Houseownership is becoming a reality for more and more Americans. The US houseownership rate reached 67.7%, the highest rate ever. Yet many Americans don't realize that houseownership is within their grasp.

A house is a financial asset and more: it's a place to live and raise children; it's a plan for the future; it's an investment in your community. That's why we at the U.S. Department of Housing and Urban Development want all Americans to have an opportunity to enjoy the benefits of owning a house.

Knowledge is said to open doors. This is literally true when it comes to buying a house. To become a first-time housebuyer, you need to know where and how to begin the housebuying process. The following questions and answers have been carefully selected to give you a foundation of basic knowledge. In addition to helping you begin, this brochure will give you the tools necessary to navigate the entire process - from deciding whether you're ready to buy, all the way to that final proud step, getting the keys to your new house.

Calling for this brochure was your first step. Now you can use this information to determine if you're ready to buy a house. if you are ready, contact a real estate agent, lender, or a housing counseling agency. They can help you decide your next step.

TABLE OF CONTENTS

Introduction

Part I Getting Started
Part II Finding Your House
Part III You've Found It
Part IV General Financing -- Questions:The Basics
Part V First Steps


GETTING STARTED

1. HOW DO I KNOW IF I'M READY TO BUY A HOUSE?

You can find out by asking yourself some questions:

Do I have a steady source of income (usually a job)? Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
Do I have a good record of paying my bills?
Do I have few outstanding long-term debts, like car payments?
Do I have money saved for a down payment?
Do I have the ability to pay a mortgage every month, plus additional costs?

If you can answer "yes" to these questions, you are probably ready to buy your own house.

2. HOW DO I BEGIN THE PROCESS OF BUYING A HOUSE?

Start by thinking about your situation. Are you ready to buy a house? How much can you afford in a monthly mortgage payment (see Question 4 for help)? How much space do you need? What areas of town do you like?

3. HOW DOES PURCHASING A HOUSE COMPARE WITH RENTING?

The two don't really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.

Owning a house has many benefits. When you make a mortgage payment, you are building equity. And that's an investment. Owning a house also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial. But given the freedom, stability, and security of owning your own house, they are worth it.

4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT CAN AFFORD?

The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA,monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, 4 should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

5. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?

Your house should fit way you live, with spaces and features that appeal to the whole family. Before you begin looking at houses, make a list of your priorities - things like location and size. Should the house be close to certain schools? your job? to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a 'wish list." Minimum requirements are things that a house must have for you to consider it, while a "wish list" covers things that you'd like to have but aren't essential.

FINDING YOUR HOUSE

6. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?

Select a community that will allow you to best live your daily life. Many people choose communities based on schools. Do you want access to shopping and public transportation? Is access to local facilities like libraries and museums important to you? Or do you prefer the peace and quiet of a rural community? When you find places that you like, talk to people that live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighborhood where you feel comfortable in.

7. WHAT SHOULD I DO IF I'M FEELING EXCLUDED FROM CERTAIN NEIGHBORHOODS?

Immediately contact the U.S. Department of Housing and Urban Development (HUD) if you ever feel excluded from a neighborhood or particular house. Also, contact HUD if you believe you are being discriminated against on the basis of race, color, religion, sex, nationality, familial status, or disability. HUD's Office of Fair Housing has a hotline for reporting incidents of discrimination: 1-800-669-9777 (and 1-800-927-9275 for the hearing impaired).

8. HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?

You can get information about school systems by contacting the city or county school board or the local schools. Your real estate agent may also be knowledgeable about schools in the area.

9. HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?

Contact the local chamber of commerce for promotional literature or talk to your real estate agent about welcome kits, maps, and other information. You may also want to visit the local library. It can be an excellent source for information on local events and resources, and the librarians will probably be able to answer many of the questions you have.

10. HOW CAN I FIND OUT HOW MUCH house ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?

Your real estate agent can give you a ballpark figure by showing you comparable listings. If you are working with a real estate agent, they may have access to comparable sales maintained on a database.

11. HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?

The total amount of the previous year's property taxes is usually included in the listing information. If it's not, ask the seller for a tax receipt or contact the local assessor's off ice. Tax rates can change from year to year, so these figures may be approximate.

12. WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?

Keep in mind that your mortgage interest and real estate taxes will be deductible. A qualified real estate professional can give you more details on other tax benefits and liabilities,

13. IS AN OLDER house A BETTER VALUE THAN A NEW ONE?

There isn't a definitive answer to this question. You should look at each house for its individual characteristics. Generally, older houses may be in more established neighborhoods, offer more ambiance, and have lower property tax rates. People who buy older houses, however, shouldn't mind maintaining their house and making some repairs. Newer houses tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new houses often don't want to worry initially about upkeep and repairs.

14. WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A house?

In addition to comparing the house to your minimum requirement and wish lists, use the HUD house Scorecard and consider the following:

Is there enough room for both the present and the future?
Are there enough bedrooms and bathrooms?
Is the house structurally sound?
Do the mechanical systems and appliances work?
Is the yard big enough?
Do you like the floor plan?
Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions.)
Does anything need to repaired or replaced? Will the seller repair or replace the items?
Imagine the house in good weather and bad, and in each season. Will you be happy with it year-round?

Take your time and think carefully about each house you see. Ask your real estate agent to point out the pros and cons of each house from a professional standpoint.

15. WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT houses?

Many of your questions should focus on potential problems and maintenance issues. Does anything need to be replaced? What things require ongoing maintenance (e.g., paint, roof, HVAC, appliances, carpet)? Also ask about the house and neighborhood, focusing on quality of life issues. Be sure the seller's or real estate agent's answers are clear and complete. Ask questions until you understand all of the information they've given. Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive. The HUD house Scorecard can help you develop your question list.

16. HOW CAN I KEEP TRACK OF ALL THE houses I SEE?

If possible, take photographs of each house: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don't hesitate to return for a second look.

17. HOW MANY houses SHOULD I CONSIDER BEFORE CHOOSING ONE?

There isn't a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, housebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you're looking for. It will help avoid wasting your time.

YOU'VE FOUND IT

18. WHAT DOES A house INSPECTOR DO, AND HOW DOES AN INSPECTION FIGURE IN THE PURCHASE OF A house?

An inspector checks the safety of your potential new house. house Inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of only repairs,that are needed.

The Inspector does not evaluate whether or not you're getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and Ventilation, the HVAC system, water source and quality, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roof. Be sure to hire a house inspector that is qualified and experienced.

It's a good idea to have an inspection before you sign a written offer since, once the deal is closed, you've bought the house as is." Or, you may want to include an inspection clause in the offer when negotiating for a house. An inspection t clause gives you an 'out" on buying the house if serious problems are found,or gives you the ability to renegotiate the purchase price if repairs are needed. An inspection clause can also specify that the seller must fix the problem(s) before you purchase the house.

19. DO I NEED TO BE THERE FOR THE INSPECTION?

It's not required, but it's a good idea. Following the inspection, the house inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the house you'd I like to purchase and it is a good time to ask general, maintenance questions.

20. ARE OTHER TYPES OF INSPECTIONS REQUIRED?

If your house inspector discovers a serious problem a more specific Inspection may be recommended. It's a good idea to consider having your house inspected for the presence of a variety of health-related risks like radon gas asbestos, or possible problems with the water or waste disposal system.

21. HOW CAN I PROTECT MY FAMILY FROM LEAD IN THE house?

If the house you're considering was built before 1978 and you have children under the age of seven, you will want to have an inspection for lead-based point. It's important to know that lead flakes from paint can be present in both the house and in the soil surrounding the house. The problem can be fixed temporarily by repairing damaged paint surfaces or planting grass over effected soil. Hiring a lead abatement contractor to remove paint chips and seal damaged areas will fix the problem permanently.

22. ARE POWER LINES A HEALTH HAZARD?

There are no definitive research findings that indicate exposure to power lines results in greater instances of disease or illness.

23. DO I NEED A LAWYER TO BUY A house?

Laws vary by state. Some states require a lawyer to assist in several aspects of the house buying process while other states do not, as long as a qualified real estate professional is involved. Even if your state doesn't require one, you may want to hire a lawyer to help with the complex paperwork and legal contracts. A lawyer can review contracts, make you aware of special considerations, and assist you with the closing process. Your real estate agent may be able to recommend a lawyer. If not, shop around. Find out what services are provided for what fee, and whether the attorney is experienced at representing housebuyers.

24. DO I REALLY NEED houseOWNER'S INSURANCE?

Yes. A paid houseowner's insurance policy (or a paid receipt for one) is required at closing, so arrangements will have to be made prior to that day. Plus, involving the insurance agent early in the house buying process can save you money. Insurance agents are a great resource for information on house safety and they can give tips on how to keep insurance premiums low.

25. WHAT STEPS COULD I TAKE TO LOWER MY houseOWNER'S INSURANCE COSTS?

Be sure to shop around among several insurance companies. Also, consider the cost of insurance when you look at houses. Newer houses and houses constructed with materials like brick tend to have lower premiums. Think about avoiding areas prone to natural disasters, like flooding. Choose a house with a fire hydrant or a fire department nearby.

26. IS THE house LOCATED IN A FLOOD PLAIN?

Your real estate agent or lender can help you answer this question. If you live in a flood plain, the lender will require that you have flood insurance before lending any money to you. But if you live near a flood plain, you may choose whether or not to get flood insurance coverage for your house. Work with an insurance agent to construct a policy that fits your needs.

27. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY house?

Always check to see if the house is in a low-lying area, in a high-risk area for natural disasters (like earthquakes, hurricanes, tornadoes, etc.), or in a hazardous materials area. Be sure the house meets building codes. Also consider local zoning laws, which could affect remodeling or making an addition in the future. Your real estate agent should be able to help you with these questions.

28. HOW DO I MAKE AN OFFER?

Your real estate agent will assist you in making an offer, which will include the following information:

Complete legal description of the property
Amount of earnest money
Down payment and financing details
Proposed move-in date
Price you are offering
Proposed closing date
Length of time the offer is valid
Details of the deal

Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just Making an offer.

Other ways to lower ins-insurance costs include insuring your house and car(s) with the same company, increasing house security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim.

29. HOW DO I DETERMINE THE INITIAL OFFER?

Unless you have a buyer's agent, remember that the agent works for the seller. Make a point of asking him or her to keep your discussions and information confidential. Listen to your real estate agent's advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors: what houses sell for in the area, the house's condition, how long it's been on the market, financing terms, and the seller's situation. By the time you're ready to make an offer, you should have a good idea of what the house is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a house. The buyer and seller may often go back and forth until they can agree on a price.

30. WHAT IS EARNEST MONEY? HOW MUCH SHOULD I SET ASIDE?

Earnest money is money put down to demonstrate your seriousness about buying a house. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary with local customs and conditions). If your offer is accepted, the earnest money becomes part of your down payment or closing costs. If the offer is rejected, your money is returned to you. If you back out of a deal, you may forfeit the entire amount.

31. WHAT ARE "house WARRANTIES", AND SHOULD I CONSIDER THEM?

house warranties offer you protection for a specific period of time (e.g., one year) against potentially costly problems, like unexpected repairs on appliances or house systems, which are not covered by houseowner's insurance. Warranties are becoming more popular because they offer protection during the time immediately following the purchase of a house, a time when many people find themselves cash-strapped.

GENERAL FINANCING QUESTIONS:THE BASICS

32. WHAT IS A MORTGAGE?

Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the house or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

33. WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF MY LOAN?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the house you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a house priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their houses. The higher the LTV the less cash housebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.

34. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?

Fixed Rate Mortgages: Payments remain the same for the the life of the loan

Types

15-year
30-year

Advantages

Predictable
Housing cost remains unaffected by interest rate changes and inflation.

Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types

Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is clue or refinanced (though not automatically)
Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan
ARMS linked to a specific index or margin

Advantages

Generally offer lower initial interest rates
Monthly payments can be lower
May allow borrower to qualify for a larger loan amount

35. WHEN DO ARMS MAKE SENSE?

An ARM may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

36. WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?

30-Year:

In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year:

Loan is usually made at a lower interest rate.
Equity is built faster because early payments pay more principal.

37. CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

38. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME houseBUYERS?

Yes. Lenders now offer several affordable mortgage options which can help first-time housebuyers overcome obstacles that made purchasing a house difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

39. HOW LARGE OF A DOWN PAYMENT DO I NEED?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.

40. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, houseowner's insurance, and mortgage insurance (if applicable).

41. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

42. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?

A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in"which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

43. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?

If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

44. WHAT ARE DISCOUNT POINTS?

Discount points allow you to lower your interest rate. They are essentially prepaid interest, With each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases With each point paid. Discount points are smart if you plan to stay in a house for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a house and you may be able to negotiate for the seller to pay for some of them.

45. WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for houseowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property tax or houseowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

FIRST STEPS

46. WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?

The first step in securing a loan is to complete a loan application. To do so, you'll need the following information.

Pay stubs for the past 2-3 months
W-2 forms for the past 2 years
Information on long-term debts
Recent bank statements
tax returns for the past 2 years
Proof of any other income
Address and description of the property you wish to buy
Sales contract

During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-6 weeks.

47. HOW DO I CHOOSE THE RIGHT LENDER FOR ME?

Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it's beneficial when the lender knows house values and conditions in the local area. Do research and ask family, friends, and your real estate agent for recommendations.

48. HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?

Pre-qualification is an informal way to see how much you maybe able to borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.

Pre-approval is a lender's actual commitment to lend to you. It involves assembling the financial records mentioned in Question 47 (Without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

49. HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?

There are three major credit reporting companies: Equifax, Experian, and Trans Union. Obtaining your credit report is as easy as calling and requesting one. Once you receive the report, it's important to verify its accuracy. Double check the "high credit limit,"'total loan," and 'past due" columns. It's a good idea to get copies from all three companies to assure there are no mistakes since any of the three could be providing a report to your lender. Fees, ranging from $5-$20, are usually charged to issue credit reports but some states permit citizens to acquire a free one. Contact the reporting companies at the numbers listed for more information.

CREDIT REPORTING COMPANIES

Company Name Phone Number
Experian 1-888-524-3666
Equifax 1-800-685-1111
Trans Union 1-800-916-8800

50. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?

Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.