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AGENDA

 Benefits of Owning a Home

 Credit Fundamentals
 Mortgage Basics
 Looking for a Home and Calculating Affordability
 Obtaining a Mortgage/Comparing Finance Options
 Loan Approval Phase
 Preparing for Closing
 Maintaining Homeownership

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BENEFITS OF OWNING A HOME

Benefits of Homeownership: Powerful Source of Wealth

Tax Deductions
 Mortgage interest and property tax payments may be included as itemized
deductions on federal and/or state income taxes. Consult with your tax advisor.
 Mortgage Insurance (MI) premiums may be tax deductible. Consult your tax
advisor.
The Power of Amortization
 Making each monthly payment reduces the loan balance, increasing your
equity in the property.
Appreciation
 As your property value increase, this provides another powerful long-term
wealth accumulation vehicle for your family’s financial security.
Personalization
 Personalize your property and its decor, as you see fit.
Inheritance
 You own something tangible that can be left to your heirs to help
establish their financial security.

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BENEFITS OF OWNING A HOME

Key Areas to Consider:

Requirements
 Buying a home requires significant upfront cash. These expenses typically include a down
payment, closing costs and reserves.
Increase in Expenses
 You will need to budget for maintenance/upkeep, property taxes, insurance and homeowner
association (HOA) fees (if you are moving into a community that requires these).
Property Function
 Your property value may fluctuate, so it is important to stay focused on the long-term benefits
of home ownership.
Limited Flexibility
 Can limit flexibility to relocate for a job or change neighborhoods.
Limited Budget
 May require you to more closely follow a budget.

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CREDIT FUNDAMENTALS

Credit Scores
Credit bureaus provide lenders your credit scores based on payment patterns and the
nature of your credit use.

A credit score is calculated based on:

 Your previous credit performance.
 Current debt levels.
 The depth of your credit file: How far back your credit
history runs and whether there is sufficient information
to ascertain payment patterns.
 Whether you have recently added new debt.
 The type and frequency of debts you take on.

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CREDIT FUNDAMENTALS

How to Improve or Protect Your Credit Profile:

 Pay your bills on time and include at least the minimum amount due.
 Don’t “max out” your credit cards.
 Limit the number of credit cards you have.
 Avoid impulse buying on major purchases.
 You are responsible for all joint accounts opened with another individual and for all
loans on which you’re the co-signer.
- Co-signing a loan is generally not a good idea. If an individual requires a co-signer, it’s likely
an indication that he or she can’t afford the loan.
 Review your credit report at least once each year. Get reports from several major
credit agencies.
 Treat student loans like any other debt and pay on time.

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MORTGAGE BASICS

Length/Term of the Mortgage

 The period of time during which you pay back the loan will also determine the amount of
your payment. The longer the term of the loan, the lower the mortgage payments. For
that reason, many first-time homebuyers prefer a 30-year loan. However, rates for shorter
terms (including 15-year loans) are generally lower and build equity faster.
Components of a Mortgage Payment: PITIA
 P stands for Principal or the amount you borrowed.
 I stands for Interest.
- Lenders charge interest on the money you are borrowing. The interest generally reflects
prevailing market rates based on investor demands.
 T is for Taxes.
- Property Taxes.
 I (Final I) represents Insurance.
- Homeowners insurance premiums (hazard insurance) is mandatory.
 A stands for Association, as in homeowner association.
- For some residential properties, HOA dues are required.

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MORTGAGE BASICS

Fixed Rate vs. Adjustable Rate

 With a fixed-rate loan, the interest rate charged by the lender never changes over the life of
the loan. That means the P (principal) and I (interest rate) portion of your PITIA payment
will not change. However, the T (taxes) and I (insurance) portions may change if your taxes
or insurance premium change. Many people prefer the stability of a fixed-rate loan.
 With an adjustable-rate loan, the interest rate can increase or decrease. There are a large
variety of adjustable-rate mortgages (ARMs).
Government Loans vs. Conventional Loans
 Government loans include VA loans guaranteed by the Veterans Administration, FHA
(Federal Housing Administration) loans administered by the U.S. Department of Housing
and Urban Development (HUD) and USDA Rural Loans insured by the Department of
Agriculture.
 If a loan is not insured or guaranteed by a government agency, it is considered to be a
conventional loan. These loans are often purchased by Fannie Mae and Freddie Mac,
although this purchase is typically invisible to the borrower. If you have less than a 20%
down payment, you will likely need private Ml. The advantage of Ml is that you need less
upfront cash and can buy your home sooner.

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LOOKING FOR A HOME AND CALCULATING
HOW MUCH YOU CAN AFFORD TO BORROW

Beginning to look for a Home:

Getting Pre-Qualified
archmi.com/rtho_worksheets
Refer to Worksheet No. 3 for an approximate calculation of your maximum mortgage
amount and monthly payment.

Selecting an Agent
archmi.com/rtho_addendum
archmi.com/rtho_resources
For further information, consult the Addendum: Shopping for Your Home packet.

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LOOKING FOR A HOME AND CALCULATING
HOW MUCH YOU CAN AFFORD TO BORROW

A lender considers the following factors in deciding what you can afford:
 Income and employment.
archmi.com/rtho_worksheets
See Worksheet No. 1 to calculate Gross Monthly Income.
 Other debts (for example, car and student loans, credit cards, etc.).
 Debt-to-Income Ratio.
archmi.com/rtho_worksheets
Refer to Worksheet No. 2 to calculate
Monthly Debt Payments.
 Down payment.
 Cash available after closing (reserves).
 Type of mortgage product.
 Interest rate of the mortgage.
 Length or term of the mortgage.
 Credit history.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

Applying for a Mortgage:

Checklist of documents the lender will typically ask for:
archmi.com/rtho_worksheets
Refer to Worksheet No. 4.

Mortgage Brokers/Bankers
 Mortgage brokers are licensed originators representing multiple lenders who work as
intermediaries to secure a mortgage for a borrower.
 Mortgage bankers originate and fund the loan with the funds of the lender they work
for, but immediately sells the loan to another lender, an investor, or directly to Fannie
Mae or Freddie Mac.
 Consider and compare potential fees that will be charged up front and at closing.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

Comparing Products (Part 1)

Rates
 Lock-in option preferable. Generally, the longer the loan period, the higher your interest rate.
Term
 The longer the term, the lower the monthly payment. However the equity buildup is slower as
well.
ARMs
 Carefully consider your ability to absorb higher payments if the rate increases.
Points
 Discount points represent the upfront payment of interest to the lender. The lower the interest
rate, the higher the discount points and vice versa. Each point is 1% of the loan amount.
 Origination points are charged to offset the administrative cost of processing and originating
your loan. They can also include a document preparation or underwriting fee.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

Comparing Products (Part 2)

Down Payment
 What is the minimum down payment
required? Will MI be required? If so, what is
the cancellation policy on the insurance
premium?
archmi.com/rtho_worksheets
Refer to Worksheet No. 4 for a list of
factors to consider when shopping for a
mortgage.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

FHA vs. Conventional:

FHA loans are guaranteed by the Federal Housing Administration and extend credit to
homeowners, particularly those who have limited down payment funds and lower credit scores.
Conventional loans are typically guaranteed or insured (when required) by private mortgage
insurers such as Arch Ml. Conventional loans are purchased by Fannie Mae or Freddie Mac.
Conventional Loans FHA Loans
 Generally require a 5% down payment, with  Require a 3.5% down payment, and most
certain programs allowing as little as 3% down. borrowers have an FHA insurance premium
 If MI is required, private Ml companies offer payment for the life of the loan. Additionally, FHA
cancelable and flexible monthly or single premium loans have both an upfront payment (which may be
options. financed into the loan amount) and monthly
 Private Ml on a conventional loan is typically less premium payments.
expensive than the Ml on a FHA loan.  Lower maximum loan limits may be imposed
 Typically, a minimum credit score of 620 is (compared to conventional).
required.  May allow lower minimum required credit score.
 Often have quicker processing time than FHA
loans.
 Generally have a lower loan-to-value (LTV) ratio
than FHA loans.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

What is MI and why is it of value to you? (Part 1)

 If you have a down payment of less than 20% (of the home's value) on a conventional
loan, you will probably be required to have MI.
 The function of private MI is to protect the lender or investor from losses incurred in
the event of foreclosure.
 Enables the borrower to purchase a home sooner, and with less upfront cash.
 Typically, you'll pay the MI premium to the lender, along with your monthly mortgage
payment.
 Unlike an FHA-insured loan, with a conventional loan you may request that your
private MI be canceled, so long as you have a good payment record and have paid off
20% of the original loan amount, or your property has appreciated (as documented
by the lender's appraisal). The cancellation occurs automatically when you have paid
off 22% of the original loan amount and payments are current.

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OBTAINING A MORTGAGE AND
COMPARING FINANCING OPTIONS

What is MI and why is it of value

to you? (Part 2)
 Piggybacks
(Purchase Money Seconds).
- Second loan that takes the place of
a portion of your down payment,
requiring you to make payments on
two loans.
- Although terms may vary by lender,
they're generally initially interest-
only, with rates adjusting monthly.
- Introductory rate may generate a
payment that is lower than a
conventional single insured loan,
but the payment can increase as
rates rise.

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LOAN APPROVAL PHASE

Lender Evaluates Mortgage Loan Application:

The following four Cs are examined in underwriting a loan
application:
 Collateral.
- Requires property appraisal. Determines whether the loan
amount is supported by property value.
 Capacity.
- Ability to repay the mortgage along with other debts.
 Credit.
- Credit history shows your willingness to repay.
 Capital.
- Down payment and closing or settlement costs
demonstrate your ability to save.

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LOAN APPROVAL PHASE

Lender Disclosures
Under the Consumer Financial Protection Bureau's (CFPB) new "Know Before You Owe
Rules," you are considered to have completed a loan application when you provide your
lender with the following six pieces of information:
1) Your name. 2) Your income. 3) Your Social Security Number. 4) Your property address.
5) Estimate of property value. 6) Loan amount.
Once you've submitted these six pieces of information, your lender is required to send you the
following disclosures within three business days:
 The Loan Estimate, which lists the charges you are likely to pay at settlement and helps
you understand the full cost of the mortgage, including fees and interest. This form shows
the amount being borrowed, the interest rate being assigned to the loan and whether
there are prepayment penalties. This form has been in use since Oct. 1, 2015, and
replaced the older Truth in Lending Statement and the Good Faith Estimate.
 A special information booklet called the “Home Loan Toolkit,” published by the CFPB,
which informs consumers of the steps they need to take to get the best mortgage for their
individual situation, explains their closing costs and what it takes to buy a home. It also
offers tips on how to be a successful homeowner.

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LOAN APPROVAL PHASE

Communication from your lender: The final decision will be forwarded

to you:
 Loan application may be approved with conditions that must be met prior to .
 Loan application may be declined. With a denial, you may consider immediate steps
or longer-term strategies.

Contingencies: Meet any contingencies spelled out in the sales contract for
the home:
 Home inspection and other inspections, such as pest or termite.

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PREPARING FOR CLOSING

Obtain Hazard Insurance (well before closing)

 If you are purchasing a single-family residence, your
lender will require you to obtain hazard insurance
for the replacement value of the property. If you are
buying a condo or townhouse, get a copy of the
umbrella insurance policy from the HOA. You will
likely also be required to purchase insurance
coverage protecting the interior, including contents.
 Certain hazards are not covered in a standard policy
(flood, earthquake), and you may be required to
purchase additional insurance.
 Borrowers should obtain more information
regarding specific insurance requirements
from their lender.

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PREPARING FOR CLOSING

Prior to Closing: Review Closing Disclosure

 The “Know Before You Owe” rules require your lender to send you a form called a Closing
Disclosure at least three business days before your loan closes. The Closing Disclosure lists
your final mortgage costs in the same format as the Loan Estimate. You should compare
your Loan Estimate to the Closing Disclosure and make sure that you understand the
reason for any differences. Be sure to keep a copy of your Closing Disclosure; because
some of the closing costs may be tax-deductible.
Closing Agent or Settlement Attorney
 Generally, these important closing functions are performed by a title or escrow company.
In certain regions of the country, specially trained closing attorneys deal with this task.
Title Insurance
 Your lender will recommend a title insurance provider, but you have the option to choose
for yourself and decide on coverage options. Title insurance policies protect both you
and the financial institution against losses resulting from certain claims, such as others
claiming ownership to the property or undisclosed liens against the property.
 A title insurance company will research public records to ensure that the seller holds
legal title to the property and that there are no undisclosed liens or past due taxes.

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MAINTAINING HOMEOWNERSHIP

Mortgage Payment
 Confirm the amount, due date and method of payment (such as direct debit from
your checking account).
Other Monthly Housing-Related Fees
 Condos, townhouses and co-ops may also have monthly association fees.
Prepaying Your Mortgage
 Consider making additional principal payments to speed your equity
build-up.
Transfer of Servicing
 If loan is transferred to another servicer, ensure payments are sent to the correct
entity.

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MAINTAINING HOMEOWNERSHIP

Consider an Impound Account

 Impound accounts exist for the purpose of collecting taxes and insurance so that your
lender can remit these funds on your behalf.
 Impound accounts are called escrow accounts in some parts of the country.
 Ensure property taxes and insurance payments are paid current and no negative
balance exists in your impound account. Adjustments to taxes and insurance
payments may occur when the value of your property increases and will be reflected
in your monthly payment if you have an impound account.
Preparing your Federal Tax Submission
 Your mortgage servicer will send a Form 1099 early in the year (generally by Jan. 31).
You may be able to deduct your mortgage interest and property taxes plus some of
your closing costs. Consult a professional tax advisor for more information.

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MAINTAINING HOMEOWNERSHIP:
STAY CURRENT ON YOUR MORTGAGE

Financial Emergency
 Always have a savings cushion.
 Consider alternate sources of funds for mortgage payment.
 Contact a credit counselor at your local Consumer Credit Counseling Services (CCCS).
Contact your Servicer if you are going to be late or miss a payment.
Alternatives to Foreclosure
 Some of the options your servicer may present, depending on your financial
circumstance, include:
- Forbearance.
- Loan modification.
- Assumption.
- Preforeclosure sale.
- Deed-in-lieu of foreclosure.
archmi.com/rtho_glossary
Please refer to the Glossary for a more in-depth definition of these terms.

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THANK YOU

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