeowners’ Association

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Buying a Cooperative Apartment

You do not own the unit in which you live• you own shares in the Corporation• managed by a Board of Directors (Coop Board)

Membership in the corporation gives you right to occupy a housing unit

Subject to rules and regulations of the Bylaws which govern the Corporation

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Other Types of Legal Ownerships

Planned Unit Developments (PUD)

Land-Lease

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The Purchase Contract

The Offer • Negotiating

The Contract• Purchase Price• Good Faith Deposit• Escrow• Closing Date

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The Purchase Contract

Contingencies• Financing

• Appraisal

• Clear Title

• Property Inspection

• Homeowner Warranty

• Personal Property

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Subject Yes No

Are you sure you want to buy a house?

Do you have steady income and stable employment?

Are there advantages to homeownership? If yes, name one

Could you name the home buying team?

Do you know what is included in the mortgage payment?

Do you know how to calculate quickly how much you can pay for a home?

Do you know the difference between pre-qualification and pre-approval?

Do you need an attorney to read the purchase contract and attend the closing?

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Step 4: Applying For a Loan

New Mortgage Lending Reform Bill

Mortgage Providers

Prime and Subprime Mortgage Loans• Risk based pricing

Mortgage Options

Steps Involved in Obtaining a Mortgage Loan

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New mortgage lending reform billSeptember 1st, 2008

Details of the Law that reforms the process of mortgage origination in the State of New York

No negative amortization No prepayment penalties No loan flipping Reasonable payments to mortgage broker Require escrows for taxes and insurance Ability to pay standards No teaser rates of less than six months duration

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Applying for a Mortgage Loan

Credit application

Personal financial information

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Verification of Information Provided

Income and employment

Assets

Down payment assistance

Credit

Debt

18 & 19

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The Mortgage Payments and Other Costs of Homeownership

Principal

Interest

Taxes

Insurance

Private Mortgage Insurance

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Closing costs

Moving expenses

Reserve funds

Home maintenance

Home Owners Association Dues (HOA) if property is a condominium or located in a PUD

The Mortgage Payments and Other Costs of Homeownership

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Beware of Fraud During the Application Process

Verify your information on the application

Review your Appraisal report comps

Loans that Include “Benefits” Packed into the Loan

Bait and Switch Loans

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Ratios: How Large a Payment Can You Afford?

33%

5%

62%

Housing Debts Other Expenses

38%

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Understanding Ratios Housing Ratio – generally no greater than

33%• If the monthly gross income is $2,500 the maximum housing

expense should be no more than $825

• $2,500x 33% = $825

Total Debt to Income Ratio – generally no greater than 38%• Maximum combination of the mortgage and other revolving

and long-term debt should be no more than 38% of the gross monthly income

• If the monthly gross income is $2,500, the maximum total debt, including the mortgage should be no more than $950

• $2,500 x 38% = $950

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What Are Fannie Mae, Freddie Mac,and FHA/VA Loans?

Financial Facilitators

Secondary Market Investors

Government-Insured Loans (applies to FHA/VA loans)

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Traditional Loan Programs

Conforming Conventional Loans • Affordable Loan Programs

# Units Maximum Loan Amount

1 $417,000

2 $533,850

3 $645,300

4 $801,950Source: Fannie Mae

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Government Loan Programs FHA, VA, and USDA mortgages

Government Insured Loans - FHA Loan Limits

State of New York Mortgage Finance Agency(SONYMA) Limits according to county

See website for targeted and non-targeted areaswww.nyhomes.org

Source: US Department of Housing and Urban Development

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One-Family Two-Family Three-Family Four-FamilyBuffalo 276,250$ 353,650$ 427,450$ 531,250$ Rochester 271,050$ 347,000$ 419,400$ 521,250$ Suracuse 281,250$ 360,050$ 435,200$ 540,850$ NY-White Plains 729,750$ 934,200$ 1,129,250$ 1,403,400$ Nassau-Suffolk 729,750$ 934,200$ 1,129,250$ 1,403,400$

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Fixed Rate or Adjustable Rate

Fixed Rate• Interest rate does not change over the term of the

loan• Fully amortized• Equal payments• Most typical – 15 and 30 years

Adjustable Rate Mortgage (ARM)• Interest rate fluctuates• Payment can change• Caps limit fluctuations• Hybrids – with fixed periods

21, Chart 24 & 25

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Mortgage Options: Advantages & Disadvantages

Fixed Rate Loans Advantages

• Fixed interest rate for the life of the loan• Terms of 15, 30 and 40 years• Principal and Interest remain the same• Loan fully amortizes

Disadvantages• Loan must be refinanced to obtain a different rate (in

falling markets) • Higher initial rate compared to ARMs• No flexibility in payment options – must make the fully

amortizing payment 23

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Sample 30-Year Fixed-Rate Loans

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Loan Amount

FICO LTV Monthly Payment

Interest Rate

Prime 350,000$ 700 95% 2,155$ 6.3%

75,000$ 700 95% 480$ 6.5%

FHA 350,000$ 620 97% 2,212$ 6.5%

75,000$ 620 97% 495$ 6.75%

SubPrime 350,000$ 580 97% 2,691$ 8.5%

75,000$ 580 97% 576$ 8.5%

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Non-Traditional Mortgage Products

What are they?

• A residential loan product that allows the customer to defer repayment of principal or interest, including but not limited to an interest-only mortgage loan product and

• A negative amortization mortgage loan product.

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Examples of Negative Amortization Product

Payment Option Adjustable Rate Mortgages (ARMs) – borrower given option to select payment as follows:• Minimum payment – not enough to pay interest

due resulting in Neg Am• Interest only• Fully Amortized P&I (no cap)• 15 year

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Adjustable Rate Loans Advantages

• Start with lower monthly rate• Fully amortize except for Payment Option ARM

where the minimum payment is made• Periodic and life interest rate caps limit the amount

the interest rate can increase

Disadvantages• Payment Option ARMS may not fully amortize • Monthly principal and interest payments vary• Adjusted rate may be higher and not affordable• Payment shock• Potential negative amortization

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Sample - ARM Rate Changes

Note: this example assumes a $150,000 loan amount, 3% down payment, $500 in lender fees, and two discount points. A 4% initial rate was offered at loan origination with a 4.274% APR.

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1-Year ARM Description At loan origination

1st adj. period

2nd adj. period

3rd adj. period

Index

Treasury securities

(MTA), COFI, LIBOR

1-yr Treasury security: 4%

4.5% 5.5% 5%

Margin

Margin set by lender (does not change)

2.5% 2.5% 2.5% 2.5%

Caps

Limits per adjustment period and life of loan

2% per adj. period

6% per life of loan

6% (4+2)

8% (6+2)

7.5% (under cap)

Note RateIndex plus

margin6.5%

(4%+2.5%) APR=6.818%

7% APR=

7.328%

8% APR=

8.349%

75% APR=

7.838%

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Interest Only • Pro - Small monthly payments• Con - Balance does not decrease

Pay Option• Pro – Choose monthly payment option• Con – ARM loan, possible negative amortization

Balloon-Payment Mortgages• Pro – Small monthly payment• Con – Possible negative amortization

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Subprime Loans

Why are they called subprime loans

What is risk-based pricing

Is a subprime rate good for you

Beware of predatory lending

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Full vs. Reduced Documentation

Full documentation

Reduced documentation• 30 yr. fixed rate loan of $300,000 might cost 0.75%

or a $2,250 up front payment• You can increase the interest rate instead of paying

the upfront payment by adding 0.375% to the interest rate or an additional $77 per month ($27,720 over 30 years)

Always compare Annual Percentage Rates

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Typical Add-on Fees

Description Price in Points

Reduced documentation 0.750% = 3/4%

Loan-to-value 90.01-95% 0.500% = 1/2%

FICO score 660-679 0.250 % = 1/4%

Credit score higher than 740 -0.125 = -1/8%

Two-unit properties 0.375 = 3/8%

High rise condominium or cooperative apartment

0.750 = 3/4%

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Pricing Exceptions

Often times Lenders set a base price which Loan Officers utilize to price their loans. • The price above or below the base price is considered a

pricing exception. • Generally, Lenders limit the amount of positive pricing

exceptions which are otherwise known as “overages”• “Overages increase the cost of the loan

Sometimes Loan Officers price loans below the base price and these are known as an “underage”• “Underages” decrease the cost of the loan

Since the price you were quoted may be based on a pricing exception • It is important to negotiate interest rates as well as your

points and fees

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Shop & Negotiate

The importance of comparison shopping• Compare annual percentage rates (APR)

Mortgage Shopping Worksheet

How to negotiate for a better rate• Try asking: “Can you give me a better rate?”

Buy-down interest

Prepayment penalty

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Other Things to Negotiate

Lender Fees

Third Party Fees

Seller paying some of the closing costs

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Important Questions to Ask

What is the interest rate and the points? What is the Annual Percentage Rate? What are the other fees? Is there a prepayment penalty? Is the rate guaranteed? Is the rate fixed or an ARM? If an ARM, what are the annual and life-time

caps? Is there negative amortization? Do I have to pay mortgage insurance?

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Loan Approval Process

Commitment Letter

Good Faith Estimate within 3 days• Review what it reflects

TILA – costs of buying on credit

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The Loan Closing/Settlement

Preparing for the closing

Who attends the closing

Closing documents

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Closing Documents

Read every document before signing it

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Sample of Closing Costs

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Appraised value $200,000.00 $75,000.00 Loan amount $190,000.00 $71,250.00 Down payment 5% 5%Product 30 year fixed-rate 30 year fixed-rateInterest rate 6.5% 6.5%Points 0.75 0.75

Closing Costs Closing CostsTotal lender’s fees $2,350.00 $1,249.38

Third party fees $4,315.16 $1,798.00 Estimated pre-paid items

(Int. & Ins.) $832.96 $196.95

Estimated escrow account funds

$955.67 $495.00

Total estimated closing costs

$8,453.79 $3,739.33

Down payment $10,000.00 $3,750.00 Total cash required at

closing$18,453.79 $7,489.33

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SubjectTrue False

A conventional mortgage is insured by the government

An adjustable rate mortgage usually offers borrowers a lower starting rate than fixed rate loans

The down payment is the only money I will need for a mortgage transaction

Interest rates and loan fees are negotiable

Non traditional mortgages are mortgages that have negative amortization

I don’t need to compare mortgages, there are many mortgage products and they are all good

If I qualify, I could get down payments and/or closing cost assistance

Subprime loans rates are based on the risk the Lenders take to lend money if I have had credit problems

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Step 5: After You Move In

Making timely payments to the Lender

What to do if you can’t make a payment

Early delinquency and foreclosure prevention

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Preserving Your Biggest Investment - Your Home

Keeping your home and managing your finances

Preventive maintenance Appropriate homeowners insurance Avoid Fraud

• Beware of offers of credit• Refinance wisely• Utilize bonded contractors

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Resources: Publications

Fannie Mae www.fanniemae.com

Freddie Mac www.freddiemac.com

HUD www.hud.gov

Federal Deposit Insurance Corporationwww.fdic.gov

NYS Banking Dept www.banking.state.ny.us

Mortgage Lenders Association of New Yorkwww.mbany.org

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Resources: PublicationsContinue…

New York Association of Mortgage Brokers

www.nyamb.org

State of New York Mortgage Finance Agency-(SONYMA) - www.nyhomes.org

NeighborWorks® America www.nw.org

Lenderrate www.lenderrate.com

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Where to Get More Information

Other training sessions Books, articles, electronic sources Consulting services Fannie Mae, Freddie Mac, HUD Housing and credit counseling agencies State and federal agencies Your lender and other financial institutions Employer assisted housing programs Nonprofit housing organizations

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A Simple Guide to Homebuying Terms

Glossary of terms

Importance of familiarity with financial terms

Definition of terms as used in this seminar

“Knowledge is Empowering” it commands respect

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Questions and Answers

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Introduction ofNon Profit Host Staff

We thank today’s Host Organization for coordinating today’s activities and for their assistance in making the seminar successful. • The work they do serving the community is

superb• The new happy homeowners that reached

their homeownership dream with their assistance are a living testimony that

“Knowledge is Empowering”

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Conclusion

Thank you for completing evaluation forms

We hope that this seminar has served to

enlighten you in the process of becoming a

homeowner

Although information and the reality of

purchasing a home can be daunting - do not

get discouraged

Get ready to start the most exciting quest for

most families…the search of a home of your

own!

“Knowledge is Empowering”