Lesson 4 Presentation

Pre-Purchase Homebuyer EducationLesson 4: Learning More About Homebuying

04

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02

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05

Housing Affordability

Down Payment & Mortgage Insurance

The Importance of Credit

Types of Mortgages

Fair Housing

 Reminder:

1. This is a self-paced, untimed learning experience. You can complete all at once or return at anytime without losing your work.
2. There will be knowledge checks throughout the lesson and at the end.
3. We highly recommend you download the slideshow and take notes.
4. Throughout the course you will see information underlined that will either take you to different parts of the presentation or direct you to additional resources.

5. To go from one slide to the next, click on the screen. If you need to move backwards to review a slide, press the backwards arrow key on your keyboard. To replay the voice over, pause it, or turn it up or down, please press on the speaker icon in the bottom right.

For questions, please email Jessika McNeill at jmcneill@nchousing.org who will be happy to assist you along the way.

01

Importance of Credit

Credit Report

It is important to establish a credit report. If you pay cash for everything, you will not have a credit score. Credit scores are checked by:

• Employers
• Lenders for a loan for a car, furniture, a home, etc.
• Utility companies
• Landlords

How will a lender review credit?

The lender will review your credit report and credit score.

• Credit Report – A detailed record of how you manage your credit
• Credit Score – A rating that indicates your credit worthiness & likelihood that you will pay back a loan

Reviewing both will give the lender a comprehensive picture of your credit worthiness.

Your Credit Report Contains:

• Personal Information
• Current and Previous Employers
• Bankruptcy
• Credit Inquiries
• Credit Card Accounts
• Accounts in Collections
• Open Loans & Revolving Credit

It is highly recommended you take advantage of reviewing your credit report for free each year on AnnualCreditReport.com. If you find something you believe to be a mistake, you will be able to take the next steps to correct these errors.

Three Reasons to Pull Your Credit Report Each Year

1. Can help you detect and dispute errors. If you find any errors, you can the steps outlined at this link to have them corrected.
2. Detection of identity theft and credit card fraud.
3. Allows you to understand the way lenders will view your credit profile.

How do I access my free annual credit report?

www.AnnualCreditReport.com

Credit Scores and Credit Bureaus

Three (3) Major Credit Bureaus:

1. Equifax
2. TransUnion
3. Experian

You also have a FICO credit score. FICO is another rating system for creditworthiness. Note: Your credit score(s) may vary across bureaus and FICO. When qualifying for a mortgage, a lender may request all three of your credit scores, a FICO report, and/or credit score from other scoring models.

Accessing Your Credit Score

• Many credit card companies often provide your credit score for free.
• CreditKarma.com shows your TransUnion and Equifax credit reports and credit scores.
• MyFico.com will allow you to access your FICO score.
• Contact one of the three major credit bureaus official sites directly.

For other ways to obtain your credit score, please visit the Consumer Financial Protection Bureau website by clicking here.

What makes up a credit score?

Date an account was opened, credit limit, current balance, current status including late payments, delinquencies, judgments and liens.

Amount Owed30%

Payment History35%

The ratio of total credit available compared to the total credit balance.

New Credit10%

Types of Credit Used10%

Length of Credit History15%

The two biggest components of the credit score are: Payment or History and Amounts Owed

Impact of Credit Inquires

Hard Inquiry (aka “Hard Pull”) – Requires approval from you and temporarily lowers your credit score by 0-10 points. Examples of hard inuiries:

• You apply for a mortgage
• You apply for a credit card

Note: According to the consumer financial protection bureau,  when shopping for a mortgage, all inquiries within a 45-day period count as only one (1) inquiry. Soft Inquiry (aka “Soft Pull”) – Does not impact your credit score. An example of a soft inquiry: when you check your credit score.

Lenders will Check your Credit Utilization Rate

This rate is how much you currently owe divided by your credit limit.

• It is expressed as a percentage
• Under 30% is good, however, under 10% is the best.

Note: Avoid a high utilization rate by keeping credit balances at zero or a minimum.

Your credit score has a big impact on whether your loan is approved, the interest rate on your mortgage, and your monthly payments.

Example of payment adjustments based on interest rate on the next slide.

The Impact of Credit on Amount of Interest Paid

In this example, a person with excellent credit will pay $88 less per month on their mortgage, or nearly $1000 less per year than a person who only has good credit (with a score of 660-679). Over the life of the loan, this means that a person with only good credit will pay almost $32,000 more in interest, compared to the person with excellent credit. A person with only fair credit (620-639) will pay almost $85,000 more in interest over the life of the mortgage.

Maximizing Your Credit Score

- Keep credit utilization low by paying down or paying off balances each month. - Correct inaccurate information on credit report. - Keep all accounts current and pay off delinquencies. - Establish credit, if none.

Additional Resources for Assistance to Improve Your Credit

Better Credit Course

Housing Counselor

Available to work with you on an individualized plan to improve your credit.

Free course that will provide you with much more information on credit scores and credit management.

Note: Review your credit score and report before applying for a mortgage so that any errors may be corrected that could negatively impact your loan approval.

Review: Breakdown of Credit Scores

Knowledge Check √

Please answer the questions on the next slide to check what you have learned so far.

02

Housing Affordability

PITIA

“Principal, Interest, Taxes, Insurance, Association dues”

These five components equal the monthly housing cost. Principal, Interest, Taxes, and Insurance, or PITI, is included in your monthly mortgage payment and paid to your lender. Homeowner Association fees are paid to the Homeowner Association. Lenders will review your PITIA when calculating housing ratios, which will be reviewed on the next slide.

Debt-to-Income and Housing Ratios

Lenders will review the borrower’s housing ratio and debt-to-income (DTI) ratio as an indication of whether the borrower can afford the monthly payments for the mortgage amount you have requested. Ratios will be used by the lender, along with other factors, to determine:

• If you qualify for a mortgage
• The amount of a mortgage you will qualify for.

Housing Ratio

Monthly Estimated PITIA ÷ Monthly Income

Debt-to-Income Ratio (DTI)

Borrower’s total monthly debts (including housing costs) divided by total monthly income.

True Affordability

After a lender provides the maximum mortgage amount you could borrow to buy a home, you should carefully consider if this amount is affordable to you. Consider these other overhead costs of homeownership that lenders do not consider in terms of affordability.

• Utility payments
• Additional insurance costs
• Maintenance, repair and/or replacement costs

Things to Consider

Lender determines what you can afford, considering:

How much I feel comfortable paying, considering everything on the lender list plus:

• Cell phone, internet and streaming services
• Food, utilities, clothes
• Medical costs
• Childcare, school expenses
• Vacation
• Place of worship
• Auto expenses (i.e. gasoline, maintenance)

• New house payment (PITIA), if applicable.
• Consumer debt (items on credit report)
• Child support and/or alimony

Your housing expense should not exceed approximately 30% of your gross monthly income. What you can borrow ≠ Affordability

Spending Plan

Creating a plan will ensure stability and sustainability. Adjustments may need to be made as your expectations and goals change throughout your journey to homeownership.

Steps to Managing and Reducing Your Debt

Track your expenses.

Prioritize your “needs” over “wants”.

Cancel or downgrade services (i.e. cable, telephone).

Limit miscellaneous spending.

Create shopping list and stick to it.

Review: How Much Can I Borrow?

Lenders will review your:

1. Housing Ratio, which determines the maximum PITIA (principle, interest, taxes, homeowners’ insurance and homeowners’ association dues, if applicable) payment, and 
2. Debt-to-Income Ratio (DTI ratio), which determines the maximum  payment allowed for total debt (PITIA plus total consumer debt).

Fair Housing Laws

03

Know Your Rights

“Sex” includes gender identity & sexual orientation.

Seven (7) Protected Classes

Prohibits discrimination in housing-related transactions, including advertising, based on the actual or perception of race, color, religion, national origin, sex, disability, and familial status. Click here to learn more about fair housing laws & your rights.

Illegal Discrimination in Homebuying and/or Home Selling

It is illegal discrimination to take any of the following actions because of race, color, religion, sex (including gender identity & sexual orientation), disability, familial status, or national origin.

• Refuse to negotiate or sell, discourage the purchase
• Make housing unavailable
• Set different terms, conditions, or privileges for the sale of a dwelling; impose different sales prices
• Falsely deny that housing is available for inspection
• Print or publish any notice that indicates any preference, limitation or discrimination.
• Use different qualification criteria, such as, income standards, application requirements, application fees, etc.
• Blockbusting – Persuading owners to sell their property cheaply due to fear of people of a particular protected class are moving into the neighborhood

For more information & examples, please visit Examples of Housing Discrimination.

Illegal Discrimination in Lending

It is illegal for a lender to do any of the following, if that decision is based on someone’s protected class status (race, color, religion, sex (including gender identity & sexual orientation), disability, familial status, or national origin).

• Use different qualification criteria or applications, or sale standards or procedures, such as income standards, application requirements, application fees, credit analyses, sale approval procedures or other requirements.
• Refuse to make a mortgage loan or provide other financial assistance for a dwelling.
• Refusing to provide information regarding loans.
• Imposing different terms or conditions on a loan, such as different interest rates, points, or fees.
• Discriminating in appraising a dwelling.
• Adding the condition of availability of a loan on a person’s response to harassment.
• Refusing to purchase a loan.

For more information & examples, please visit Examples of Housing Discrimination.

Redlining

Lenders drew red lines on maps in areas where they would not offer financial services. The perception of high default rate made it difficult to get loans. It did not take individual creditworthiness into account.

Illegal Discrimination in Insurance

It is illegal for insurance companies or agents to do any of the following activities when their decision is based on someone’s status in a protected class (race, color, religion, sex (including gender identity & sexual orientation), disability, familial status, or national origin.

• Charging higher rates.
• Offering policies with inferior coverage.
• Not returning calls for information.
• Denying coverage altogether.
• Imposing different terms and conditions for coverage if dwellings in minority neighborhoods.
• Refusing to write policies for dwellings in minority neighborhoods.
• Offering inferior policies for dwellings in minority neighborhoods.

For more information & examples, please visit Examples of Housing Discrimination.

Example of Racial Discrimination

Example of Familial Status Discrimination

Note: NC Fair Housing Statute expands the federal Familial Status protections to include: any person who is pregnant or is in the process of securing legal custody of any person who has not attained the age of 18 years.

Example of Disability-based Discrimination

Note: The NC Statute refers to “disability” as a “Handicapping Condition.”

Example of Sex Discrimination

Exemptions

The Federal Fair Housing Act covers most housing. In some circumstances, the Act exempts:

1. Owner-occupied buildings with no more than four (4) units.
2. Single-family housing sold or rented without the use of a real estate agent, if not more than 3 are owned at one time.
3. Housing operated by religious organizations and private clubs that limit occupancy to members, so long as they don’t discriminate in their membership.
4. Housing designated for older persons.

Note: North Carolina State Fair Housing Act has additional exemptions including:

1. Single-sex dormitories.
2. The rental of a room or rooms in a private house where the owner (or a member of the owner’s family) lives in the house.

Making a Fair Housing Complaint

If you believe your rights have been violated, you are able to submit a complaint with HUD’s Office of Fair Housing and Equal Opportunity (FHEO) by doing one of the following:

• Online: In English or Spanish
• Email: You can download this form and email it to your local FHEO office as the email address on this list.
• Phone: Speak with an FHEO intake specialist by calling 1-800-669-9777 or 1-800-877-8339.
• Mail: Print out this form & mail it to your regional FHEO office at this address on this list.

Note: For more information on filing a complaint, including forms in additional languages, please visit About FHEO File a Complaint.

Knowledge Check √

Please answer the questions on the next slide to check what you have learned so far.

04

Types of Mortgages

What is a Mortgage?

The loan obtained from a lender for the money borrowed for the purpose of purchasing or refinancing real property. In exchange for the money, you give the lender the right to foreclose in the event the payments are not made. Note: The terms ”Mortgage” and “Home Loan” are used interchangeably throughout this course.

What is a Lending Limit?

The maximum amount that may be loaned to a buyer for the purchase of a property. This cap amount is set by guidelines established by government agencies.

Mortgage Categories

75%

60%

45%

Interest Rate

Government-Insured

Conforming vs. Non-Conforming

Fixed Rate or Adjustable Rate

Mortgages: By Interest Rate

Adjustable-Rate Mortgage (ARM) Mortgage with a variable interest rate which means that the mortgage payments can change over time.

• Ideal borrowers who plan to keep the loan for a limited time.
• Best for borrowers who are comfortable with the risk of larger payments in the future.

Fixed-Rate Mortgage A mortgage that has the same interest rate over the life of the loan, often 15-30 years.

• Your monthly mortgage payments remain the same for the entire loan period.
• Best for borrowers who want the predictability of the same payments throughout the entire loan.

VS

Payments

Fixed-Rate Mortgage Example If a 30-Year mortgage amount is $160,000 at an interest rate of 4.5%, the payment of only principal and interest (no property taxes or homeowners’ insurance) would be about $810/month for 30 years. Adjustable-Rate Mortgage Example Say that same $160,000 mortgage is now an ARM and offered initially at a lower interest rate of 3.8% with a principal & interest payment of be $745/month.

• However, imagine in year two, the interest rate is increased to 4.9%. Then the monthly payments would become $849/month.

Practice Question:

Sam and Julie Johnson have a busy life. They have one child, Benji, and both parents work full-time. Julie is also going to college part-time to get her degree. They have been saving and have money for a small down payment. Their credit score is 680. Between saving for the down payment, establishing an emergency savings fund, and paying for Julie’s tuition, money is very tight. So, Sam and Julie developed a budget and are very good at sticking to it. However, they need to plan for any expenditures in order to meet all their financial goals. Which type of mortgage would be best for the Johnson’s and why: a fixed rate mortgage or adjustable-rate mortgage?

Practice Answer:

There is no absolute right answer here. Which mortgage type is right for you depends on your life circumstances.

• Given Sam and Julie’s current situation, a fixed rate mortgage would likely be best as they need to carefully plan their finances. Sam and Julie would not be able to meet their financial goals if their mortgage payment went up as a result of interest rates going up, which could happen with an ARM.
• In general, the ARM loan does not seem right for the Johnsons because of the unpredictability of future mortgage payment amounts, unless….if Julie arranged with her employer for a more senior position with pay raise upon completion of her degree which will be complete within the next six months,, then perhaps the lower initial monthly mortgage payment of an ARM could serve the Johnsons short-term. Then they could refinance later and convert their ARM to a fixed rate mortgage.

Conforming Loans Meets the guidelines to be sold to either Fannie Mae or Freddie Mac.

• Has loan limits.
• Meets the standards set by the Federal Housing Finance Agency (FHFA).

Non-Conforming Loans Does not conform to the requirements set by Fannie Mae and Freddie Mac.

• Has no monetary limits.
• Does not meet FHFA standards.
• May be offered when credit score is lower

NOTE: All government back loans are considered non-conforming loans, though they have lending limits.

VS

Conventional Mortgage Loan

• Down payment may be as low as 3%.
• Minimum credit score of 620-640 required.
• However, the better the credit score, the better the interest rate offered.
• Debt to income ratio of no more than 45%, may go as high as 50%.
• Requires private mortgage insurance if down payment is less than 20%, but may be removed when equity has reached 20%.
• May be fixed-rate or an adjustable-rate mortgage.
• 75% of all mortgages made are conventional mortgages.

Note: This mortgage is not government-insured.

In a competitive market when there may be multiple offers made on a property, conventional loans are preferred as they are considered faster to close & there may be less problems with appraisals.

Government-backed Loans

A mortgage insured or guaranteed by the government, such as:

• Federal Housing Administration (FHA) Loans
• U.S. Department of Agriculture (USDA) Loans
• U.S. Department of Veterans Affairs (VA) Loans

Best when your credit score is lower and when you have little or now down payment funds. May be advantageous for veterans, properties eligible for USDA loans, low/mod-income families wanting to enter the homebuying market, or homes that need rehabilitation.

FHA Loans

• Low minimum down payment of 3.5% with credit score of at least 580.
• Establishes a lending limit every year by county.
• Debt-to-income ratio up to 43%.
• Offers a fixed-rate mortgage & an adjustable-rate mortgage.
• Requires both an upfront mortgage insurance payment & an annual mortgage insurance payment for the life of the loan.

FHA 203(k) Loan

For home purchases involving rehabilitation, allowing the buyer to wrap cost of rehab into mortgage payment.

• Low minimum down payment of 3.5% with credit score of at least 580.
• FHA lending limits apply but can borrow up to 110% of home’s after-rehab value.
• Debt-to-income ratio up to 43%.
• Amount of required paperwork may cause this to be a longer process.
• Requires both an upfront mortgage insurance payment & an annual mortgage for the life of the loan.
• Mortgage interest rates may be higher than a standard FHA loan.
• Requires the buyer works with a HUD approved 203(K) consultant.

USDA Loan

Home must be in an eligible rural area as defined by USDA.

• Down payment not required & often has lower interest rates.
• Credit score requirements vary by lenders, however, a score of 640 is needed to qualify for automatic approval.
• Requires an upfront “guarantee fee” that works like mortgage insurance.
• Two Types:
• Direct for household incomes at 80% Area Median Income (AMI) or less.
• USDA guaranteed between 81%-115%.

VA Loan

Available to veterans, or veteran spouses with VA entitlement. In order to qualify, a person must have a Certificate of Eligibility.

• No down payment required & often has lower interest rates.
• Credit score requirements vary by lenders starting at 580 & 620 for some.
• Debt-to-income ratios vary by lender but 41% is favored by the VA.
• No loan limit.
• No mortgage insurance but there is a “funding fee” charged to borrowers.
• So these mortgages can remain low-cost & available to future veterans.
• Fee is included in the loan.

Additional Loan Types (Atypical)

Interest Only

Balloon

Jumbo

Large loan amounts (over conforming loan limit) Must have high credit score & significant savings.

Lower payments or no payments due until the end of the term. Full amount or large amount due at the end of the term.

Pay interest only for 2 to 10 years which may result in lower monthly payments & ability to buy a more expensive home. Must have significant assets, excellent credit score & low debt-to-income ratio.

Loan Types Compared: Which is Right for you?

Homebuyer Education

First-time homebuyers are often required to take a homebuyer education class before a loan is approved.

• Practical and helpful.
• Down payment assistance programs often require borrowers to take homebuyer education class.
• May entitle borrowers to lower down payments and lower interest rates.

Practice Question:

Hurricane Florence destroyed Carlos and Mary Rivera’s Home. They and their 3 children have moved in with Mary’s parents for the last few years to reestablish some financial stability. After living with her parents for two years, everyone is getting on each other’s nerves. Carlos is enlisted in the military and Mary is now a part-time Teacher’s Aide. Carlos and Mary would be considered low- to moderate income. Their credit score took a hit after the storm when the company Mary works for went out of business, but they have managed to keep their credit score at 640 - 660 for the past year. While they have managed to pay off the balance on two credit cards over the past two years, they no longer have any savings as they had a lot of expenses after the storm. They prefer country living and do not mind a longer commute to work. Which type of mortgage would be best for the Rivera’s and why: conventional mortgage or government insured mortgage (and which type of mortgage if recommended)?

Practice Answer:

Again, there is no absolute right answer here. Which mortgage type is best upon depends on many factors, based on your personal circumstances.

• Carlos and Mary would have a difficult time being approved for a conventional mortgage as they cannot meet the 3% minimum down payment requirement, and while their credit score exceeds the minimum requirement, it would only be considered “fair” credit. 
• With no down payment, their best bet appears to be obtaining a VA loan. Carlos is eligible and the VA loan requires no down payment. They may also want to consider a USDA loan with no down payment requirement if they choose to live in an eligible rural area near where they live now.

Knowledge Check √

Please answer the questions on the next slide to check what you have learned so far.

05

Down Payment & Mortgage Insurance

Down Payments and Mortgage Insurance

• Conventional Loan
• If down payment is less than 20% of the property’s value for a conventional loan, the borrower will be required to have Private Mortgage Assistance (PMI).
• Mortgage insurance protects the lender in case the borrower defaults on the mortgage.
• FHA Loan
• FHA charges a Mortgage Insurance Premium (MIP).
• USDA and VA Loans = No Down Payment Requirement
• Lenders can specify the source of the down payment funds.

Mortgage Insurance costs may vary between 0.55% to 2.25% of the loan.

Mortgage Insurance by Loan Type

Reminder: Mortgage insurance protects the lender in case the homeowner defaults on the loan.

Down Payment Assistance

Down payment assistance programs are available to help potential home buyers with low-interest loans or grants that reduce or eliminate the amount needed to save for a down payment. Note: A HUD-Certified Housing Counselor may be able to provide you with information on down payment assistance programs.

NC Housing Finance Agency

If you are a first-time buyer or military veteran and qualify for the NC Home Advantage Mortgage™, you may also be eligible for $8,000 in down payment assistance with the NC 1st Home Advantage Down Payment.

Provides qualified first-time and move-up buyers with stable, fixed-rate mortgages and down payment assistance up to 5% of the loan amount.

For more information, please visit nchomeadvantage.com

NC Housing Finance Agency (Continued)

Community Partners Loan Pool (CPLP)

Self-Help Loan Pool

Assists eligible buyers to purchase home built or rehabilitated by a SHLP Member, typically a local NC Habitat for Humanity affiliate.

• Up to $35,000 in mortgage financing.

Provides qualified buyers with down payment assistance.

• Up to 25% of the sales price, not to exceed $40,000 (effective May 2, 2022), when using a NC Home Advantage Mortgage™.
• Up to 10% of the purchase price when combined with a USDA’s Section 502 loan.

Note: Total household income must be at or below 80% of the Area Media Income (AMI). For additional eligibility requirements, click on each one to learn more.

Additional Resources and Potential Assistance

Your housing counselor may be able to advise you if other assistance programs are available. Contact your local city and county government community development departments and inquire about assistance. Visit HUD’s webpage for NC at North Carolina | HUD.gov / U.S. Department of Housing and Urban Development (HUD)

Knowledge Check √

Please answer the questions on the next slide to check what you have learned so far.

YOU HAVE COMPLETED LESSON 4 In this lesson, you learned about:

• The importance of credit
• Housing affordability
• The Fair Housing Act
• The types of mortgages
• Down payment assistance and mortgage insurance

Please click here to begin Lesson 5 of the Pre-Purchase course (the last lesson in this course) or return to the homepage.