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1 Welcome to the New York Homebuyer Education Program.

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Presentation on theme: "1 Welcome to the New York Homebuyer Education Program."— Presentation transcript:

1 1 Welcome to the New York Homebuyer Education Program

2 2 “Knowledge is Empowering” New York Homebuyer Education Program Designed to provide you with information about the steps towards homeownership

3 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 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 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 Apprais al Pric e Budget Lender Loan Broker Rat e FICO Credi t

6 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.

7 7 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

8 8 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 9 How Much Can You Afford to Pay For a Home? $60,000 Income $150,000- $180,000 House Price 2½-3 times Debt ?  8

10 10 How Much Can You Afford to 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

11 11 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  9

12 12 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 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 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 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

16 16 Credit Reporting Agencies  Experian (888)  TransUnion (877)  Equifax (800)

17 17 Sites to Access Your Credit Report       10

18 18 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

19 19 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  10

20 20 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 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   Factors that are not part of the credit score  10

22 22 What’s In the FICO Score?  10

23 23 More About Scores  A “Perfect Score”800+  Very Good Score750  Good Score680  Marginal Score620  Low ScoreUnder 600

24 24 Improving Your Credit Score FICO® score component Score Weight Advice to improve credit Payment History35%Pay your bills on time Amount owed30%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 credit10%Apply for new credit only when you really need it Types of credit used 10%Have a sensible mixture of credit Total100%  11

25 25 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

26 26 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

27 27 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  36

28 28 Step 3: Finding a Home The Home Buying Team  The Real Estate Professional  The Real Estate Attorney  The Lender

29 29 The Home Buying Team Sold Home Buyer Seminars One on One Counseling You are a Home Owner $ The Lender $ You Attorney Real Estate Professional  12

30 30 The Home Buying Team Sold Home Buyer Seminars One on One Counseling You are a Home Owner $ The Lender $ You Attorney Real Estate Professional

31 31 Mortgage Providers  Banks and Savings and Loans  Mortgage Lenders  Credit Unions  USDA Rural Development  Government Agencies  Nonprofit Organizations

32 32 Shopping for a Mortgage Could Be Daunting You May Feel That You Cannot Do It Alone What are your options?  You could go directly to a Lender  Seek assistance from a Housing Counselor  Work with a Mortgage Broker  12-14

33 33 How Mortgage Brokers Earn their Income Fees paid by you  Broker points  Application fees  Other processing fees  Yield Spread Premium

34 34 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

35 35 Getting Pre-Qualified Before Applying For a Mortgage Loan  Reasons and advantages  The difference between prequalification and pre-approval  The down payment  14

36 36 What Type of Property Are You Buying?  Single Family Townhouse, Condo & Coop Manufactured Home Modular Housing  2-4 Family Dwelling  Duplex, Triplex, Fourplex  15

37 37 Buying a Condominium  Home attached to another home  Share common area  Homeowners’ Association  15

38 38 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  15

39 39 Other Types of Legal Ownerships  Planned Unit Developments (PUD)  Land-Lease

40 40 The Purchase Contract  The Offer Negotiating  The Contract Purchase Price Good Faith Deposit Escrow Closing Date  17

41 41 The Purchase Contract  Contingencies Financing Appraisal Clear Title Property Inspection Homeowner Warranty Personal Property

42 42 Check Your Knowledge Subject YesNo 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?  36

43 43 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

44 44 New mortgage lending reform bill September 1 st, 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

45 45 Applying for a Mortgage Loan  Credit application  Personal financial information  18

46 46 Verification of Information Provided  Income and employment  Assets  Down payment assistance  Credit  Debt  18 & 19

47 47 The Mortgage Payments and Other Costs of Homeownership  Principal  Interest  Taxes  Insurance  Private Mortgage Insurance  19

48 48  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

49 49 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  19

50 50 Ratios: How Large a Payment Can You Afford? 38%  20

51 51 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

52 52 What Are Fannie Mae, Freddie Mac, and FHA/VA Loans?  Financial Facilitators  Secondary Market Investors  Government-Insured Loans (applies to FHA/VA loans)

53 53 Traditional Loan Programs  Conforming Conventional Loans Affordable Loan Programs # UnitsMaximum Loan Amount 1$417,000 2$533,850 3$645,300 4$801,950 Source: Fannie Mae  21

54 54 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 areas Source: US Department of Housing and Urban Development  26-27

55 55 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

56 56 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

57 57 Sample 30-Year Fixed-Rate Loans  28

58 58 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.  22

59 59 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  22

60 60 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

61 61 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.  25

62 62 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  25

63 63 Subprime Loans  Why are they called subprime loans  What is risk-based pricing  Is a subprime rate good for you  Beware of predatory lending  28

64 64 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  26

65 65 Typical Add-on Fees DescriptionPrice in Points Reduced documentation0.750% = 3/4% Loan-to-value %0.500% = 1/2% FICO score % = 1/4% Credit score higher than = -1/8% Two-unit properties0.375 = 3/8% High rise condominium or cooperative apartment = 3/4%  30

66 66 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

67 67 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  37

68 68 Other Things to Negotiate  Lender Fees  Third Party Fees  Seller paying some of the closing costs  30

69 69 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

70 70 Loan Approval Process  Commitment Letter  Good Faith Estimate within 3 days Review what it reflects  TILA – costs of buying on credit  32

71 71 The Loan Closing/Settlement  Preparing for the closing  Who attends the closing  Closing documents  32

72 72 Closing Documents  Read every document before signing it  32

73 73 Sample of Closing Costs  33

74 74 Check Your Knowledge Subject TrueFalse 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

75 75 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  34

76 76 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

77 77 Resources: Publications  Fannie Mae  Freddie Mac  HUDwww.hud.govwww.hud.gov  Federal Deposit Insurance Corporation  NYS Banking Deptwww.banking.state.ny.uswww.banking.state.ny.us  Mortgage Lenders Association of New York  38

78 78 Resources: Publications Continue…  New York Association of Mortgage Brokers  State of New York Mortgage Finance Agency- (SONYMA) -  NeighborWorks® America  Lenderratewww.lenderrate.comwww.lenderrate.com  38

79 79 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

80 80 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

81 81 Questions and Answers

82 82 Introduction of Non 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”

83 83 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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