Home Financing Guide

Buy Your Home

and Keep It Too
HOME FINANCING GUIDE

Home Financing Guide

Mortgage Basics ...................................................................................................................................................................... 4

What's a mortgage? ................................................................................................................................................................................. 4
What's included in my monthly payment? .................................................................................................................................... 4
What is an escrow account? ................................................................................................................................................................. 5
Mortgage Process .................................................................................................................................................................... 5
Step 1: Determine your budget .......................................................................................................................................................... 5
Step 2: Find a Lender .............................................................................................................................................................................. 5
Step 3: Get Pre-Approved ..................................................................................................................................................................... 6
Step 4: Go Find Your Next Home ........................................................................................................................................................ 7
Renters guide to preparing for home ownership ....................................................................................................... 7
Adjusting your finances ......................................................................................................................................................................... 7
PITI ................................................................................................................................................................................................................. 7
Maximum loan balance .......................................................................................................................................................................... 8
Rent and Savings ....................................................................................................................................................................................... 9
Interest rates and the rent-save ratio ........................................................................................................................................... 10
The bottom line ...................................................................................................................................................................................... 10
Conservative House Financing ........................................................................................................................................ 11
Mortgage Interest Rates ..................................................................................................................................................................... 12
Types of Borrowers .............................................................................................................................................................................. 14
Types of Loans ........................................................................................................................................................................................ 14
Conventional 30-Year Amortizing Mortgage ................................................................................................ 15
The Interest-Only, Adjustable-Rate Mortgage .............................................................................................. 16
Negative Amortization Mortgages ..................................................................................................................... 17
Stated Income Loans ............................................................................................................................................................................ 21
Down payments ..................................................................................................................................................................................... 23
Equity Components .............................................................................................................................................................................. 24
Initial Equity ................................................................................................................................................................ 26
Financing Equity ........................................................................................................................................................ 26
Inflation Equity ........................................................................................................................................................... 27
Speculative Equity ..................................................................................................................................................... 28
Mortgage Equity Withdrawal ........................................................................................................................................................... 30
The Fallacy of Financial Innovation ............................................................................................................................................... 33
Summary ................................................................................................................................................................................................... 36
FHA Loan Requirements .................................................................................................................................................... 36
FHA Mortgage Insurance .................................................................................................................................................................... 37
FHA Loan Limits ..................................................................................................................................................................................... 38
Loan Checklist ......................................................................................................................................................................................... 39
Closing Costs ............................................................................................................................................................................................ 39
FHA Debt Ratios ..................................................................................................................................................................................... 40
Mortgage Payment Expense to Effective Income ........................................................................................ 40
Total Fixed Payment to Effective Income ....................................................................................................... 41
FHA Credit Issues .................................................................................................................................................................................. 42
No Credit History ....................................................................................................................................................... 42
Chapter 13 Bankruptcy ........................................................................................................................................... 42
Chapter 7 Bankruptcy ............................................................................................................................................. 42
Late Payments ............................................................................................................................................................. 43
Foreclosure .................................................................................................................................................................. 43
Collections, Judgments And Federal Debts .................................................................................................... 43
FHA Financing and Loan Assumption ........................................................................................................................... 43
Utilize fixed-rate assumable financing ......................................................................................................................................... 43
Maximize your down payment (within reason) ...................................................................................................................... 44
Expect no home-price appreciation .............................................................................................................................................. 44
Assumption of Mortgage .................................................................................................................................................................... 45
Lenders despise mortgage assumptions (and they should) ................................................................... 45
Understanding by example ................................................................................................................................... 46
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Home Financing Guide

Sell faster or sell for more ..................................................................................................................................... 47

How to use owner financing to obtain equity from assumable loans ................................................ 48
Seller financed second mortgages ...................................................................................................................... 48
Wrap-around mortgages .................................................................................................................................................................... 49
Facts about loan assumptions .......................................................................................................................................................... 50
Be Wary the High Cost of FHA Insurance .................................................................................................................................... 51
Accelerated Mortgage Payoff ........................................................................................................................................... 51
Pay more when you can ...................................................................................................................................................................... 52
Refinancing for accelerated amortization .................................................................................................................................. 52
Time to Payoff ......................................................................................................................................................................................... 53
How Not to Manage Your Debt ........................................................................................................................................ 54
What is a Ponzi Scheme? .................................................................................................................................................................... 54
Ponzi Schemes of debt ......................................................................................................................................................................... 55
Going Ponzi .............................................................................................................................................................................................. 55
The Ponzi limit ........................................................................................................................................................................................ 57
The Fate of Ponzis ................................................................................................................................................................................. 58

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Home Financing Guide

Mortgage Basics
This is a very brief overview of some terms you will need to understand to get the most from this guide. If you are
familiar with basic mortgage terminology, you can skip this section.

WHAT'S A MORTGAGE?

Type of loan that is secured by real estate (i.e., the home you purchase). Unless you are paying cash for
the home, you'll need a mortgage.

You promise to pay back the lender (usually in monthly payments) in exchange for the money used to
purchase the home. If you stop paying, you'll go into default, which means you've failed to meet the
terms of the loan and the lender can take back the property (foreclosure).

WHAT'S INCLUDED IN MY MONTHLY PAYMENT?

Your mortgage payment typically includes PITI:

Principal What you borrowed (also referred to as "amount financed");

Interest What the lender charges you to borrow the money used to purchase or refinance the home;

Taxes What you pay in property taxes to your local city/municipality and sometimes county; and

Insurance What you pay to insure your home from damages (fire, natural disasters, etc.). There is also
Private Mortgage Insurance (PMI) which is usually required on most loans when your down payment is
less than 20%. PMI is paid monthly until you reach the 20% equity threshold.

NOTE: in some cases, your monthly payment might also include the fees paid to a homeowner's association on
your property (HOA fees).

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Home Financing Guide

WHAT IS AN ESCROW ACCOUNT?

Taxes and insurance are usually held in an escrow account and paid by the mortgage company when they are due
(a portion of your monthly payment goes to fund the escrow account). This can be beneficialespecially for first-
time buyers or buyers without significant savingsas you set aside a small amount each month instead of having a
large, semi-annual or annual out-of-pocket expense. But, it does increase your mortgage payment and reduce your
cash flow each month.

Some lenders require an escrow account and some let the homeowner pay their insurance and taxes directly.
Always check with your lender to see what's covered in your monthly payment.

Mortgage Process
Now that you've learned some basics, let's go through the steps of getting a mortgage.

STEP 1: DETERMINE YOUR BUDGET

Don't look for homes until you know what you can reasonably afford. Remember to not only factor in your
monthly mortgage payments, but also taxes, insurance, maintenance and any other monthly costs (car, student
loan, credit cards).

STEP 2: FIND A LENDER

Now that you have an idea of what you can spend, its time to find a lender. Unless you are paying cash for the
home, youll need to work with a lender to secure financing. And similar to the process of finding a real estate
professional, you should talk with a few lenders to find the best fit for your situation. Remember, while the
interest rate youll pay is a big factor, it shouldnt be the only factor. Also considerthe different types of loan
options available, their customer service, closing costs and other fees, etc. This is the largest financial investment
youll make, so shop around.
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