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Financial Empowerment Center
Counselor Training Curriculum
Topic 11: Homeownership
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Questions to Think About
• What are the advantages and disadvantages of
renting versus ownership of a home?
• How do you determine affordability?
• How can you avoid foreclosure through financial
planning?
• What are some practices to look out for when
purchasing a home?
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Leasing / Renting vs. Buying Own Home
Advantages of Renting
Disadvantages of Renting
• Few responsibilities for
maintenance
•
•
•
•
• Easier to move and
relocate
No equity built
Possible rent increases
Possible eviction
No tax benefits
• Little or no investment
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Leasing / Renting vs. Buying Own Home
Advantages of Owning
Disadvantages of Owning
• Build equity and wealth
where property
appreciates
• Tax benefits
• Control over property
• Capital investment
• Responsible for
maintenance
• Liable for property taxes
• Insurance
• Less flexibility in relocating
• Possible foreclosure
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Financing a Purchase
• Client must decide how much he/she can afford
• Review budget
• Consider all expenses
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Cost of Purchasing a Home
1. Down Payment - Amount of equity above what is borrowed
2. One-Time Payments – Closing costs including attorney’s fees, bank
fees, title insurance charges, first year’s homeowner’s insurance
premium, allocated real estate taxes if pre-paid by seller, termite and
engineering inspection
3. Recurring Payments – Mortgage principal and interest, real estate
taxes, homeowner’s insurance, fuel, maintenance
4. General Guideline – Monthly housing expense should not exceed 25%
- 35% of gross monthly income depending on place of residence
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Types of Mortgages
• Fixed Rate – Interest rate is fixed for the term of the loan
• Adjustable Rate – Rate will change periodically throughout the term
of the loan; borrower should use worst case scenario (i.e. highest
rate of interest permitted under mortgage agreement to plan
affordability)
• Seller Mortgage – Seller holds mortgage and allows purchaser to
pay on installment
• Balloon Mortgage - Loan payments are made according to a
payment schedule for a term. At end of term, entire remaining
balance becomes due
• Interest Only Mortgages – Only interest is paid on the principal of
the loan. At the end of term, entire principal balance is due
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Advantages, Disadvantages & Pitfalls of Types of
Mortgage
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Applying for a Mortgage
Different types of lenders
• Traditional Banks
• Credit Unions
• Mortgage Brokers and Originators (Must be licensed by the
Washington State Department of Financial Institutions (DFI)
– www.dfi.wa.gov/cs/mortgage.htm)
• Other financial services companies
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Applying for A Mortgage
• Shop around for mortgage rates and terms
• Beware of lenders recommended by seller’s real estate
broker – conflict of interest
• If it sounds too good to be true, it probably is
• Check credentials of private mortgage lenders (real
potential scams)
• Beware of attorney recommended by seller’s or lender’s
broker (conflict of interest)
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Evaluating a Mortgage Offer
1.
Review a consumer’s means (budget) for affordability (take into account
other expenses such as real estate taxes, insurance, utilities)
2.
Review terms of mortgage
a) Principal
b) Interest rate
c) Term of loan
d) Monthly payment
e) Points (fee paid for institution to lend)
f) Prepayment penalty
g) Default triggers
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Value of Property
Appraisal
• Usually done by appraiser engaged by the lender
before approving the loan
• Purchaser may want to hire his/her own appraiser
before bidding on the property on signing the contract
to purchase
• Web sites that allow purchaser to compare prices of
homes in the neighborhoods
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Programs to Help with Purchase
First Time Home Buyers
• Assistance with down payment
• Closing costs
• HomeSight – www.homesightwa.org
• eHomeAmerica - www.ehomeamerica.org/orglist.php?c=2965
• HomeStead Community Land Trust http://homesteadclt.org/
• Habitat for Humanity - http://seattle-habitat.org/
• HUD - www.hud.gov/buying/index.cfm
• Washington State Housing Finance Commission (WSHFC) http://wshfc.org/
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Tax Provisions & Homeownership
Deductible items which will help reduce income tax:
• Real estate taxes paid
• Interest on mortgage or loan
• Points paid in connection with obtaining mortgage or
loan
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Common Predatory Lending Tactics
• Falsifying documents
• Forging signatures
• Loans in excess of value of
home
• Bait & switch – higher rate
mortgage at closing
• High interest rates
• High points
• High closing costs
• Negative amortization
(principal increases)
• Padded appraiser’s fee
• Bogus closing fees
• Steering borrowers to
mortgage brokers,
insurance brokers and
attorneys (kickbacks or
commissions earned)
• Balloon mortgages on which
borrowers were not advised
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Impact of Predatory Tactics
• Overpaying fees, interest
• Borrower cannot afford payments when low initial payment of
adjustable mortgage expires
• Over valuing property makes it impossible to refinance mortgage – if
able to refinance, it is at very unfavorable terms
• Borrower cannot make lump-sum balloon payment
• Damage to credit
• Foreclosure – loss of equity by borrower, brings down property
values in area
• Incur legal fees to protect rights
• Owing more than borrowed
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Avoiding Foreclosure
• Initial planning, budgeting for affordable home purchase and funding
• As soon as problem arises – seek help immediately, e.g. refer to
Washington Homeownership Resource Center at
http://development.homeownership-wa.org/mortgage-default/ or
877-894-4663
• Seattle-King County ABC www.skcabc.org/initiatives/foreclosure.html
• Do not avoid the problem
• Work with a reputable counselor or attorney
• Beware of foreclosure help that promises to wipe away all your
troubles (Rescue Scams)
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Impact of Foreclosure on Tenants
• Face sudden unexpected eviction when property is
foreclosed
• Rents and security deposits paid to property owner
are lost
• While in foreclosure – no utilities or maintenance by
owner or institution seeking foreclosure
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
1. Creditors required to make a reasonable, good faith
determination of a consumer’s ability to repay any consumer
credit transaction secured by a dwelling (excluding an openend credit plan, timeshare plan, reverse mortgage, or
temporary loan)
2. Criteria for evaluation – 8 underwriting factors:
a. current or reasonably expected income or assets;
b. current employment status;
c. monthly payment on the covered transaction
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Underwriting criteria cont’d
d. Monthly payment on any simultaneous loan;
e. Monthly payment for mortgage-related obligations;
f. Current debt obligations, alimony, and child support;
g. Monthly debt-to-income ratio or residual income; and
h. Credit history
3. Verification – creditors must use “reasonably third party
records to verify information” used for confirming
underwriting criteria
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
4. Guidance on application of Rules
a. Example: ARMs must apply highest rate imposed by mortgage
being considered to determine payment
b. Special calculations apply to balloon and other mortgages,
interest only and negative amortization
c. Generally assume highest rates apply to first 5 years and for
balance debt-to-income ratio that is less than or equal to 43
percent.
5. Encourages refinance of “non-standard” mortgages to mortgages
with at least five years of fixed payments
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
6. Presumption that mortgages are “qualified,” i.e. meet the ability
to repay, but it is rebuttable
a. “prohibit loans with negative amortization, interest-only
payments, balloon payments, or terms exceeding 30 years from
being qualified mortgages.”
b. “No documentation” loans are not qualified
c. Mortgage charging more than 3 points generally not deemed
qualified
d. “Ability to repay” rule now applies to Prime mortgages as well
(did not under Federal Reserve)
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
7. Implements section 1414 of the Dodd-Frank Act limiting which limits
prepayment penalties (in exchange for reduced interest rate)—must be
qualified mortgage
a. 1st year -up to 3%
b.
2nd year- up to 2%
c. 3rd year – up to 1%.
8. Requires creditors to retain evidence of compliance with the rule for
three years after a covered loan is consummated
www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgagestandards-under-the-truth-in-lending-act-regulation-z/#detailedsummary
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Consequences of violation of “Ability to Repay” Rule
1. Mortgage may be deemed unqualified and in violation
of law, and is therefore voidable
2. If consumer able to pay loan over longer time, it will be
harder to rebut the presumption that the loan was
qualified
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
Regulates Mortgage Service Providers
1.
Must provide regular statements including:
a. Amount and due date of the next payment;
b. Breakdown of payments by principal, interest, fees and escrow; and
c. Recent account activity.
2. Must credit account the day the payment is received
a. If places partial payments in “suspense account,” once full
payment, received, must credit
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
3. Must provide advance notice of next effective higher interest rate adjustments
for most adjustable-rate mortgages
4. Disclosure on “forced-place insurance,” - cannot push homeowners into new,
high-cost policies when they do not pay their homeowner’s insurance: must
advise that homeowner can buy lower rate insurance .
5. Upon two consecutive missed mortgage payments -alert borrower of
options, e.g. lowering monthly installments
a. Must provide written notice of the date the homeowner became delinquent
and the amount needed to bring the loan current.
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
6. Point of contact must be given to borrower
a. Must be accessible
b. Provide accurate information about account.
7. Simplifying Modifications: Must explore all options available to help
borrower avoid foreclosure e.g. deferments, loan modifications.
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
8. Must offer single application for all options and consider
borrower for all options at once
9. Upon applying for a modification - must acknowledge receipt of
application within 5 days and notify borrower if it is complete
a. Inform of status of application and make sure documents go
through the right procedures.
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
10. Can no longer start foreclosure proceedings until homeowners have
missed payments for at least 120 days – give opportunity to understand
options
12. If completed application for loan modification or other help - cannot
start or complete the foreclosure process until the application has been
processed and borrower has had time to respond
a. must explain reason for rejection of modification
b. Borrower can appeal, and servicer must choose someone new to
conduct a review.
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Consumer Financial Protection Bureau (CFPB)
“Ability to Repay” Rule - Effective January 10, 2014
Amendment of Regulation X of the Real Estate Settlement
Act and Z (implementation of mortgage servicing rules in
Truth-in-Lending Act)
13. Unavoidable Foreclosure: If home cannot be saved, must
consider borrower for short sale or other options
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Policy Issues
Foreclosure prevention; foreclosure rescue scams; what can
be done?
• Require full disclosure of relationships among brokers, lenders
and attorneys
• Have all appraisers post bonds or purchase insurance to
guarantee their appraisals based upon reasonable standards
• Cooling off period before any foreclosure rescue plan agreement
is effective
• Require all non-blank foreclosure rescue plans to be reviewed by
approved counselors
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What to Know About Homeownership
• While a home owner is responsible for its maintenance, has
less flexibility in relocation and may face foreclosure if unable
to make mortgage payments, homeownership allows control
over the property, tax benefits, and equity
• In order to determine affordability, review budget, and consider
all expenses – down payment, one-time payments, recurring
payments, and monthly housing expense should not exceed
25%-35% of gross monthly income
• Avoid predatory schemes – pressure tactics to get buyer to buy
an unaffordable home, refinancing loans scams, and home
improvement loans among other tactics
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Topic 11 Exercise #1
Discussion: Participants will be asked to discuss the pros and
cons of rental vs. home ownership based on: Marital status, tax
bracket, single or dual income, with or without children,
lifestyle.
Review: Compare financial impact of different rates of interest,
term lengths and types of mortgages
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Topic 11 Exercise #2
Marta and Bobby want to consider buying a house because
prices have come down. Right now, the children share a
bedroom, and they anticipate that each should have his/her
own room. Based on their current financial situation, how
should they proceed and what should they be considering?
Assume:
• Savings from inheritance $150,000
• Paid off all credit card debt
• Marta’s gross weekly income $750
• Bobby’s gross weekly income $827
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