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What about an all-cash offer?

Although most home buyers could never buy a property with all cash, anyone considering such a move (or who has bought a lottery ticket lately) may be wondering how to approach such a deal.

Because buyers sidestep the tedious and time-consuming loan qualification process, the deal can close very quickly. In addition to fewer hassles and a better position in price negotiations, the all-cash buyer's primary advantage is completely avoiding mortgage interest, which can total hundreds of thousands of dollars over the life of the loan. Buyers also save money that would be spent on loan origination fees, required appraisal, some closing costs and various other charges imposed by the lender.

At the same time, all-cash buyers should consider potential pitfalls of the transaction. Buyers who want to use the home as their primary residence lose out on many of the tax advantages available to homeowners with conventional loans, since the IRS allows home owners to deduct all mortgage interest on loans up to $1 million.

If you can afford to pay cash but are concerned about price appreciation, you may be better off obtaining some financing. Also, look at other which investments are paying off and determine if spending cash on a home is worthwhile.

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What are the risks of "b" and "c" loans?

The major risk is the cost of the loan. Desperate home buyers who are not selective when seeking an "A-," "B," "C" or "D" loan may find themselves locked into long-term loans with outrageous fees and interest rates. "Watch out how costly they are," said Jon Riccardi, a mortgage broker with MPR Financial in Albany, Calif. "Some of the quotes are a little difficult to quote."

Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's record.

In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent.

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The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many home buyers engaged in this process look at these less desirable loans as a penalty while others are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms. "The goal of these loans is to pay them off quickly," Riccardi said. "What I've seen is, people don't investigate these loans enough and when they try to get out of it, realize what they got into."

Resource: "How to Shop For a Mortgage," a brochure available from the Mortgage Bankers Association of America, 1919 Pennsylvania Ave. N.W., Washington, DC 20006-3404; call (202) 557-2700; mbaa.org.

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What is a wrap-around loan?

"This method of seller financing is risky if the underlying first loan has a "due on sale" clause because the loan might be called due when the first lender becomes aware that the property has transferred title," says Dian Hymer, author of "Buying and Selling a Home, A Complete Guide," Chronicle Books, 1994.

A seller usually will want to incorporate a late charge to encourage the buyer to make monthly loan payments on time. "A buyer will probably want to stipulate that prepayment of the loan be without penalty. This should not cause a problem unless the loan payments are a source of retirement income, in which case early prepayment could have negative financial repercussions for the seller...

"Most sellers prefer to have a due-on-sale provision included in the note, but this can be a negotiable item. Buyers who are concerned that they might be forced to sell during a period of high interest rates can request that the note be assumable by a future buyer, and sellers might find this provision agreeable as long as they have the right to approve the future buyer's credit report and financial statement," Hymer writes.

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Are FHA loans assumable?

Lenders will only permit those loans that have a "subject to transfer" clause to be taken over through a formal assumption process. Look to your loan agreement for specific terms. In addition, you should candidly discuss any risks with your lender, and possibly consult an attorney before signing the final agreement.

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How do you find out if a loan is assumable?

Look to the loan agreement to determine if it is assumable by someone else. Then talk to the lender about specific requirements based on the value of the home.

Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages.

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What are no-doc loans?

"No-doc" loans are mortgages for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more.

These mortgages are common among self-employed people who say they earn a certain amount of money but whose tax returns show that their earnings are much lower.

Resources:

* "How to Shop for a Mortgage," Mortgage Bankers Association of America, 1919 Pennsylvania Ave. N.W., Washington, DC 20006-3404; call (202) 557-2700; mbaa.org.

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Can someone who is unemployed get a loan?

Generally, lenders will not make loans to unemployed persons because someone without an income would seemingly have no way of making monthly mortgage payments.

However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower.

Borrowers should check directly with lenders when seeking a no-doc loan. If specific lenders do not offer them, ask for a referral.

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What about a 15-year v. 30 year loan?

The difference in payments and overall savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an example, monthly payments on the 15-year note would be $912.86. Monthly payments on a $100,000 loan at 7.25% fixed for 30 years would be $682.18.

The 15-year note offers the opportunity to save considerable money over the life of the loan, since the period of amortization is half that of the 30-year note. This means that the total interest paid on a 15-year note as compared to a 30-year note is significantly less.

However, calculating the overall savings of the 15-year note over the 30-year note depends on several individual circumstances, such as the borrower's changing income status.

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Are 40-year mortgages a good idea?

Smaller monthly payments are the primary advantage of adding 10 years to the traditional 30-year mortgage, but real estate experts say the shorter-term loan usually is more beneficial for the home buyer. The drawback becomes apparent simply by calculating the cost of additional interest payments, which can total thousands for a few dollars difference in mortgage payments.

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What about splitting my mortgage in two and paying bi-weekly?

Some people set on paying off their home loan early and reducing interest charges opt for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks.

Because there are 52 weeks in a year, the program results in 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could save $60,000 in interest and pay off the balance in less than 21 years.

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What about these ads for no-cost loans?

In many states, real estate regulatory agencies are cracking down on such advertising. The very term, "no-cost" loan, is misleading because borrowers are actually paying a higher interest rate in exchange for not having to pay fees or closing costs up front when the loan is secured.

A "no-points" loan is one for which the lender does not charge points (one point is equal to 1 percent of the loan amount). But there are other fees involved in no-point loans, as with most loans.

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Is there such a thing as a no-cost or no-fee loan?

Not really. While some lenders occasionally promote "no-cost" loans, banking regulators have cracked down on these misrepresentations. Advertised "no-fee" loans may actually cost the borrower more over the long term because these costs are often rolled into the new note through higher interest or more principal.

A typical no-fee loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.

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Are there low-down-payment home loans?

A host of private lenders offer low-down-payment loans. In addition, there are government programs to help cash-strapped buyers.

The U.S. Department of Housing and Urban Development offers a variety of programs through the Federal Housing Administration that require approximately 4 to 5 percent cash down. Loan limits vary depending on the county where the property is located.
Fannie Mae's Community Home Buyers program allows people to buy with just 3 percent down. For details, contact lenders who offer government-insured loans. In addition to calling lenders for information, call Fannie Mae at (800) 732-6643; fanniemae.com.

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Can I get a HUD home for as little as $100 down?

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down.

With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower.
Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.

The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.
If you are interested in purchasing a VA foreclosure, call (800) 827-1000 or visit foreclosurefreesearch.com for a current listing. About 100 new properties are listed every two weeks.
You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

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How can Fannie Mae help a home buyer?

Fannie Mae's Community Home Buyers Program allows first-time buyers with little cash to obtain 95 percent financing. Participants may put down as little as 3 percent of their own money, with the remainder permitted in the form of a gift from family members, a government program or nonprofit agency. Mortgage insurance is required on all loans above 80 percent loan-to-value ratio when borrowers do not use their own funds for at least 5 percent down.

The program is administered through participating lenders. There are income limits in different states. However, the income restriction is waived when borrowers participate in the Fannie Neighbors program. Fannie Neighbors also has lower income requirements for borrowers who want to buy in designated central cities.

People who are borrowing in either of these programs must attend a seminar on home ownership and the home buying process.

For a list of participating lenders, call Fannie Mae at (800) 732-6643; fanniemae.com.

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Do states offer help to home buyers?

Most states have a housing finance agency, usually located in the state capital, which offers help for first-time home buyers.

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Are there no-down payment home loans?

Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. Occasionally, a builder will offer no-down-payment loans to induce sales in an otherwise slow-moving project. Desperate sellers will also promise to finance the down payment to get out from under a property. A veteran can buy a house with nothing down through a VA home loan, as can members of some pension funds.

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What about nothing down?

Though some real estate experts advise against it, home buyers interested in buying a house with nothing down can do so. But it's not easy finding these loans and in some cases they can be risky. Occasionally, a builder will offer no-down loans to induce sales in an otherwise slow-moving project. Desperate sellers also may agree to finance the full purchase price to get out from under a property. The Department of Veterans Affairs, or VA, loan program is one program that allows buyers to qualify for a no-down loan.

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Is equity sharing a good idea?

Equity sharing is not as popular in a slowly appreciating real estate market as in a rapidly appreciating one (when equity investors are easy to find).

Nevertheless, a form of equity sharing called tenants-in-common partnerships is becoming more popular, particularly in high-priced markets. First-time buyers are the most interested in TIC arrangements because it gives them a way to buy property collectively with an unrelated partner.

Loan underwriting standards are more complicated in TIC deals because lenders have more than one party's financial situation to assess. But many standard loan programs do apply.

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What are the benefits of seller financing?

Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans.
If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?

You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.

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How are the rates set for seller financing?

The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.

Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.

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What is seller financing?

Seller financing is when a seller helps to finance a real estate transaction by taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.

Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.

The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.

If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.

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Where do I get information on finding the best loan?

For information on how to find the best home loan for you, check out this booklet:

* "How to Shop for a Mortgage," by the Mortgage Bankers Association of America, 1919 Pennsylvania Ave. N.W., Washington, DC 20006-3404; call (202) 557-2700; mbaa.org.

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Where do I get information on mortgages?

For information on mortgages, check out the following sources for information:

* American Bankers Association; 1120 Connecticut Ave. N.W., Washington, DC 20036; (800) BANKERS; aba.com.

* Mortgage Bankers Association of America, 1919 Pennsylvania Ave. N.W., Washington, DC 20006-3404; call (202) 557-2700; mbaa.org.

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Where do I get information on correcting loan payments?

The following auditing services can do a thorough review of residential mortgages for lender calculation errors:

* Mortgage Monitor, 1100 Summer Street, Samford, 06905; (203) 973-0288; mortgagemonitor.com.

* Loantech, Box 3635, Gaithersburg, MD 20885; (301) 762-7700; loantech.com.

But keep in mind that these services come with a fee, and your lender should be able to work with you to make your own accurate calculation.

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Where do I get information on PMI?

Look for tips in "A Mortgage Insurance Guidebook," or "How to Buy a Home with a Low Down Payment," available at the Federal Citizen Information Center.

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Where can I get a list of mortgage brokers?

For information on mortgage brokers, contact the National Association of Mortgage Brokers 8201 Greensboro Dr., Ste. 300, McLean, VA 22102; (703) 610-9009; namb.org.

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How do I monitor my ARM loan?

Consumer Loan Advocates publishes a book with form letters and worksheets to help people who want to check mortgage payments or adjustments on their own. It costs $19.95 plus $4 shipping and handling. For a copy, write or call Consumer Loan Advocates, 655 Rockland Road, Lake Bluff, IL 60044; (847) 615-0024.

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Are there low-down-payment home loans?

A host of private lenders offer low-down-payment loans. In addition, there are government programs to help cash-strapped buyers.

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Do I have to disclose a parent's gift?

Having generous parents is nothing to hide. An estimated one-third of first-time buyers purchase their home with a loan or a money gift from their parents.

Lenders will ask for a gift letter stating that no repayment of the "gift" is expected. In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.

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How do some of these low-down programs work?

Most of the private and government low-down loan programs have special requirements. These rules range from requiring borrowers to be first-time home buyers to limits on family income.

In general, cities and counties require that borrowers earn no more than 100 percent to 120 percent of the county's average household income. However, some programs such as the Federal Housing Administration have no income restrictions and do not require the borrower to be a first-time buyer.

Many private low-down loan programs insist borrowers have good credit and also that they obtain private mortgage insurance, which is a small monthly insurance payment that insures the lender against default. Some of the city and county programs are available only in targeted neighborhoods where local leaders are trying to spark reinvestment or increase the homeownership rate.

Resources:

* "Unlocking the Doors to Homeownership," Freddie Mac publication 183; call (800) FREDDIE; freddiemac.com

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Should I put more or less down, if we can afford it?

Putting down as little as possible allows buyers to take full advantage of the tax benefits of home ownership, many experts say. Mortgage interest and property taxes are fully deductible from state and federal income taxes. Buyers using a small down payment also have a reserve for making unexpected improvements.

Other real estate experts, however, advise that it is more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed.

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Who do I call for a low-down-payment loan?

Here are several popular programs available to home buyers, along with the appropriate telephone numbers for more information:

*The Federal Housing Administration has programs which require as little as 3 or 4 percent cash down. FHA loans are originated and serviced by private lenders. Check with local lenders to find the best source for your loan.

* Veterans (and reservists) who qualify can buy a home with no money down through the U.S. Department of Veterans Affairs. Call (800) 827-1000 to find out more.

* Both the VA and FHA offer foreclosure properties for sale, some requiring as little as $100 down. Anyone interested in a VA foreclosure can call the VA Benefits number (800) 827-1000 to request a current listing. For FHA-insured properties, call your local U.S. Housing and Urban Development office.

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What is a low down payment?

A low down payment is anything less than the standard 20 percent. Many people borrow with less than 20 percent down by obtaining private mortgage insurance, or PMI. There also are numerous programs to help first-time buyers with little or no down payment, including FHA, VA and Fannie Mae's Community Home Buyers Program.

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Are there alternatives to low-down-payment loans?

There are a variety of alternative financing arrangements such as equity sharing, employer housing assistance, seller-financing and lease options that may reduce the size of the down payment.

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What is Fannie Mae's low-down program?

Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage.

Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.

To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae's Community Home Buyers Program.

Fannie Mae's new Start-Up Mortgage will assist buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan.
Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.

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Is PMI always required on low-down home loans?

A growing number of private lenders are loosening up their requirements for low-down-payment loans. But private mortgage insurance, or PMI, usually is required on loans with less than a 20 percent downpayment. The Homeowners Protection Act states PMI must be dropped on any loan originated after July 29, 1999 IF it has a 78 percent loan-to-value ratio.

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Who do I call for a low-down-payment loan?

Fannie Mae helps buyers who can put down as little as 3 percent of their own money. To see if this can work for you, call (800) 732-6643.

* Many cities and counties offer special housing loans in order to promote the benefits of home ownership in their communities. To find out what funds may be available to you, inquire at your local housing department.

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How do you clear up bad credit?

There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual's credit record from 7 to 10 years. Now, many states have specific timeframes if you challenge a credit blemish.

The first step is to check your existing credit record. Anyone can obtain copies of their own credit report free of charge if they have been turned down for credit recently. For a fee, people can request copies of their own credit report from the three major credit reporting agencies: Experian at (888) 397-3742 experian.com, Equifax at (800) 685-1111 equifax.com and Trans Union at (312) 408-1077 transunion.com. The bureau also should provide instructions on how to read the report and how to dispute any inaccuracies it contains.

If the credit report is correct, take care of any outstanding delinquent obligations first.

Resources: * "Clean Up Your Credit File," Nolo Press, Berkeley, Calif.; 2001.

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What options are there after Chapter 11?

A previous bankruptcy can remain in a credit file for seven to 10 years.
Depending on when the bankruptcy was discharged and what kind of credit a borrower has reestablished since then, it needn't be an obstacle to obtaining loan approval. The longer ago the discharge occurred, the better off a loan applicant will be.

Many lenders also will take into account the circumstances surrounding a bankruptcy. For example, they may look more favorably upon you as a borrower if your bankruptcy was due to financial reverses you suffered due to your employer's own financial difficulties. On the other hand, if you declared bankruptcy because you overextended your personal credit lines and lived beyond your means, a lender probably won't be as forgiving.

If you are in the latter category, you may want to contact a mortgage broker who may qualify them for a "b" or "c ," loan, which usually comes at a higher interest rate.

Resources:

* "Clean Up Your Credit File," Nolo Press, Berkeley, Calif.; 2001.

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How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies and foreclosures can remain on a credit report for seven to 10 years.

Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

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What can I do if I have bad credit?

While some people have rebounded from a foreclosure to buy another home within several years, credit problems stemming from a foreclosure can continue much longer for others.

Real estate experts say you should be candid with your lender in discussing these issues. If your bankruptcy resulted from losing your job due to your employer's financial difficulties, a lender probably will look upon your situation more favorably than if your bankruptcy was caused by overextended credit cards.

Resources:

*"Clean Up Your Credit File," Nolo Press, Berkeley, Calif.; 2001.

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What exactly is bad credit?

There are numerous types of credit report problems that would cause a lender to reject your application for a loan.

Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.

If you feel that your credit report is wrong, experts say it's best to take it up with the organization or company claiming you owe them money.
But if you've been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.

You can order a copy of your own credit report by contacting the three major credit reporting agencies: Experian at (888) 397-3742 experian.com, Equifax at (800) 685-1111 equifax.com and Trans Union at (312) 408-1077 transunion.com.

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What if there is a credit reporting mistake on my report?

There is no fast and easy way to repair damaged credit that took months or years to occur. The law allows negative information to appear on an individual's credit record from seven to 10 years.

Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. Some states now have mandatory timelines to respond to your inquiry or remove the blemish. For a copy of your report, contact one of the three major credit reporting agencies: Experian at (888) 397-3742 experian.com, Equifax at (800) 685-1111 equifax.com and Trans Union at (312) 408-1077 transunion.com.

The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains.

If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won't consider any borrower who has had a delinquent payment in the past year.

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Will bad credit prevent someone from getting a home?

There are numerous types of credit report problems (which may or may not be your fault) that would cause a lender to reject your application for a loan.
Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.

You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian at (888) 397-3742 experian.com, Equifax at (800) 685-1111 equifax.com and Trans Union at (312) 408-1077 transunion.com.

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How do I find out what my credit report says?

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Where do I get a copy of my credit report?

For a copy of your own credit report, call one of the three main national credit reporting agencies: Experian at (888) 397-3742 experian.com, Equifax at (800) 685-1111 equifax.com and Trans Union at (312) 408-1077 transunion.com. The bureaus also should provide instructions on how to read their report and dispute any inaccuracies it contains.

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Where do I get information on consumer credit laws?

For information on consumer credit laws, contact the National Foundation for Consumer Credit, 801 Roeder Road, Suite 900, Silver Springs, MD 20910; call (800) 388-2227; nfcc.org.

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What do I do if I get turned down for a loan?

Increasing numbers of loan applicants are finding ways to buy their own home despite past credit problems, a lack of a credit history or debt-to-income ratios that fall outside of traditionally acceptable ranges.

Ask the lender for a full explanation, then appeal the decision in writing.

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Do I have to disclose a parent's gift?

Having generous parents is nothing to hide. An estimated one-third of first-time buyers purchase their home with a loan or a money gift from their parents.

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What is a gift letter?

If someone is willing to make a gift of funds in order for you to purchase a home, lenders will ask for a gift letter stating that no repayment of the "gift" is expected. The amount of the gift and the date funds were transferred should be spelled out in the letter, along with the donor's name, address, telephone number and relationship to the borrower.

In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.

Gifts -- with the proper documentation -- can be from relatives, friends, an employer, church, municipality, or nonprofit organization. Lenders often have stricter restrictions on gifts from friends and relatives other than parents.
Also, if you put less than 20 percent down, some lenders may require that a portion of the down payment be your own cash, not a gift. If you want to use a gift as part of your down payment, check with individual lenders to learn the restrictions of specific private or government-insured mortgage programs.

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How do you qualify as a first-time buyer?

In general, lenders define a first-time home buyer as someone who has not owned any real estate -- whether a personal residence, vacation home or investment property -- during the past three years.

Lenders verify an applicant's status by examining their income tax returns, checking to see that the individual did not take any deductions for mortgage interest or property taxes.

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What is the first step when looking for a home loan?

Most experts recommend that you should get prequalified for a loan first. By being prequalified, you will know exactly how much house you can afford. Almost all mortgage lenders now prequalify and preapprove customers, and many of them can even do it on the Internet. You also can do your own affordability calculations; most recent consumer books on home buying include steps to doing so, as do various real estate Internet sites.

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What is PMI?

Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.

PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.

Lenders generally turn to a list of companies with whom they regularly work when lining up private mortgage insurance.

In most cases, PMI can be dropped after the loan-to-value ratio drops below 80 percent. The Homeowners Protection Act requires PMI to be dropped when the loan-to-value ratio reaches 78 percent of the home's original value AND the loan closed after July 29, 1999. For other loans, find out from your lender what procedure to follow to have PMI removed when your equity reaches 20 percent.

For homeowners who have improved their properties and believe that their equity has increased as a result of these improvements, refinancing the property at a loan-to-value ratio of 80 percent or less is another possible way of eliminating PMI payments.

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What does PMI cost?

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How do I drop PMI?

In some states, the loans have to be at least two years old, and the borrower cannot have made any late payments in the last year in order to drop private mortgage insurance. In addition, the loan-to-value ratio must be less than 75 percent. Some state disclosure laws require lenders to notify borrowers after the close of escrow whether the borrower has the right to cancel private mortgage insurance. Under the new federal law - The Homeowners Protection Act - lenders must drop PMI if the loan closed after July 29, 1999 AND the loan-to-value ratio reaches 78 percent of the home's original value.

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Where do I get information on who regulates lenders?

The following regulatory bodies oversee lenders:

* Comptroller of the Currency, Compliance Division, Washington, D.C., (202) 874-4800; occ.treas.gov.

* Office of Thrift Supervision, Consumer Affairs, Washington, D.C., (800) 842-6929; ots.treas.gov.

* Federal Deposit Insurance Corp., Consumer Affairs, Washington, D.C., (800) 925-4618; fdic.gov.

Your state departments of real estate or commerce also may regulate the lenders in your area.

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Where do I get information about housing discrimination?

For information about housing discrimination, call the U.S. Department of Justice at (202) 514-2000, 950 Pennsylvania Ave., NW DC 20530, usdoj.gov; or your local U.S. Department of Housing and Urban Development office.
For detailed information, the booklet, "Your Loan is Denied, Defending Yourself Against Mortgage Lending Discrimination," is available from the Center for Investigative Reporting,131 Steurt Street, Suite 600, San Francisco, CA 94105; call (415) 543-1200; or visit www.muckraker.org.

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What is the Community Home Buyers program?

The Community Home Buyers loan program is sponsored by the Federal National Mortgage Association, commonly referred to as Fannie Mae, and administered through participating direct lenders.

Fannie Mae's Community Home Buyers program has an income cap of 120 percent of the area's median income. In addition, the borrower must attend a seminar on home ownership and the home buying process.
It is not geared only for first-time home buyers, unlike many of the other low-down -payment programs on the market.

This loan program allows for 97 percent financing. The borrower may put down as little as 3 percent of his or her own money, with the remaining 2 percent coming in the form of a family gift or loan from a government or nonprofit agency.

For more information, call Fannie Mae at (800) 732-6643; fanniemae.com.

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Who is Fannie Mae?

Fannie Mae is a congressionally chartered secondary-mortgage market company that buys loans from private lenders. Because the firm is so big and has been involved in purchasing packages of loans from lenders for 25 years, it has enormous influence on the mortgage market. For more information, visit fanniemae.org or call Fannie Mae at (800) 732-6643

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Are there Fannie Mae programs for inner cities?

Home buyers in urban neighborhoods can take advantage of the secondary mortgage market institution's Fannie Neighbors Program.

This mortgage plan was created to increase homeownership and promote revitalization in central cities as well as minority low and moderate income "targeted" areas. Borrowers need less income to qualify for a mortgage and less cash for closing than with standard mortgages. The program includes mortgages to buy or refinance a home.

Fannie Neighbors has no income limit for residents who are purchasing a home within designated central cities (if not the largest city in a metropolitan area, cities must have populations of 250,000 or more.) Borrowers must attend a seminar on home ownership and the home buying process. For a list of participating lenders, call Fannie Mae at (800) 732-6643.

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Where are interest rates headed?

At any one time, no one knows for sure where rates are headed. Beyond public policies put in place by the Federal Reserve Board, there are no laws that govern mortgage rates. Historically, usury laws were used to prevent lenders from charging sky-high interest rates when lending money. But in some states where there are usury laws, banks, thrifts and a number of other financial institutions are exempt from the law.

Today, interest rates are governed solely by the financial markets and by Federal Reserve Board action, neither of which can be predicted with absolute certainty.

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How do you lock in an interest rate?

Locking in a mortgage rate with a lender is one way to ensure that same rate still will be available when you need it.

Lock-ins make sense when borrowers expect rates to rise during the next 30 to 60 days, which is the usual length of time lock-ins are available.
A lock-in given at the time of application is useful because it may take the lender several weeks or longer to prepare a loan application (though automated loan practices are cutting this time dramatically).

However, some lenders require borrowers to pay lock-in fees to assure particular rates and terms. Be sure to check that the rates and points are guaranteed and that your lock-in period is long enough. If your lock-in expires, most lenders will offer the loan based on the prevailing interest rate and points.

Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.

Resources:

* "Consumer’s Guide to Mortgage Lock-Ins" from the Federal Citizen Information Center (800) 333-4636; pueblo.gsa.gov.

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How do you choose between fixed and adjustable rates?

There is risk involved in selecting an adjustable rate mortgage, or ARMs, because rates may go up. On the other hand, a fixed-rate loan offers good protection against rising interest rates but the borrower is stuck with the initial rate if interest rates drop.

Statistics show that home buyers who have chosen ARMs since 1981 have saved thousands of dollars. For a period, the percentage of home buyers applying for ARMs rose substantially, then buyers and homeowners began flocking to fixed-rate loans.

Whether to opt for a fixed or adjustable rate mortgage is a matter of personal choice. The first route offers stable payments; the second offers lower initial payments.

Another consideration is the length of time a buyer plans to own the home. If you're planning on moving within three or four years, an ARM makes sense even if rates do nothing but rise during that period of time.

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What are rates for FHA and VA loans?

There are no set interest rates for FHA and VA loans. The FHA stopped regulating rates in 1983 and the VA followed suit soon after. Shop around for the best rate.

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How do you get a low-interest rate loan?

Price discounts and interest rate buydowns are common incentives offered by new-home builders trying to overcome slow sales.

Buydowns are a financing technique used to reduce the monthly payment for the borrower during the initial years of the loan. Under some buydown plans, a residential developer, builder or the seller will make subsidy payments (in the form of points) to the lender that "buy down," or lower, the effective interest rate paid by the home buyer.

State agencies often offer lower rate loans. But to qualify, borrowers usually must be a first-time home buyer and meet income limits based on the median income level of their county.

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What are the most popular ARM indices?

Among the most common indexes are the Cost of Funds (COFI), Treasury Securities (T-Bills), Certificates of Deposit (CDs), and Libor (London inter- bank offering rate). Most metropolitan newspapers publish current ARM index rates.

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How do adjustable-rate loans change?

Adjustable-rate mortgages go up and down with interest rates, based on several esoteric money market indexes which cause the cost of funds for lenders to vary. Several popular indexes include Treasury Securities, Cost of Funds, Certificates of Deposit, and Libor (London inter-bank offering rate). Most big city newspapers publish ARM index rates.

The interest rate and payment adjustments do not always coincide. There is usually a lag. There are a variety of consumer protections built into these loans. But consumers need to beware of advertising and other claims made by lenders.

Resources:

* For more information, consult the "Consumer Handbook on Adjustable-Rate Mortgages," available on the HUD website, provided by the www.federalreserve.gov

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Where can I get adjustable-rate loan info?

For adjustable-rate loan information, consult your local lender or the "Consumer Handbook on Adjustable-Rate Mortgages," available on the HUD website, provided by the www.federalreserve.gov Federal Reserve.

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What is APR?

The Annual Percentage Rate (APR) is the relative cost of credit as determined in accordance with Regulation Z of the Board of Governors of the Federal Reserve System for implementing the federal Truth-in-Lending Act, according to Charles O. Stapleton III, Thomas Moran and Martha R. Williams, authors of "Real Estate Principles," 5th Ed., Dearborn Financial Publishing, Chicago; 2001.

The APR is the actual yearly interest rate paid by the borrower, figuring in the points charged to initiate the loan and other costs. The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that the points will be paid off incrementally over the term of the loan. The APR is usually about 0.5 percent higher than the note rate.

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How do I monitor my ARM loan?

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What is the value of a mortgage lock-in?

Locking in a mortgage rate with a lender is one way to ensure that same rate still will be available when you need it.

Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.

Resources:

* "Consumer’s Guide to Mortgage Lock-Ins" from the Federal Citizen Information Center (800) 333-4636; pueblo.gsa.gov.

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Do you advise a lock-in on a home loan?

Locking in a mortgage rate with a lender is one way to ensure that same rate still will be available when you need it.

Lenders may have preprinted forms that set out the exact terms of the lock-in agreement. Others may only make an oral lock-in promise on the telephone or at the time of application.

Resources:

* "Consumer’s Guide to Mortgage Lock-Ins" from the Federal Citizen Information Center (800) 333-4636; pueblo.gsa.gov.

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Where do I get information on lock-ins?

For information on lock-in mortgage rates, check out this brochure:

* "Consumer’s Guide to Mortgage Lock-Ins" from the Federal Citizen Information Center (800) 333-4636; pueblo.gsa.gov.

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What is negative amortization?

Negative amortization occurs when the monthly payments on a loan are insufficient to pay the interest accruing on the principal balance. The unpaid interest is added to the remaining principal due.

When home prices are appreciating rapidly, egative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home.

Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.

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When is a negative-amortization loan a good idea?

Experts don't agree on this question. Negative amortization is less likely to occur in rapidly appreciating markets. In markets where prices are stable or dropping, it is possible to end up with a loan balance that is higher than the market value of your home.

Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.

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Can I convert a negative-amortization loan to a regular loan?

Loan terms vary and each agreement needs to be reviewed carefully. Talk to your lender about specific situations.

Negative amortization occurs when monthly payments on a loan are not enough to pay the interest accruing on the principal balance. The unpaid interest is added to the principal due.

Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.

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What about splitting my mortgage in two and paying bi-weekly?

Some people set on paying off their home loan early and reducing interest charges opt for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks.

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What are the benefits of pre-paying the mortgage?

By making additional payments that go toward the principal balance, you can save thousands of dollars and shave years off the length of your loan.

Principal payments over and above the minimum monthly amount required by the terms of the mortgage constitute partial prepayment of a mortgage. Each mortgage will have terms describing how and when prepayment may occur. Refer to the note to see if there is any penalty incurred for prepayment.

The total savings potential also depends on how long you want to stay in the house. Borrowers who plan to move in the near future should not expect to realize as significant a savings as people who pay ahead of schedule until they own the home free and clear.

Check with your lender, who should be able to provide specific answers as to how such a prepayment plan will shorten the life of the loan and what kind of interest savings can be expected.

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How does FHA work?

The U.S. Department of Housing and Urban Development offers a variety of loan insurance programs through the Federal Housing Administration which require approximately 3 to 5 percent cash down. FHA loan limits vary depending on the county where the property is located. FHA loans administered by HUD are originated by private lenders. For more information, contact lenders who offer FHA loans or a regional HUD office.

Resources:

U.S. Department of Housing and Urban Development, 451 7th St., Washington, DC 20410; call (202) 708-1112; hud.gov. http://www.hud.gov/offices/hsg/fhahistory.cfm

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Which lenders offer FHA loans?

Lenders who handle Federal Housing Administration loans typically advertise in the Yellow Pages under "real estate loans" and in the real estate sections of newspapers. FHA also supplies limited lists of approved lenders. For general qualifications and program details, see the FHA brochure, "How to Qualify for an FHA Loan." To order, write the U.S. Department of Housing and Urban Development, Printing Branch, Room B-100, 451 7th St., Washington, DC 20410; (800) 767-7468.

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Do FHA loans require impound accounts?

Yes, according to the "Realty Bluebook," 33rd Ed., Dearborn Financial Publishing, Chicago; 2003: "Under FHA financing it is the lender's responsibility to ascertain that property taxes and hazard insurance premiums are paid when due. Lenders, therefore, will insist that the monthly payments include proportionate amounts for taxes and insurance."
www.realtybluebook.com

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How do you find government-repossessed homes?

The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors.

You can only purchase HUD-owned properties through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price.

Down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from the conventional market's 5 to 20 percent.

One caution. HUD homes are sold "as is," meaning limited repairs have been made made but no structural or mechanical warranties are implied.

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Can I get a HUD home for as little as $100 down?

If you are strapped for cash and looking for a bargain, you may be able to buy a foreclosure property acquired by the U.S. Department of Housing and Urban Development for as little as $100 down.

Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.
The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.

If you are interested in purchasing a VA foreclosure, call (800) 827-1000 or visit foreclosurefreesearch.com for a current listing. About 100 new properties are listed every two weeks.

You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

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Are there programs for fixer-uppers?

If you need home loan to buy a "fixer-upper" and remodel it, look at the U.S. Department of Housing and Urban Development's Section 203(K) loan program. The program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.

A 203(K) loan is usually done as a combination loan to purchase a "fixer-upper" property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.

Investors no longer may participate - only owner-occupants. Owner-occupants are required to come up with only 3 to 5 percent. HUD requires that a minimum of $5,000 be spent on improvements.

Two appraisals are required. Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.

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Do you have to buy HUD homes through a realty agent?

You can only purchase a U.S. Department of Housing and Urban Development property through a licensed real estate broker. HUD will pay the broker's commission up to 6 percent of the sales price.

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Rules for a FHA Loan?

The U.S. Dept. of Housing and Urban Development offers a variety of loan insurance programs through the Federal Housing Administration, which requires approximately 3 to 4 percent cash down. There are no income requirements to qualify for a FHA mortgage. Other advantages are that FHA loans do not contain prepayment penalties and in some cases they are assumable by qualified purchasers.

FHA loan limits vary, depending on the county where the property is located. FHA loans are originated and serviced by private lenders.

FHA does not lend money. The mortgage is made by a bank, savings and loan, mortgage company or other FHA-approved lender. In addition, FHA does not set the rates and points. The lender determines these, so it is best to shop around by calling several FHA-approved lenders.

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Are FHA loans assumable?

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What are VA programs?

Veterans Administration loans, which are available to veterans, reservists and military personnel, are attractive because the buyer is not required to make a down payment. The maximum loan amount the U.S. Department of Veterans Affairs will insure varies by region. There is no restriction on the purchase price as long as you have the cash to make up the difference between the loan amount and the purchase price.

For the nearest regional office of the U.S. Department of Veterans Affairs, call (800) 827-1000; va.gov.

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Can National Guard vets, and other reservists, get VA loans?

The Veteran's Benefits Improvements Act of 1994 gives men and women who have completed six years in the Army, Air Force, Marine Corps, Coast Guard Reserves, the Army National Guard or Air National Guard eligibility for VA home loans, including no-down payment programs. If you are a reservist or a National Guard veteran, you can receive VA home loan benefits, but you will pay higher funding fee, up to 2.75 percent of the loan amount. If you make a down payment, the fee can be incorporated into the loan amount.

www.homeloans.va.gov

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What if a VA loan is foreclosed on?

VA loan holders who suffer a foreclosure must repay the full debt before the federal agency will insure another loan. People with concerns about a specific loans should contact their lender or the VA directly at (800) 827-1000.

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Who can get a VA loan?

Millions of veterans and service personnel are eligible to participate in the U.S. Department of Veterans Affairs’ Home Loan Guarantee Program, which in most cases requires no down payment. VA loans can be used to buy a home, build a home, improve a home or to refinance an existing loan.

After issuing a certificate of eligibility to the vet, the VA guarantees the loan to the lender up to $203,000. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility (complete Form 26-1880). Call (800) 827-1000 for more information about VA programs.

homeloans.va.gov.

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How does someone qualify for VA loans?

After issuing a certificate of eligibility to a veteran, the U.S. Department of Veterans Affairs guarantees the loan to the lender up to a certain amount. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. The Veteran's Benefits Improvements Act of 1994 gives men and women who have completed six years in the Army, Air Force, Marine Corps or Coast Guard Reserves or the Army National Guard or Air National Guard eligibility for VA home loans, including no-down payment programs.

To qualify for a loan, the first step is to apply for a Certificate of Eligibility (complete Form 26-1880) and call (888) 487-1970 for more information.

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Where do I get information on VA loans?

For information on VA loans, call the U.S. Department of Veterans Affairs directly at (800) 827-1000; homeloans.va.gov. Also refer to:

* "To the Home-Buying Veteran."

* "VA Home Loans."

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Where do I get information on the secondary market?

Two major secondary-market sources are Fannie Mae at (800) 732-6643; fanniemae.com, and Freddie Mac, (800)FREDDIE; freddiemac.com.

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Where do I get information on who regulates lenders?

The following regulatory bodies oversee lenders:

* Comptroller of the Currency, Compliance Division, Washington, D.C., (202) 874-4800; occ.treas.gov.

* Office of Thrift Supervision, Consumer Affairs, Washington, D.C., (800) 842-6929; ots.treas.gov.

* Federal Deposit Insurance Corp., Consumer Affairs, Washington, D.C., (800) 925-4618; fdic.gov.

Your state departments of real estate or commerce also may regulate the lenders in your area.

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