Planning for homeownership Financial factors Lenders’ qualifying guidelines The home buyings process The mortgage loan process Closing on your loan Managing the financial responsibilities of homeownership Maintaining your home and building its value Wrap-Up

Planning for homeownership

Buying a home is the single largest purchase that you will ever make. If you are thinking of buying a home, Amerihome Lending would like to help you prepare for this life-changing event. That is why we have prepared this Homeownership Guide for you. We would like to prepare you for your journey by taking you through the home buying process step by step — from deciding whether homeownership is right for you to finding the perfect home for you, obtaining a mortgage and closing on the sale.

Are you ready to buy?

Before you begin preparing for the home buying process, you should determine if homeownership is right for you. Once you have considered the pros and cons, only you can honestly decide whether or not buying a house makes sense for your specific situation.

Following is a list of some things to consider before you get started:

Advantages of homeownership

1. A home is a place to call your own, it helps you become a part of the community and make a difference in the area where you live.

2. While rent payments typically increase each year, the principal and interest payments will stay the same on most mortgage loans for the life of your loan. This helps you to better budget and plan for the future.

3. Most homeowners realize significant tax benefits from homeownership.

4. A home is an investment which can, and usually does, increase in value over time. It’s the only investment you can live in at the same time.

Disadvantages of homeownership

1. Homeownership usually costs more than renting.

2. You will be responsible for all repairs and maintenance of your home, which can be costly.

3. There are no guarantees that a home will appreciate in value.

4. If you move frequently because of your job, owning a home may be more of a burden than you want.

5. Finally, say you suffer a financial setback such as the loss of a job. If you own a home and do not keep up with your mortgage payments, the mortgage lender could foreclose on your mortgage. That means that you could lose your home and the equity you’ve built up.

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Financial factors

Once you’ve decided to buy a home, the next step is to determine how much house you can afford. It’s a good idea not to become “house poor,” which means you don’t want to spend every dime of monthly income on debts, including your housing expenses. Many first-time homebuyers discover that when they add up their total housing costs (monthly mortgage payment, moving costs, early repairs, taxes, insurance, maintenance, etc.) the overall costs are more than they paid as renters. If this sounds like you, it’s a good idea to set up a strict budget. If budgeting is new to you, Amerihome Lending will show you how to get started.

Budgeting

There are three main reasons why a budget is so critical in the home buying process:

1. A realistic budget will help you determine how much house you can afford.

2. A budget will help you determine if you can afford the extra expenses related to homeownership.

3. A budget will help you plan to save money for the down payment on your home, as well as develop good saving habits for other financial goals, such as retirement, or college tuition for your children.

Preparing a budget

Budgeting is simply a management tool that helps you keep track of how and when you are spending your money. By following a budget, you will be able to set goals for how you want to spend your income. Here’s how.

1. List all current, regular net monthly income for yourself and any co-borrowers.

2. List all current monthly expenses. Keep receipts in your checkbook so that you can total expenses by each category at the end of the month. If you develop a budget, and then decide not to keep a record of your actual expenses, you’ve wasted your time.

3. After recording your actual expenses at the end of the month, you will be able to analyze whether or not your budget was realistic. You may need to go back and adjust your budget accordingly.

How much can you afford?

There are several major areas regarding money that you need to examine to start the home buying process. These areas will determine exactly how much you can afford to pay each month for your mortgage principal, interest, real estate taxes, homeowner’s hazard insurance and mortgage insurance (“PITI”). Now that you have analyzed your current monthly expenses by preparing a budget, let’s discuss the other money factors that you must consider.

Many experts use a basic, easy formula to determine how much someone can afford in a house. The rule says that you should multiply your pre-tax, or gross, annual income by two and a half. For example, if you have a household income of $40,000, you should be able to buy a house worth $100,000. This quick ballpark figure is great. However, your buying power ultimately depends on two things:

1. How much you have available for the down payment and closing costs, and

2. How much a financial institution will agree to lend you.

Down Payment

Most mortgage loan programs require that a borrower make a down payment from their own cash when they purchase a home. The size of the down payment determines how large a mortgage you need, as shown in this example:

The annual percentage rate (“APR”) is 7.46%, with 360 payments of $661.71. This payment does not include escrow amounts for real estate taxes and insurance.

The amount of the borrower’s required down payment varies, depending on the type of mortgage loan program for which the borrower qualifies. Amerihome Lending is pleased to let you know that we have loan programs that do not require a borrower to make a down payment. Your Amerihome Lending loan officer would be happy to share more in-depth information regarding loan programs offered in your area that feature no down payment requirements.

Closing costs

Your down payment is just one of the up-front fees that you will pay during the home buying process. Homebuyers also usually pay other closing costs, which on average are between 4% and 10% of the mortgage amount. Geography plays a major role in what closing costs will be.

Here are a few examples of typical closing costs: loan origination fee, appraisal fee, credit report, flood certification fee, attorney’s fee, state tax, title insurance, and document preparation fees.

Your borrowing power

In addition to your down payment, other factors that may limit how expensive a home you can buy will be how much you can borrow. The lender will consider two factors in determining how large a loan to grant you:

1. Your earnings, and

2. Your existing debt.

Components of your monthly mortgage payment

Each monthly mortgage payment includes the repayment of a portion of the amount that you borrowed (principal) and the interest (the fee you pay the lender for using their money). This amount is referred to as the principal and interest (“P&l”).

A homebuyer’s monthly mortgage payment usually includes an added amount to cover the borrower’s real estate taxes, homeowner’s hazard insurance and mortgage insurance. The lender holds these additional amounts in a separate “escrow’ account and then pays the tax and insurance bills when they come due. The lender does this to ensure that these annual expenses get paid in a timely manner. The inclusion of taxes and insurance in the mortgage payment is referred to as PlTl.

How can you increase your borrowing power?

If upon calculating how much of a house you can afford you are not happy with the amount that you can qualify for, there are some things that you can do. You may need to lower your sights and purchase a less expensive starter home. However, before you stop here, you should consider these other ideas:

1. Reduce your existing long-term debt.

2. Wait to apply for a mortgage until your income increases.

3. Find a financing option that results in a lower down payment and a lower monthly mortgage payment.

4. Ask your Amerihome Lending loan officer if there are any programs offered in your area that provide grants to low-to-moderate income home buyers that would reduce the amount of money that you would have to borrow.

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Lenders’ qualifying guidelines

Qualifying for a home

In order to buy a home, you will need to obtain a loan to cover the cost of the purchase. You must meet certain qualifications to be approved for a loan. It is important to understand what these qualifications are so that you will know approximately how expensive a home you can afford. Even if you do not currently qualify for a loan, you should know what is required so that you can prepare for purchasing a home in the future. Obtaining a “pre-qualification” is your next step in buying a home. Real estate agents love homebuyers who submit offers on their homes with a “Pre-Qualification” letter in hand! This is why you should always see your lender first.

Loan approval requirements

Amerihome Lending will review your past financial history to determine your willingness and ability to handle the increased financial responsibility of buying a home. Six primary areas of consideration for credit approval are as follows:

1. Income - Do you have sufficient income to pay your new house payment?

2. Income stability - Is your income received regularly?

3. Credit history - How have you handled your other credit obligations?

4. Housing increase - Is there a large increase from your current housing expense to your new mortgage payment (Payment Shock)? If you have paid your past debt on time and have also saved money for emergencies, you will likely be able to handle the increased debt.

5. Funds for closing - Do you have enough money saved up to pay the required down payment and closing costs?

6. Property - Is the home that you want to purchase worth as much or more than the loan you are getting?

Qualifying guidelines

Amerihome Lending will use two qualifying guidelines to determine what size mortgage you are eligible for. They are as follows:

1. Your monthly housing cost (includes mortgage payment, property taxes, homeowner’s hazard insurance, mortgage insurance and condominium fees, if applicable) should typically total no more than 28% of your gross monthly (before-tax) income. This can be increased to 33% if you are eligible for one of our affordable home loans.

2. Your monthly housing costs plus other long-term debts should total no more than 36% of your gross monthly income. This can be increased to 38% if you are eligible for one of our affordable home loans.

Basically, we are saying that a household should spend no more than about one-fourth of its income (28%) on housing and not more than one-third (36%) on total indebtedness. Remember, this is based upon pre-tax dollars, so you still have to pay income taxes, and have enough money left over to live within your budget comfortably.

Amerihome Lending is pleased to let you know that we have mortgage products that we have designed with our low-and moderate-income homebuyers in mind. We understand that our customers who fall into this income range will have to put more of their income towards their housing expense, and so we have increased these ratios for them accordingly.

Credit history

Credit Reports are a snapshot of your personal credit history. Usually, if you are rejected for a loan or other form of credit, your credit history is the culprit. Anyone who denies you credit must tell you why in written form. Since you know that Amerihome Lending will review your credit report to see how well you have responded to debt and credit in the past, you should be proactive and get a copy of your credit report before you shop for a mortgage. By doing this, you will be able to see if there are any problems with your credit and have an opportunity to fix them before you go through the home shopping and mortgage application processes.

An Amerihome Lending professional will be happy to review your Credit Report with you and make suggestions on ways to improve your credit rating.

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The home buyings process

House hunting

Now that you are pre-qualified and have determined approximately the price of a home you can afford, you are ready for the next step - finding the perfect home for you! It is important to keep in mind what you feel comfortable paying. Your Amerihome Lending loan officer will help determine the highest priced home for which you can qualify, but only you can decide how much you feel comfortable paying each month. Remember your budget!

Before you shop, it is a good idea to make a “wish list”. A good real estate agent will assist you in determining your housing requirements by asking good qualifying questions. Don’t waste your time looking at houses that do not meet your basic requirements. Listed below are some items that you should consider before beginning your house hunt:

1. Do you have a specific school district that you prefer?

2. Do you want a new or existing home?

3. Is there a specific location where you want to reside?

4. Are there certain features that you can’t live without?

The role of the Realtors

In choosing a real estate agent you may want to get references from people you know who have recently purchased homes. It is important to work with an experienced real estate agent who is familiar with the areas in which you are interested. You should feel comfortable working with the real estate agent. While you are not obligated to work with only one real estate agent, you will probably choose to do this once you find an agent that you like and trust.

In a typical real estate transaction you will pay nothing for the services provided by a real estate agent. The agents are paid by the seller from sale proceeds; and, therefore, the agent represents the seller. However, a real estate agent can represent you as a buyer’s broker. An agent can assist you with a variety of services, including the following:

• Review general qualifying requirements to help determine affordable homes to consider.
• Review your wish list and qualifications to compile a list of potential properties.
• Make arrangements to show you houses that meet your requirements.
• Provide information on neighborhoods, schools, property tax rates and public services available to each neighborhood.
• Work with other real estate agents in getting your offer accepted by the seller
• Assist you in the selection of an attorney, professional home inspector, and title and homeowner’s insurance companies.
• Help to coordinate the many activities that must be handled during a real estate transaction.

Negotiating a purchase

Make an offer that you feel is appropriate and makes you comfortable. You may choose to offer a lower price or to request the seller pay some of your closing costs; your real estate agent should advise you if the price you wish to offer is out of line and help you negotiate the purchase.

You will be expected to put down a deposit when making the offer. The deposit will be held in escrow until loan closing and can be applied towards the cash that you need to bring to closing. Your real estate agent will present your offer to the seller or to the seller’s agent. If your offer is not accepted, you should take your time in considering a counter offer. Do not be pressed into acting too quickly, even if other buyers are waiting. Remember that this is probably the largest purchase you will have ever made, so you must make sure that you are comfortable with the price and terms of the agreement.

Once you and the seller have accepted all terms, the agreement becomes a legally binding contract. You will be expected to follow through on all terms of the transaction, and cannot change your mind after the offer has been accepted.

The importance of a professional home inspection

A contingency that many buyers choose to place on the contract is the home inspection. The intention of the pre-purchase home inspection is to provide the buyer with useful information about the condition of the residence and identify major deficiencies in the home’s structure and components.

A home inspector is a professional who has been trained to examine the visual condition of residential properties and determine they are free from discoverable major mechanical (heating, plumbing, electrical, etc.) or structural (walls, roof, foundation, etc.) deficiencies. A professional home inspector will tell you if the roof or heating system will soon need major repair or replacement, and whether the electrical and plumbing systems are functioning properly. The inspector will let you know whether the major mechanical/structural systems are in overall satisfactory condition.

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The mortgage loan process

After the seller has accepted the sales contract, you must apply for your home loan, or mortgage. At first, this process may seem a little overwhelming; however, as with anything, knowing what to expect makes it easier

Applying for a mortgage loan

Amerihome Lending will assist you in completing a mortgage loan application, and you will be required to pay for your credit report and property appraisal at the time the application is completed. You need to sign a variety of forms so that Amerihome Lending can verify your rental or mortgage payment history, employment, savings and checking accounts, child care expenses, and any installment debt accounts.

Mortgage loan insurance

Whenever a borrower makes a down payment of less than 20 percent of the purchase price of the home, the lender will require some type of mortgage insurance. This insurance protects the lender against loss if the borrower defaults on the loan. Listed below are the different insurers of mortgage loans. Each mortgage insurer has different down payment and qualification criteria.

1. Conventional/Mortgage Insurance (“Ml”)
Typically the Ml Company will require the borrower to have a 3-5% down payment from their own funds invested in the transaction. A gift from a relative may be received for additional down payment or closing costs. The cost for Ml varies depending on the amount of down payment that you make, and is added to your monthly mortgage payment.

2. Rural Development Guaranteed Loan Program (“RD”)
RD will insure loans that meet their guidelines and are located in rural designated areas. This program sets maximum income limitations as well as maximum loan amount limitations.

3. Veterans Affairs Guaranteed Loans (“VA”)
VA will issue a guarantee on loans for 100 percent of the sales price for veterans with VA eligibility and for eligible reservists with six years of service. Specific VA qualifying guidelines must be met.

4. HUD-insured Loans (Federal Housing Administration or “FHA”)
The U.S. Department of Housing and Urban Development may also insure loans. Maximum loan amounts are calculated based on the acquisition cost (sales price + borrower-paid closing costs) and are limited by the HUD-designated limits. HUD-insured loans must meet specific property requirements, and HUD specified borrower-qualifying guidelines. A gift for the full down payment and closing costs is allowed.

The application process

Here’s what happens after you and your loan officer completes the loan application:

1. Verification process
You will be requested to sign forms authorizing Amerihome Lending to verify your current and previous employment, bank accounts, rental payment history and other credit references at the time of loan application.

2. Disclosure forms
Amerihome Lending will provide you with certain disclosures about your loan. You should ask your loan officer about anything that you do not understand.

3. Payment of fees
You will be required to pay for your credit report and the property appraisal.

4. Loan processing
An individual will be assigned to assist with the processing of your loan. Amerihome Lending will mail the verification forms and order your credit report and appraisal. Based upon the information that results from this process, you may be requested to provide explanations or additional documentation to explain items such as gaps in employment, newly opened checking or savings accounts, past delinquent credit or recent inquiries by creditors.

5. Loan decision
You will be notified in writing of the final decision on your loan. If your loan is approved, you will receive a commitment letter, which indicates the terms of loan approval and conditions that must be met prior to the closing of the loan.

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Closing on your loan

Preparing for loan closing

Once your loan is approved, you should begin planning for loan closing or settlement. Together, Amerihome Lending and your real estate agent will assist you with the many details to be managed. This is the time when the sales transaction is completed. Lender will provide your loan funds; the title to the property will be transferred to you; the sellers will receive their sales proceeds; and you will receive the keys to your new home. There are many forms that you are asked to sign or understand at closing. The more familiar you are with these forms the more comfortable you will be on the day of closing.

Selecting the settlement agent

You get to choose who represents you at loan closing. In different parts of the country, closings are variously conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, or attorneys for the buyer or seller. You may be able to save money by shopping around for a settlement agent.

Homeowner’s insurance

It is a closing requirement that you obtain homeowner’s hazard insurance. You pay the premium, and you and the lender are protected from loss if a fire or storm destroys your home. A homeowner’s hazard insurance policy should include:

• Personal Liability Insurance - This is to protect you if someone sues you after being injured on your property or by a member of your family.
• Property Coverage - This protects you against fire, theft and specific weather-related hazards.

Amerihome Lending encourages you to shop around for homeowner’s hazard insurance. Your insurance agent will help you decide how much coverage you need. Amerihome Lending requires that you obtain coverage up to the “replacement value” of the improvements to the property (including the house, garage, outbuildings, etc.).

Title insurance

Title insurance is defined as “insurance against loss by reasons of liens and encumbrances upon the property, defects in title to the property and other matters that may affect your right to use and enjoy the property.” Title insurance offers the following types of coverage:

• Someone claims to have an easement through the middle of your property;
• A neighbor claims to be the true owner of a piece of your property; or
• A bank tries to foreclose on your home because a recorded mortgage or Deed of Trust on the property was never satisfied.

There are two types of title insurance:

• Lender’s Coverage - will protect the lender’s interest in the property and will defend that interest should any claims arise. Lender requires that you obtain Lender’s Coverage.
• Owner’s Coverage - will protect your interest in the property for as long as you own the property. Lender does not require that you obtain Owner’s Coverage; however, it is recommended that you obtain this very reasonably priced coverage for your protection.

Legal documents

• The Note

This is your promise to repay Lender for the principal and interest of the loan. The note will reflect the terms under which you are borrowing the money (interest rate, term, late payments, prepayment and default).

• The Mortgage
The mortgage or Deed of Trust is the legal document that secures the note and gives the lender a claim against your house and land if you default on your payments. In effect, you have ownership and possession of the property, but the lender has an interest in the property (called an encumbrance) until the loan has been fully paid.

• The Deed
This legal document conveys legal title from the seller to the buyer. The seller is responsible for preparing the Deed.

• HUD-1 Settlement Statement
This document itemizes all of the costs related to the transaction. It indicates which party (buyer or seller) is responsible for payment of each item and will summarize the amount of money that you owe and the amount due to the seller at closing. Both the buyer and seller are required to sign this document. You may request a copy of your HUD-1 from your settlement agent prior to closing so that you can review this document.

Final walk-through inspection

Your contract should have included a clause allowing you to examine the property within 24 hours immediately prior to closing. This allows you to make sure the seller has (where applicable) vacated the property and left any items that were negotiated in the contract and that there has not been any damage to the property.

Closing day

Your settlement agent or attorney will notify you, in advance, of the amount of cash you will need for closing. You must make sure that you have these funds available in advance of closing, and you must take a cashier’s or certified check to closing (personal checks are not acceptable).

Closing usually takes place in the office of the settlement agent or attorney. All final papers will be prepared for you to review and sign. All forms will be explained to you before you sign them. Copies of all of the closing forms will be provided to you and the settlement agent will give you the keys to your new home.

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Managing the financial responsibilities of homeownership

Understanding your obligations as a borrower

Now that you are a homeowner, you need to take the steps necessary to protect your investment. Remember that your mortgage is due on the first day of each month. If you do not sign-up for Autopay, Lender will mail a payment coupon booklet or monthly payment statement to you after loan closing. In the unlikely event that your coupon booklet or monthly payment statement does not arrive prior to the time that your first payment is due, Lender will include in your settlement package a “First Payment Letter.” This letter provides you with the date of your first payment, the amount of your payment, and the address where you must mail your payment.

Predatory lending and refinancing

Refinancing your mortgage loan can make sense and save you money if interest rates have dropped, but it must be done carefully. The amount of money that you will save by refinancing your existing mortgage loan must fully offset the cost of the refinance transaction.

Beware of Predatory Lenders who lend money against borrower’s homes in a way that can harm the borrower more than help them. They may try to convince the borrower to refinance their home for no good reason (other than to earn fees). While not all of the practices of Predatory Lenders are illegal, consumers need to protect themselves.

Here are some warning signs of Predatory Lending:

1. The interest rate seems higher than reasonable.
2. The lender contacts you even though you are not in the market for a loan.
3. They use aggressive, high-pressure tactics.
4. They rush you through the process and discourage you from taking time to read and understand what you are signing.
5. They encourage you to refinance a loan you already have without showing you any real benefit.
6. They insist on you buying life insurance as part of the loan.

Don’t borrow trouble

If you are not confident that you can make the monthly payments, do not borrow the money. You could lose your home. Do not try to borrow your way out of debt. If you cannot make your current payments, getting a new loan is generally not the solution. We encourage you to seek help if you are having financial trouble. Your Amerihome Lending Representative will be happy to suggest different agencies that will be able to assist you with evaluating your finances.

Avoiding foreclosure

As stated in your loan documents, your mortgage payment is due on the first day of each month. By making this obligation a priority, you can avoid costly late charge assessments and maintain a good credit history. Even the most reliable borrowers sometimes fail to meet every payment on its due date, and it is possible that there is a good reason for this failure. If you are having problems making you monthly payments, you must act immediately. If you do, you might avoid losing your home through foreclosure. Amerihome Lending will do everything in our power to assist you with getting back on track.

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Maintaining your home and building its value

Now that you have moved into your American Dream Home, it’s time to think about the future. Your home is likely by far your most valuable asset, so it is critical that you give it the attention that it deserves.

Maintenance and repairs

It’s your home now, so when something breaks, you can’t just call the building superintendent. Neither the property seller nor Amerihome Lending are responsible if the water heater breaks. You have to fix it or pay someone else to fix it. Attention to regular maintenance can often help you avoid repairs, and prompt repairs can help you avoid more costly disasters.

Major repairs/home improvements

Sooner or later you may need to hire an expert to help you with major repairs or home improvement. Perhaps you want to remodel your kitchen or bathroom that you promised yourself when you moved into your new home. The following guidelines can help you get such a project done right for a fair price.

1. Interview several contractors. Find one that listens to you and with whom you feel comfortable working.
2. Ask for references and check them. You might begin by asking friends and neighbors to recommend companies or individuals that have provided them with good service. Many counties and cities have a licensing process for home improvement contractors. If the repair job is relatively small or you’re on a budget, you may get better service from an individual than from a large firm.
3. Get cost estimates, and find out whether these are estimates or firm bids. Often, especially on older houses, contractors will not give a firm bid because it’s impossible to know until they start the work what they’ll find and how hard it will be to fix.
4. To protect yourself, especially for a larger job, be sure you have a contract that specifies exactly what work is to be performed, when payments are due, and so on. Always hold back part of the payment until after the job is finished. If the job requires permits, find out who is responsible for obtaining them.

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Wrap-Up

We hope that you have learned a lot about the home buying and mortgage process. Remember that you can’t be expected to know everything, but we hope that you have a clearer understanding of the issues.

Good luck on your journey down the road to homeownership.

Visit us at www.amerihomelending.com or Amerihome Lending office, and let us know how Amerihome Lending can help you! As always, “We Make It Happen”.