HOW TO BUY A HOME

Why Buy A Home?

Obstacles Of Home Ownership

Why Low Down Payment Loans Are Possible

The Secondary Market

Government Vs. Private Insurance

Qualifying For A Loan

Mortgage Affordability

Types Of Property

Initial Meeting With Lender

Key Factors In Qualification

Payment Table

Evaluating Your Financial Resources

WHY BUY A HOME?

If you're dreaming of buying a home, congratulations. You're in good company! Almost two-thirds of the nation's households own their own home.

The rewards of homeownership:

* personal satisfaction

* sense of community

* tax savings

* stability for you and your family

* investment in the future

Obstacles to Homeownership

Still, for many Americans, owning a home continues to remain just slightly out of reach. For more and more families, saving the money for a down payment is the biggest obstacle to homeownership. Many people mistakenly believe that you have to come up with a down payment equal to 20% of the price of a home.

WHY LOW DOWN PAYMENT LOANS ARE POSSIBLE

Simply put, mortgage insurance protects the mortgage lender against financial loss if a homeowner stops making mortgage payments. Lenders usually require insurance on low down payment loans for protection in the event that the homeowner fails to make his or her payments. When a homeowner fails to make the mortgage payments, a default occurs and the home goes into foreclosure. Both the homeowner and the mortgage insurer lose in a foreclosure. The homeowner loses the house and all of the money put into it. The mortgage insurer will then have to pay the lender's claim on the defaulted loan.

The Secondary Market

The lender's decision to use mortgage insurance is driven by the requirements of investors in the mortgage market. Because of the losses that could occur, major investors require mortgage insurance on all loans made with low down payments.

Government Insurance and Private Insurance

Now that we have explained how mortgage insurance works and why it is necessary, let's look at the basic kinds of mortgage insurance. Low down payment mortgages can be insured in two ways--through the government or through the private sector. Mortgages backed by the government are insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Farmers Home Administration (FmHA).

QUALIFYING FOR A LOW DOWN PAYMENT LOAN

Qualifying for a low down payment loan is much like applying for a regular loan.

To be considered for a low down payment loan, you generally need to have:

* sufficient income to support the monthly mortgage payment

* enough cash to cover the down payment

* sufficient cash to cover normal closing costs and related expenses (explained below)

* a good credit background that indicates your payment history or "willingness to pay"

* sufficient appraisal value, which shows the house is at least equal to the purchase price

* in some instances, a cash reserve equivalent to two monthly mortgage payments

So How Much of a Mortgage Can You Afford?

There are two basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

What Kind Of Property Can You Buy With A Low Down Payment Loan?

There are few restrictions regarding the type of home you may buy with a low down payment loan. In addition, low down payment loans may be used with the wide variety of mortgages.

Your Initial Meeting With a Lender

LOAN APPROVAL PROCESS

The loan approval process generally begins with an initial interview where the prospective home buyer and the lender meet to discuss the potential loan. You will need to bring information to verify your income and long-term debts.

For your first meeting with the lender, you should bring:

* A purchase contract for the house (if you have one)

* Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 2-3 months

* Pay stubs, W2 withholding forms, tax returns for two years, or other proof of employment and income verification

* Divorce settlement papers, if applicable

* Credit card bills for the past few billing periods, or canceled checks for rent or utility bill payments, to show payment history and amount of revolving debt

* Information on other consumer debt such as car loans, furniture loans, student loans and retail/credit cards

* Balance sheets and tax returns, if you are self- employed

* Any gift letters, if you are using a gift from a parent or relative or other organization to help pay the down payment and/or closing costs. This letter simply states that the money is in fact a gift and will not have to be repaid.