1 welcome to the new york homebuyer education program
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1
Welcome
to the
New York Homebuyer Education Program
2
“Knowledge is Empowering” New York Homebuyer Education Program
Designed to provide you with information about the steps towards homeownership
3
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
4
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
5
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
6
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
9
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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10
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
9
13
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
9
14
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
10
15
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
10
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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
10
21
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?
10
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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
11
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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
11
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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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The Home Buying Team
Sold
Home Buyer Seminars
One on One CounselingYou are a Home Owner
$ The Lender $
You
Attorney
Real Estate Professional
12
30
The Home Buying Team
Sold
Home Buyer Seminars
One on One CounselingYou are a Home Owner
$ The Lender $
You
Attorney
Real Estate Professional
31
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
12-14
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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
14
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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
15
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Buying a Condominium
Home attached to another home
Share common area
Homeowners’ Association
15
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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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Check Your Knowledge
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%
20
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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 $801,950Source: Fannie Mae
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Government Loan Programs FHA, VA, and USDA mortgages
Government Insured Loans - FHA Loan Limits
State of New York Mortgage Finance Agency(SONYMA) Limits according to county
See website for targeted and non-targeted areaswww.nyhomes.org
Source: US Department of Housing and Urban Development
26-27
One-Family Two-Family Three-Family Four-FamilyBuffalo 276,250$ 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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Mortgage Options: Advantages & Disadvantages
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
24
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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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Mortgage Options: Advantages & Disadvantages
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%
30
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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?
30
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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
33
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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Check Your Knowledge
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
36
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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
35
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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
38
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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
41
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Questions and Answers
82
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”
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