6 Things Our Real Estate Editor Didn’t Expect to Learn in a Homebuyer Class
I have an exciting announcement to make: I just took my first homebuyer education course. The less exciting part? I’m not buying a house.
I took the online course to learn as much as possible about the ins and outs of homebuying. Even as a real estate editor, I figured there was more I could stand to know about the minutiae of mortgage loans, closing costs, escrow, and all that jazz.
The $99 class, which I signed up for via eHomeAmerica.org, took me about five hours. I did it all in one day, though it can certainly be spaced out across several days. The course’s three modules consisted of readings and videos with learning assessment quizzes to break them up. Overall, I’d recommend the online class to newbies entering the house-buying world, as well as to folks who are casually considering homeownership one day. Even if you’re not planning on buying a home tomorrow, the knowledge gleaned from the course can help you decide if homeownership is right for you in the first place.
Although I won’t be purchasing a home for quite a while (thanks, student loans), I discovered there was a lot I didn’t know when it came to buying a house. Here are six surprising things I learned while taking the course.
There are three types of credit reports.
Apartment Therapy does a great job of breaking down the confusing elements of credit reports and compiling tips about how to boost your credit score. But what I didn’t know was that there are actually three different types of credit reports, and they all serve different purposes.
First, there’s the consumer credit report, which is free for you to pull from a single credit bureau. Your credit score is not affected for requesting it, which sometimes happens when reports are pulled. This kind of report lists out a record of your credit history from places like banks and credit card companies. It doesn’t come with a credit score, according to the class, but you can request your credit score with it for an additional fee.
Then there’s the in-file credit report, which compiles information from two or three different credit agencies. (There are three main credit reporting agencies, by the way: Equifax, Experian, and TransUnion.) This kind of report is pulled by a creditor with your authorization, and requesting it can affect your credit score. Per eHomeAmerica, it’s the report creditors use to decide whether to lend you money and what some mortgage lenders use to quote you loan rates prequalify you for a mortgage.
Lastly there is a Residential Mortgage Credit Report, or RMCR. This one uses information from the three main credit bureaus and states your credit store. It’s the most in-depth report, and is used by lenders (not individuals) to determine whether you’re eligible for a mortgage loan. The RMCR usually comes with a fee and does affect your credit score when it’s pulled.
There’s such a thing as a “wraparound mortgage.”
I’d never heard of a wraparound mortgage before. Basically, it’s a mortgage in which the seller also collects your mortgage payments like a lender would. In this arrangement, you agree to make monthly payments to the home seller, who then takes that money to pay the mortgage lender. A wraparound mortgage is considered a “junior” loan, since the buyer doesn’t have to apply for a conventional bank mortgage. It’s understood that these kinds of loans are risky for sellers, since they’re on the hook for the whole mortgage.
You could be penalized for paying off your mortgage early.
Wouldn’t you think paying off your mortgage earlier than expected would be cause for celebration? Apparently, this isn’t always the case. Some mortgages have a feature called a “prepayment penalty,” which is the amount you have to fork over if you pay off your loan early (or refinance) within some window of time after buying the property. In some cases, you can also incur this fee if you sell your home before paying it off. Not all loans have prepayment penalties, but you should read over your loan documents carefully if yours does.
You might have to pay mortgage “points.”
I will be honest: I didn’t know about mortgage points before this course. Now that I do know about them, I still think they’re pretty confusing. Sometimes, on top of charging interest, a mortgage lender will ask you to pay them “points.”One point is equal to one percent of your loan amount. The example eHomeAmerica gives if that if you were taking out a $95,000 loan, one point would cost $950.
There are a couple things that can happen with points. You could be charged in points by your lender just to receive the loan. You could choose to have points paid to you in the form of lender credits. And you can also opt for discount points, which means you can pay your lender in points to lower your interest rate. (Paying one point usually lowers your interest rate by a fourth of a percent.)
Individual development accounts can help you save for a house.
There are a lot of programs and down-payment assistance plans that can help lower-income individuals buy a home. One I hadn’t heard of was an individual development account, or IDA, which is a special bank account you can open when saving for a house. When you put money into an IDA, your state matches the amount of money that you’ve deposited. Some accounts have a full match, while others double the match—the amount varies from state to state. Not everyone can open an IDA, however. You need to be below a certain income threshold to qualify.
There are so many fees.
Homebuyers generally expect to pay fees when buying a house. I knew there were a lot of fees, especially ones associated with closing costs, but damn. There are a lot of fees! Typically, you can expect to pay between 2 and 5 percent of your home’s total cost in closing fees.
Seeing some of these fees listed out really surprised me. Here’s an incomplete list of fees you might be slapped with when buying a house:
- A loan application fee
- A loan origination fee
- A credit report fee
- A processing fee
- An underwriting fee
- An appraisal fee
- A recording fee
- A survey fee
- A document preparation fee
- An attorney fee
- An escrow fee
Are there any other homebuying concepts that have mystified you? Let us know in the comments below.