Before setting out to choose a final house plan or buy land to build your new home on, a smart step is to get pre-qualified and pre-approved for a loan. You will want to know how much home you can afford before falling in love with a house that is out of your family's budget. Pre-qualifying will also help you in the following ways:

• Typically, interest rates are locked in for a set period of time so that you will know in advance exactly what your payments will be at varying home price levels.
• A seller is more likely to make concessions because they know your financing is secured. This makes your offer more competitive.
• You can select the best loan package without being under pressure, as you have already completed the preliminary steps of the lending process.

You can now more easily determine how much home you can afford. There are three key factors to consider:

• The amount of down payment you are able to bring to the table. Most loans today require a down payment of between 3.5% and 5.0%, depending on the type and terms of the loan. If you are able to come up with a 20-25% down payment, you may be eligible to take advantage of special fast-track programs and eliminate mortgage insurance.
• The closing costs associated with your transaction. You will be required to pay fees for loan processing, closing attorney services and other closing costs. These fees must be paid in full at the final settlement, unless you are able to include them in your financing. Typically, total closing costs will range between 2-5% of your mortgage loan.
• Your ability to qualify for the mortgage. Most lenders require that your monthly payment range between 25-28% of your gross monthly income. Your mortgage payment to the lender includes the following items:
• Principal on the loan (P)
• Interest on the loan (I)
• Property taxes (T)
• Homeowner's insurance (I)
• Your monthly PITI and all debts (from installments to revolving charge accounts) should range between 33-38% of your gross monthly income.

Shop around and choose a lending institution you feel comfortable with, as they are privy to your entire financial history, they are establishing the terms of your loan, and ultimately are providing you with the financing to make one of the most significant purchases of your life. You may be more comfortable working with a large, national banking institution for a greater feeling of stability, or you might choose to work with a local community bank that will provide more personalized, one-on-one service. Whatever lending institution you choose to work with, it is wise to do a bit of background research on the bank and compare their mortgage interest rates with the national average.

After beginning the financing process, DO NOT do anything that will significantly change your financial status within the next few months, including change jobs, buy a car or make any other significant purchase, excessively use credit cards, make large deposits to your bank accounts, change bank accounts, and most importantly do not spend money you have set aside for closing!

Conventional vs. FHA Loans

When procuring financing for a new home you will have a myriad of financing options, but they will essentially boil down to two typical mortgage types, Conventional and FHA loans. Both have their benefits and drawbacks, so discuss your options thoroughly with your mortgage lender. FHA loans are government-backed loans that provide backing to lenders in the event the borrower defaults on the loan, although they do not actually lend money. A conventional loan is one that is not insured by a government agency and therefore the lender bears more risk and generally has higher standards for qualification. The following is a breakdown of the major differences between Conventional and FHA loans.

Conventional

• Minimum 5% down payment
• Closing costs vary greatly
• Cost of Private Mortgage Insurance varies greatly
• Buyer should have a credit score of 620 or higher
• Fewer bureaucratic hurdles
• Buyers build equity faster, as they must make a larger down payment
• Higher loan limits

FHA

• Minimum 3.5% down payment
• Closing costs low and regulated by The Department of Housing and Urban Development (HUD)
• Low-cost Private Mortgage Insurance
• No credit score requirements
• Originally created to help first-time buyers, although others may qualify
• Homeowner may not have more than one FHA-insured loan at a time
• Stricter standards such as requiring a termite report and mandatory home inspection
• Lower loan limits

The Real Estate Closing Process

• The "closing" is where the buyer and buyer's real estate agent meet with some or all of the following: the seller, the seller's real estate agent, a representative from the lending institution and a representative from the title company, in order to transfer the property title to you, the new buyer.
• The Purchase Agreement or Contract that was initially signed by both the buyer and seller describes the property, states the purchase price and terms, sets forth the method of payment, and names the date and place where the closing or actual transfer of the property title and keys will occur.
• If financing the property, the lender will require you to sign a document, usually a promissory note, as evidence that you are personally responsible for repaying the loan. You will also sign a mortgage or deed of trust on the property as security to the lender for the loan. The mortgage or deed of trust gives the lender the right to sell the property if you fail to make the payments. Before exchange of these papers, the property may be surveyed, appraised and inspected, and the ownership of title will be checked in county and court records.
• At closing, you will be required to pay all fees and closing costs in the form of "guaranteed funds" such as a wire or cashier's check. Your real estate agent or escrow officer will notify you of the exact amount at closing.

What Is an Escrow Account?

An escrow account is a neutral depository held by your lender for funds that will be used to pay expenses incurred by the property, such as taxes, assessments, property insurance, or mortgage insurance premiums which fall due in the future. You will pay one-twelfth of the annual amount of these bills each month with your regular mortgage payment. When the bills fall due the lender pays them from the escrow account. At closing, it may be necessary to pay enough into the account to cover these amounts for several months so that funds will be available to pay the bills as they fall due.

Glossary of Basic Real Estate Terms

Appraisal: An estimate of real estate value, usually issued to standards of FHA, VA, and FHMA. Recent comparable sales in the neighborhood are the most important factor in determining value. This should be contrasted against the home inspection.

Settlement Statement (HUD1): A financial statement rendered to the buyer and seller at the time of transfer of ownership, giving an account of all funds received or expended.

Deed: Written instrument, which when properly executed and delivered, conveys title to real property.

Escrow Payment: That portion of a mortgagor's monthly payment held in trust by the lender to pay for taxes, hazard insurance, mortgage insurance, lease payments and other items as they become due.

Mortgage Insurance Premium (MIP): The amount paid by a mortgagor for mortgage insurance. This insurance protects the investor from possible loss in the event of a borrower's default on a loan.

Settlement: An Escrow Officer oversees the closing of the transaction: seller signs the deed, buyer signs a new mortgage, the old loan is paid off and the new loan is established. The seller, Realtors, attorneys, surveyors, title company, and other service providers for the parties are paid. Title insurance policies will then be issued to the buyer and lender.

Title Insurance: An insurance policy which protects the insured (purchaser and lender) against loss arising from defects in the title. There are two types of title insurance:

• Coverage that protects the lender for the amount of the mortgage.
• Coverage that protects the buyer's equity in the property.

Both the buyer and lender will want the security offered by title insurance. Title agents search public records to determine who has owned a piece of property, but these records may not reflect irregularities that are almost impossible to find. Here are some examples: an unauthorized seller forges the deed to the property; an unknown, but rightful heir to the property shows up after the sale to claim ownership; conflicts arise over a will from a deceased owner; or a land survey showing the boundaries of your property is incorrect. For a one-time charge at closing, title insurance will safeguard you against problems including those events that an exhaustive search will not reveal.

Title Search: Copies of documents are gathered from various public records: deeds, deeds of trust, various assessments and matters of probate, heirship, divorce, and bankruptcy are addressed.