Your guide to fnancing your frst home Brought to you by:
Are you ready to become a homeowner? Buying your frst home is exciting, but you re likely to have lots of questions. This guide can help you by outlining the programs, tools, and personal support you ll have at every stage of the home loan process. Whether you re just in the planning stages or ready to apply for fnancing, we look forward to helping you achieve your goal of buying and owning your frst home. Look inside for need-to-know information, helpful tools and tips, and the following: Learning about mortgages... Page 3 Qualifying for a mortgage... Page 5 Understanding types of mortgages... Page 7 Beginning your home search...page 10 Seeing what s possible... Page 12 2017 Wells Fargo Bank, N.A. All rights reserved. Table of Contents / Page 2
Learning about mortgages What is a mortgage? A mortgage is a loan secured by real estate. When you borrow money to buy a home, you promise to pay it back over a specifed period, at a specifed cost. Typically, you repay the loan through monthly mortgage payments. If you stop repaying the loan, your lender may take ownership of the property. What does my mortgage payment include? A mortgage payment consists of principal and interest. The principal portion of your payment reduces the original amount you borrowed. The interest portion covers the fee to borrow the amount you still owe. And if you make less than a 20% down payment, your mortgage payment may also include mortgage insurance. In addition to principal and interest, if you have an escrow account, a portion of your mortgage payment covers: Homeowners insurance Most lenders will require you to have homeowners insurance, which protects the homeowner against fnancial losses resulting from fre, wind, natural disasters, or other hazards. Real estate/property taxes Most communities fnance schools and other services through property taxes. Tax rates vary from town to town, so ask your real estate agent about taxes in your area. The good news is that property taxes are usually fully tax deductible. Consult your tax advisor for details. Mortgage insurance (if applicable) Mortgage insurance (MI) protects your lender against fnancial loss if you can t repay your loan. If you make less than a 20% down payment, you may be required to have mortgage insurance. What is an escrow account? An escrow account is an account that your lender sets up to pay your homeowners insurance, real estate/property taxes, and mortgage insurance (if applicable). With an escrow account, your lender deposits a portion of your taxes and/or insurance every month. When your taxes and insurance premiums are due, your lender pays those bills on your behalf with the money in your escrow account. Note: Using an escrow account to pay real estate taxes and homeowners insurance may be optional for some homeowners. If you use an escrow account to collect the funds to pay these expenses, be aware that once your mortgage loan is paid in full, you ll be responsible for paying your taxes and insurance directly when they come due. 2017 Wells Fargo Bank, N.A. All rights reserved. Learning about mortgages / Page 3
What does amortization mean? Amortization is the process of paying of a debt with regularly scheduled payments that include both principal and interest. Early in your mortgage term, your monthly mortgage payment is mostly interest and only a small portion pays down your principal. Over time, as you continue making payments, the principal balance is reduced and a larger portion of your payment goes toward reducing principal until your entire loan is repaid. What are closing costs? In addition to the sales price of the home, you ll need to pay for the services of real estate and lending-related professionals who are required to complete the purchase transaction. Depending on your lender, the mortgage you chose, and the location of the home, these closing costs can add up to several thousands of dollars. You ll get a better idea of the amount when you receive a Loan Estimate, soon after you apply for your mortgage. What is a Loan Estimate? The Loan Estimate is a good faith estimate of closing costs and fees, as well as the loan terms. Your lender delivers or mails this document to you within three business days of submitting your mortgage application. What other costs should I consider? As a homeowner, you ll have other expenses beyond your mortgage payments that you may have to pay, including: Ongoing maintenance and repairs Keeping your property in top condition can be costly. This is particularly true of older homes, where system and appliance warranties may have expired. Association dues Some communities have homeowners associations that can charge fees as high as several hundred dollars a month. These fees are generally not included in your mortgage payment, so you ll need to budget for them. Utilities When you own your home, you re responsible for paying each utility bill. These can include gas, electric, sewer, water, cable, internet, and garbage removal. 2017 Wells Fargo Bank, N.A. All rights reserved. Learning about mortgages / Page 4
Learning about mortgages Qualifying for a mortgage How do I know how much money I can borrow? You can get an estimate of the amount you may be able to borrow by getting a preapproval letter from your lender. Your Wells Fargo Home Mortgage consultant can help you apply for our PriorityBuyer preapproval. 1 What is a credit score? A credit score is a three-digit number that indicates your creditworthiness based on information provided by your creditors and lenders, including: Your payment history The total amount you owe The amount of time you ve had available credit Whether you have any judgments entered against you Whether you fled bankruptcy The number of times potential lenders have reviewed your credit The three major credit reporting agencies Experian, TransUnion, and Equifax compile this information in a credit report and your credit score is generated. Credit scores range from 300 to 850. Lenders will use your credit report and score to determine if you re approved for a loan, the terms of the loan, and the interest rate. 1. A PriorityBuyer preapproval is based on our preliminary review of information provided and limited credit information only and is not a commitment to lend. We will be able to ofer a loan commitment upon verifcation of application information, satisfying all underwriting requirements and conditions, and property acceptability and eligibility, including appraisal and title report. Preapprovals are subject to change or cancellation if a requested loan no longer meets applicable regulatory requirements. Preapprovals are not available on all products. See a home mortgage consultant for details. 2017 Wells Fargo Bank, N.A. All rights reserved. Qualifying for a mortgage / Page 5
How will a lender determine if I qualify for a mortgage? Lenders look at your credit score, the cash you have available for a down payment and closing costs, your income, and your existing debt and fnancial obligations. Two ratio guidelines are used: The housing expense-to-income ratio (or front-end ratio) compares your anticipated monthly mortgage payment to your total household gross monthly income (pre-taxed). A good rule of thumb is to keep your housing costs at or below 28% of your gross monthly income. The debt-to-income ratio (or back-end ratio) compares your anticipated monthly mortgage payment and your monthly debt requirements to your gross (pre-taxed) monthly earnings. Monthly debt includes credit cards, car loans, student loans, consumer loans plus other fnancial obligations such as child support and alimony. A good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income. It s important to know that making large purchases with a loan or credit card just before applying for a mortgage may impact your ability to qualify. Consider your needs and priorities carefully. How can I improve my credit score? Managing and improving your credit score is possible by: Paying down revolving debt. Don t move debt around between credit cards. Not opening a lot of new accounts. Instead, keep and maintain your older accounts. Making bill paying automatic. Set up electronic withdrawals from your checking or savings accounts to help you make on-time bill payments. Contacting your creditors if you re having trouble. Most creditors are willing to work out a payment schedule rather than see you miss payments or not pay at all. TIP: Get free counseling about owning a home You can get up to two free hours of personalized fnancial coaching right over the phone to help you prepare for owning a home. Ask your home mortgage consultant about the options and support available through our My Home Roadmap SM service. 2 2. The My Home Roadmap SM service provides up to four sessions (an estimated two hours) of free fnancial coaching with a National Foundation for Credit Counseling (NFCC) certifed counselor from a NFCC member organization that will be paid for by Wells Fargo Home Mortgage. At your option, you may purchase additional coaching sessions or services or decide to participate in another NFCC member agency program. Program may change or be discontinued at any time. 2017 Wells Fargo Bank, N.A. All rights reserved. Qualifying for a mortgage / Page 6
Understanding types of mortgages What s the diference between a conventional loan and a government loan? A conventional loan is a mortgage loan that is not insured or guaranteed by a government agency. These loans meet the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) standards and may require a down payment. A government loan is a mortgage loan whose requirements are established by a government agency such as the Federal Housing Administration (FHA) or U.S. Department of Veteran s Afairs (VA). Government loans typically have lower down payment requirements than conventional loans. Keep in mind though FHA loans have lower down payment requirements, you ll want to consider all costs involved, including upfront and long-term mortgage insurance and all fees. Ask your home mortgage consultant to help you compare the costs of all your home fnancing options. What s the diference between a conforming mortgage and a non-conforming mortgage? A conforming mortgage has a loan amount that conforms to the guidelines set by Freddie Mac or Fannie Mae. A non-conforming mortgage has a higher jumbo loan amount or underwriting guidelines that difer from Freddie Mac and Fannie Mae. TIP: Visit our Learning and Planning Center at wellsfargo.com to fnd answers to frequently asked questions about the homebuying process, our home loan comparison tool, and more detailed information about loans and programs. 2017 Wells Fargo Bank, N.A. All rights reserved. Understanding types of mortgages / Page 7
How can I save for a down payment? It s never too early to start saving. To help you identify your need-to-haves, cut back on nice-to-haves, and put aside money you ll need to buy a home, you can take advantage of our online budgeting and savings tools. You could also set up a separate frst home savings or investment account and have a set amount directly deposited into it every month. The set amount could be automatically deducted from the account where you deposit your paycheck or other income. Ask a Wells Fargo banker for more details. What if I am not able to make a 20% down payment? There are several mortgage loans and programs that may help homebuyers reach their goals with less available cash. Just remember, if you make less than a 20% down payment, you will likely be required to purchase mortgage insurance. Can I use gifted money to help me make my down payment? Some loan program guidelines may allow you to use monetary gifts from family as part of your down payment. Keep in mind: You will most likely be required to provide written proof that the funds were truly a gift and not a personal loan. There are limits on how much gift money you can receive per year without increasing your tax obligations. Speak with a fnancial advisor, tax accountant, or your home mortgage consultant to learn more about how these options can impact your overall home fnancing plans and future goals. Are there any other down payment sources I may be able to use? Not-for-proft down payment assistance programs (DAPs) provide funds to qualifed homebuyers to help with down payments and closing costs. Many DAPs don t require repayment, if you meet their guidelines. Your home mortgage consultant can help you fnd out which programs are available in your area, explain their details, and see if you qualify. TIP: Log on to our My FirstHome interactive online program designed to help you prepare to purchase a home and become a responsible homeowner. Go to wellsfargo.com/myfrsthome. 2017 Wells Fargo Bank, N.A. All rights reserved. Understanding types of mortgages / Page 8
What other types of mortgages are available? There are many types of mortgages with diferent down payment requirements available. Your home mortgage consultant can help you understand your options so you can make informed decisions. Loan Program Who may beneft? Features Fixed-rate mortgage Often chosen by buyers who plan to stay in their home Predictable monthly principal-and-interest payments for a long period of time. Protection from rising rates Adjustable-rate mortgage (ARM) yourfirst Mortgage SM FHA loan VA Loan Easy-to-Own SM Guaranteed Rural Housing Program Often chosen by buyers who think they might sell/ move or refnance within a few years, or those who think they can make larger monthly payments if the rate adjusts upward. First- and next-time homebuyers who are looking for a low down payment option. Plus, when you complete an approved homebuyer education course, you may be eligible to receive a closing cost credit. Talk to your home mortgage consultant about loan amount, type of loan, and type of property to ensure eligibility. Homebuyers looking for a low down payment. FHA loans have the beneft of a low down payment, though you ll want to consider all costs involved, including upfront and long-term mortgage insurance and all fees. Be certain to ask your home mortgage consultant to help you compare the overall costs of all your home fnancing options. Active duty or veteran military service members and eligible spouses looking to buy a home. Homebuyers looking to buy a property in an outlying area. The initial interest rate is usually lower than that of a fxed-rate mortgage The initial interest rate can be locked in for diferent introductory periods After the introductory period, the interest rate typically adjusts every year 3% down payment option on a conforming fxed-rate loan Monetary gifts and down payment assistance are allowed Home seller may be able to contribute to closing costs Must be for a primary residence and single-family dwelling/unit Mortgage insurance is required 3.5% down payment requirement Cash gifts may be allowed for all or a portion of a down payment and/or closing costs Financing can be assumed by qualifed buyers when the home is sold Provides FHA Section 8 Assistance - a monthly subsidy provided by the FHA on behalf of a qualifed family to assist them in becoming homeowners Credit history may come from traditional sources like a credit report, and non-traditional sources like tuition, rent, or utility bill payments Down payment assistance allowed Citizenship not required, however, a Social Security number and employee authorization document are required Upfront and monthly mortgage insurance is required Low or no down payment requirement A wide range of rate, term, and cost options Lower closing costs Monetary gifts may be allowed for all or a portion of the closing costs Financing can be assumed by qualifed veteran and non-veteran buyers when the home is sold An upfront VA funding fee is required Mortgage insurance is not required Low or no down payment requirement Homebuyers with limited credit history may be considered Closing costs may be fnanced into the loan, reducing the amount of out-of-pocket cash required to close Property location and income restrictions may apply An upfront loan guarantee fee is required, which can be paid by the buyer or seller, or fnanced into the loan An annual loan guarantee fee is required, collected as part of the monthly mortgage payment Mortgage insurance is not required 2017 Wells Fargo Bank, N.A. All rights reserved. Understanding types of mortgages / Page 9
Beginning your home search How do I know how much home I can aford? Your preapproval gives you the estimated amount you may be able to borrow. When you add your preapproved loan amount to the amount you plan to use for your down payment, you ll know your home purchase price range. Your preapproval may save you time by narrowing down your search. It also lets sellers know you re a serious buyer. TIP: You can compare loan options, run diferent scenarios to estimate your home price range, interest rates, monthly payments, and closing costs using our online Home Loan Shoppping Tools. On your smartphone, go to wellsfargo.com and click on Explore Home Loans then scroll to Tools for Homebuyers. On your desktop, go to /planning How do I fnd the real estate agent that s right for me? It s important to fnd a real estate agent you re comfortable working with. Looking for a good agent could be as easy as: Noting the names of agents on For Sale signs as you drive through neighborhoods of interest. Asking friends and family members and your home mortgage consultant for referrals. Checking the websites of local realty companies. When you ve got a list of potential agents, interview at least two or three of them. In addition to experience, the real estate agent you choose should be trustworthy and easy to talk to. 2017 Wells Fargo Bank, N.A. All rights reserved. Beginning your home search /Page 10
How can a real estate agent help me? A good real estate agent should have a working knowledge of the area where you re thinking of buying and can help you: Decide what you want in a home. Use our Home Wish Checklist at /tools/checklists to help communicate your needs and preferences to your agent. Search the Multiple Listing Service (MLS) and other resources for homes in your price range that match your needs and show you potential homes, listed by any agency. Access valuable information on communities, comparable values of neighboring homes, tax rates, and building code regulations. Get school reports so you ll know the quality of public schools for any neighborhoods you re interested in. Make an appropriate bid on a home you want to buy and act as an intermediary between you and the seller during the negotiating process. What should I consider when choosing a neighborhood? Location is a very important factor in determining your long-term happiness in your new home. Here are a few things to think about and discuss with your real estate agent: Do the schools meet my needs? Is the commute time acceptable? Are there public recreation areas nearby? Are stores and services conveniently located? Are most of the homes in the neighborhood owner occupied? What population, development, and economic trends are occurring in neighboring areas? Where else can I research homes and neighborhoods? There are several excellent websites that showcase homes for sale. Searching in your price range will narrow the feld you d like to explore further. Write down the MLS numbers of listings that get your attention so you can give them to your real estate agent. You can also go online to research town, city, visitor s bureau, and area newspaper websites. 2017 Wells Fargo Bank, N.A. All rights reserved. Beginning your home search / Page 11
Seeing what s possible You could reach your goal of owning your own home with Wells Fargo s wide range of loans and programs, you have many options to meet your needs. Don t have a lot to put down? You may qualify for one of our lower down payment options. Have less-than-perfect credit? Even without traditional credit, you may still qualify for a home loan. Your home mortgage consultant will listen to your goals and help you understand your options. TIP: Attend a free Homebuyer Workshop to learn more about fnding, fnancing, and owning a home. When you re ready, contact me I m here to provide you with one-on-one support at every step of the homebuying process. I m dedicated to helping you become a successful frst-time homeowner. Contact me anytime. Information is accurate as of date of printing and is subject to change without notice. Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A. 2017 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. NMLSR ID 399801. #5352 Seeing what s possible / Page 12
Wells Fargo Home Mortgage Phone: 1-877-937-9357 http://www. Restrictions may apply. Contact your Home Mortgage Consultant for details. Credit is subject to approval. Some restrictions apply. This information is accurate as of date of printing and is subject to change without notice. Wells Fargo Home Mortgage is a division of Wells Fargo Bank,N.A. 2011 Wells Fargo Bank,N.A. All rights reserved. NMLSR ID 399801